Sunday, May 24, 2009
Barron's had a some interesting stuff this weekend. First up was a profile of Roy Niederhoffer who has a brother named Victor you may have heard of. A big thing in the way I try to do my job and navigate market cycles is to keep things very simple. I like diversified stock and bond portfolios, tend to heed very simplistic indicators for taking defensive action and am quite content to get what I need for the portfolio with exchange traded products (stocks, bonds and funds).
Read the profile of Roy and it is clear that his approach is not simple in the least. His is a high frequency trading model, Barron's said holding periods can be a few hours or a few weeks. His offices have 160 computer screens. About halfway through the article there was mention of his at some point having added 60 new (trading) rules in addition to however many he had previously.
His results have obviously been good (otherwise there'd be no profile). My point is not to bag on him in anyway but to point out that success is possible with very simple methods like just buying index funds to complex programs involving dozens of factors requiring very beefy computers to execute. If success can be had with many types of approaches then we can conclude that approaches different from our own are not wrong but perhaps wrong for us. Ray's approach is not wrong but wrong for me just as mine is wrong for him and so on. This does not mean we cannot learn from people who trade markets in ways completely different from what we do.
Alan Abelson had some interesting thoughts from Louise Yamada that we've touched on before and that some other folks have discussed about the current market being like 1938 as opposed to 1932.
The idea being that the decline in 2008 was the second big decline in the decade. The chart I included has a big black arrow at the point back then that looks like the 2009 equivalent. I don't think this is useful for predicting percentages but in terms of certain types of behaviors repeating over time the notion of years of frustration as Louise puts it still to come is plausible and reasonable.
One thing to take from the chart is that from 1938 forward the market was more than halfway through the economic event of that day but there was still plenty of ups and downs (big volatility) yet to come. Some of those declines were straight down. For months I have been using the term stumble along the bottom to describe what I thought things would be like. I'm not sure if wide, volatile trading range that makes no progress for a couple years is aptly described as a stumble along the bottom but this sort of thing is what I had in mind but not lasting as many years as what happened back in the late 30s/early 40s.
For a while I wrote about expecting a bottom in Q2 2009 but things seem to be playing out on a longer time table. SPX 666 may turn out to be the bottom but if the SPX goes back down close to that number again does it matter whether another decline stops at 700 (not a new low) or 625 (would be a new low)? If we have another fast decline down to those types of numbers what matters is that it will scare the hell out of a lot of people and many will sell at precisely the wrong time.
Joellyn took this picture when we were at Kalawao where Father Damien built the church on Molokai. We're not rally cat people but I think it is a great photo.