I had an epiphany yesterday, a moment of clarity if you will. I figured out how to articulate my view on the current market.First, this came about from a small trade I did early in the day Thursday. With SPX near 882 I started to buy back the Statoil I sold in May. Specifically I sold about 25% of the position back in May around $43. I bought those shares back times two around $16.10.
If that is not clear, if someone sold 100 in May they bought 200 yesterday. For a little more color please check out Greenfaucet.
Somewhere between SPX 900 and SPX 1000 there is an important Mendoza line that marks the difference between normal bear market and oversold freak out.
I don't know exactly where that line is but at SPX 900 or lower I tend to think more about re-equitizing and up over SPX 1000 I start to think about defense (either selling or buying the double short ETF back). A bigger idea is that a portfolio will probably look a little different at the end of a bear then at the start of a bull. The dance between 900 and 1000 is perhaps where the transition needs to occur.
This is not about bottom calling but more about the understanding that the world is not ending, most companies will survive and a new cycle will start even if it takes an uncomfortably long time to happen.
I talked about not having a great feel for the short term (sometimes I get hunches) and I think contributing to that has been the inability to articulate this 900-1000 theme. While I still don't have a feel for the bottom in terms price or time, this notion of scared prices at SPX 900 and normal bear market prices at 1000 (just round numbers so don't obsess on them) does make things a little clearer.
Buying stock below 900 was not comfortable. I have no worry about the world ending (metaphorically) but I'd obviously prefer to minimize whatever emotion any of our clients might feel. The bottoming process, a process that can go on for a long time, should be uncomfortable. If we go down I may buy something else and if we have a meaningful rally, as mentioned before I may sell something (or buy double short).
31 comments:
What happended to the 200 DMA?
great question. A couple of things I should have included...
The intention is not to go hog wild but i am generally speaking more than 30% cash, a level I did not think I would ever need. I was about 20% cash in the summer, which of course was still below the 200 DMA.
THe other day I mentioned the need to think about what to do WRT to the 200 DMA when we were 34% below it, then the market went up 11% in a day. Since then it headed back down to 30% below again.
If I took the cash level to 25%, that would still be quite defensive but also but would mean doing some buying to get there.
I don't know if I will buy anything else for a while but nibbling a little at SPX 900 doesn't seem to dumb to me.
Sounds like good common sense to
me:-) I'm thinking a "w" pattern.
A guy with your talents should just accept a buy and hold strategy with periodic rebalancing and do something more productive with your life. Essentially, that is what you are doing now. By your own admission, you don't know where the market is going, no one does. No one knows what sectors will do well because events that affect them are random and unpredictable.
For me, what you do does not work in a taxable account. If there are any short term trades involved, basically I have to beat the market by 40% to just earn the market. No one can do that on a consistent basis, not even the Oracle of Omaha.
Do something with your talents that provide real value to the economy.
Having said that, I really like your blog and your insights.
basically I have to beat the market by 40% to just earn the market.
I don't think that one is quite right.
Buy a stock at $20 sell it @ $21 you have to pay $0.40 in tax. If the market was flat....
While $0.60 is not compelling the concept is correct.
Further, I've got years of blog posts that refute most of your comment.
Fair enough.
Perhaps the academic evidence is all wrong, though it is quite compelling.
At least you admit you don't know where the market is heading nor claim to know the optimal allocation of resources in advance. I suppose your approach may be a notch above buy and hold and a couple of notches below wild speculation.
Good luck with your trading and thanks for sharing.
anon 6:03
There is a very good program that airs in the UK called 'Hustle'. It's basically several ex-cons who go around conning people out of thousands using various techniques (they give back the money after letting the victims in on the scam).
Last night they said that a good con artist will accentuate the financial gains you can make and dismiss any potential losses. People now advising 'sell' seem to be doing the exact opposite at, what is probably, near the bottom of the market.
I saw another program on the financial situation in the UK and an analyst was answering viewers' questions, one asked him if it's the right time to sell his pension/investments. The guy said 'you never should sell your investments' which I thought was good advice. I'd add that you should only place money in the markets if you're willing to not see it again until you retire.
Will we have volatility - yes
will it take a while to establish a bottom - yes
can we break out of this range to the upside or the down side - yes
personally I think we will get a rally. I do not accept your trading range concept to hold for long, although it may seem like an eternity.
WAG or in Roger's case SWAG?
sorry, don't follow WAG v SWAG
Wild Ass Guess vs Scientific Wild Ass Guess
If the ted spread keeps getting better, which it looks like it is to me, you better get ready for a rally
lol
The risk reward is there to DCA. As you stated a while ago Roger - something something is there more risk in the market now, or when it was 40% higher in Oct...close enough. To lazy to search.... Have a great weekend...GO SOX!! (I thought today's post we would get a little picture with a market bounce tie in or the like."
I have always appreciated your comments and still think you have done better than most up until now, but I am closer to 20% cash while yo are at 30%. You always cautioned those of us that went 100% cash about lagging the market if it went up.
Aren't you to heavy in cash at these levels?
seg
Seg,
I believe my comments were about missing not lagging. I have said repeatedly that lagging is nowhere near as bad as missing.
You have exercised a discliplne of some sort (not questioning it, just don't know what it is) that most folks do not have.
and yes i might have too much cash. I would expect to lag not miss from here.
Well, I've been buying a little
this week...safe stuff. Roger,
is there any advantage owning
KMP over KMR or vice versa?
thanks
Buffett:
"If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
"Why?
"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&ref=opinion&oref=slogin
can't give specific advice.
tomk, be greedy or maybe hold your nose?
I asked you last week ..."seeing we were so far below 200dma what would be a trigger to start re-equitizing?" Your post seems to indicate that you have decided it is some "feeling" that at S&P 900 has the feel of an irrationally low level, but at S&P 1000 is "normal". I find it disappointing that you seemed to have switched from "logic" to "a feel". On the the other hand I do agree it is time to start to re-equitize. However, I believe this is because it is now possible to find stocks with fundamentals such as book value and p/e that are indeed very compelling both historically and compared to current "risk free" rate of returns. Falling below the 200 dma may be a good measure of a falling demand for stocks, and hence possibly a good indicator on when to lighten-up on equities, but I think you should seriously consider using more fundamental measures to drive re-equitization. I think if you study the "normal" low for these fundamentals you will find p/e, book value, and dividend payout percentages as clear "buy" indicators.
The screaming deal right now are TIPS with ~3% real yield. The yield hasn't been that high for six or seven years.
i can't recall a previous bear markets where "good" fundies were a catalyst for a bounce.
tips at 3%, ted spread at 3.64% (down from ~4.5%) is indicative of high interest rates that are due to come down. IF they come down I think you will get a big rally in equities.
At least that is the way I currently view things.
seg
Just got my monthly statement, it's time to slam my money manager's face into the ground and piss on his car.
LOL...anon 1:30 pm
Did you sue him when your funds
we up 25% when he said they would
only go up about 20% ?
I'm sure he bought him lunch and took his family on vacation. :)
hi roger,
wild ride
can u care to comment about this article which follows my line of belief
http://www.financialsense.com/fsu/editorials/willie/2008/1016.html
thanks
@anon@8:05 am: KMP vs. KMR. I own KMR in an IRA (picked it up fairly recently). Watching both for a while, it seems KMP yields a bit more than KMR, as a rule, BUT owning KMP in a tax-advantaged account can be problematic, because, as a MLP, once distributions hit $1k annually, the "Unrelated Business Tax" applies. KMR avoids the issue, by paying the dist. as additional shares (sort of an automatic divvie reinvestment). This avoids the UBT issue (your cost basis is reduced with KMR, meaning any tax is only due upon sale of shares).
Hope that helps, some.
Jan
PS: Check with your tax preparer, of course.
David Rosenberg from Merrill Lynch is calling for a 750 S&P before this is over and he has been one of the few that has been very accurate. over the past year I felt he was too bearish, but he seems to be making more sence over the past 4-6 weeks. He thinks we still have a terrible 4th quarter in front of us and a very weak 1st and 2nd quarter of 09.
BWJR
BWJR
Roger,
I day trade futures as well as "actively trade" etfs and their options. One common opinion I've been hearing on the blogs and dedicated websites seems to involve the likelihood of a "complex bottom".
I interpret that to mean an extended period of retesting lows, perhaps rotating through sectors.
It makes a lot of sense to me, and I'd be interested in your thoughts.
(In such a scenario, the reliance on a single metric (i.e., the 200DMA on SPX) may prove very lagging, indeed. But obviously, if you're not a day trader glued to your screens all day - and part of the night - this may mean a very difficult time for "portfolio management".)
I've long been of the opinion that some of "portfolio management" begs the critical questions faced by day traders, well, daily: when to enter, and when to exit. The answers are often elided (or simply avoided) when talking about portfolio management in general, but in fact, it's where the rubber meets the road. Everything is just "paper trading" until you pull a trigger (to enter, or to exit).
Would you agree that to some extent, in periods of complex markets (such as the one we're in/entering now) (or for that matter, the past decade's "round trip to nowhere") there is no hiding from the fact that success or failure in investing will still depend on when you choose to enter, and when you choose to exit?
(And if so, maybe you can offer some meaningful distinction that doesn't reduce to "time" that distinguishes the successful investor from the successful trader?)
All the best, and keep up the great work!
R in NY
If you would have exited the first week of Sept. you would have saved yourself a 18-20% drop in the Stock market and about a 12% drop in the bond market. Nothing has been woeking for over a month. Typical of a nasty bear, not a normal one. More to come. Look out below!!
BWJR
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