The stock market has clearly been en fuego for an awfully long time. As has been the the case the whole way up from March people can spin all information available anyway they want to conclude what they want but the market has gone up regardless of anyone's conclusion.
The other day Laszlo Byrini made a comment that I have made many times before (not sure who originated it) which is that the bear case is always more compelling and more articulate. I can't make a convincing bull argument. Ages ago (the end of 2008) I made the case for a big snapback rally based on the simple fact that no matter how bad things are (were), after hideous declines the market retraces a noticeable portion fairly quickly.
At some point the current snapback rally went from ordinary (in magnitude) to out of the ordinary. One reader noted that the only thing the market has going for it is sentiment. I don't know if that is the only thing but I remain quite skeptical. In weighing out the positives (there are positives) and the negatives I think the the balance favors the negative by a wide margin. The worst economic event in 80 years resolves itself like a (almost) normal recession? That just doesn't make sense to me.
That being said a point I made countless times about why 100% cash is a bad idea is that you end up missing huge rallies. Lagging a huge rally is different than missing a huge rally. At one point the cash level was in the ballpark of 30% plus the double short ETF and a market neutral fund or two. Through the course of the year I have added slowly to clients' equity exposure with a discretionary ETF, a purchase of Caterpillar, an increase in the tech ETF we use and recently adding Suncor (SU).
YTD I am a little behind the market but still have a fair bit of dry powder so it is possible my risk adjusted stats look decent. Clients did not drop anywhere near what the market dropped and despite lagging this rally clients are now down high single digits from the quarterly high water mark from 2007.
I mention this to create a proper (IMO) long term context. I talk often about viewing this over the course of the entire stock market cycle (a bit of process perhaps gleaned from John Hussman). People all too often focus on absurdly short periods of time. Quick, did you beat or lag the market in Q2 2004 and by how much? You don't know from memory because it doesn't matter. We've had a horrible, but not unprecedented, decade for equity returns. What matters is whether you avoided some of that decline. Actually what probably matter more than that is how much you saved over the last decade.
Anyone of at least mediocre investing ability will have periods where they are ahead of the market and periods where they are behind. That just goes with the territory. If you know ahead of time there will be periods where you "beat" the market then there is no reason to get cocky about it. Likewise if you know there will be periods that you will lag the market there is no reason to get despondent about it.
The way I view things there are times to smooth out the ride (not pull off the road) and times to take every bump as it comes. You cannot be right all the time but you can reduce the consequence of being wrong.
Wikinvest Wire
12 comments:
Roger, an interesting chart over at Abnormal Returns:
http://tinyurl.com/kvpak5
The S&P 500 is 20% above its 200 day moving average for the first time since May 1983; just eye-balling the chart, it looks like it was about 38% below back in March, for the only time being that much below since 1983. You have noted on several occasions that big downs/ups are frequently followed with big ups/downs. If that's the case now, there is certainly room for further upward movement. Do you concur/non-concur? Any comments or thoughts on this rare occasion?
Thanks,
JCarr
the 20% above the 200 DMA is getting a lot of play these days. when it was way below that got a lot of play and turned out to be right.
i have not changed my mind about one more scare the hell out of them decline as part of this cycle and I doubt I will change my mind. that thought will either be right or wrong but I believe it will happen.
being right or wrong about it is of little importance so much as bracing clients for it in case it does happen.
Off topic, for today at least, but there is a very interesting article on medical tourism at the following link:
http://tinyurl.com/mfqypm
You have to expect significant disagreement from people when you express cautiousness and the data as well as opposing interpretations indicate a much more aggressive stance should be taken. I summarize my views by calling it a bull.
Several choices to hedge a portfolio using the ETN- VXX or just buy call options on any of the double short funds SDS, DXD etc. rather than the funds themselves. That way you have control over what you might loose and have low cost leverage. Sound like a good idea or am I missing something?
Ron
VIX does not have to go up if the market goes down.
With double short fund options, you are attempting to manage volatily expectations in addition to expectations about the market (or just satisfying your desire to hedge) point being both of your points are valid but more complicated IMO.
I haven't heard it used since we were on the reverse side of the 200 day SMA, but the rubber band analogy applies again. The further we get from "normal" (whatever that is), the harder the snap back will be to normal. I've been increasing short deltas (i.e. selling out of the money calls on speculative long holdings) to hedge this snapback.
I do have one nice problem, I'm getting a decent disbursement that I can throw 100% at long term holdings. What to do, what to do ... everything looks so expensive right this minute.
Someone wrote a while back about government issuance of bonds only for individual retirement accounts. The more I think about this and review what stocks have done for the last 10-15 years, the more I like it. I would have beaten the stock market handily, with no investment risk (just interest rate risk). From what I understand from the article (don't remember where), the bonds would be tax-free, would currently be issued at 5%, and would rise with interest rates for new issuance. I could ladder my bonds. For a portion of my safe portfolio, this sounds pretty good. Supposedly, the bonds would go to help get foriegn entities out of our deficit financing.
i am inclined to think that in terms of time and magnitude most of the decline is in. another scare the hell out of them decline would be more about trading and sentiment than fundamentals IMO. Keep in mind we are 2 years and still about 30% from the peak. my take on the recovery is weaker than normal creating the need for more foreign. I will still have some cash, still own a little absolute and an ever shrinking position in SDS in case we go down more than 20%.
Roger,
I look at cash as tactical. I use it to position myself. I had very few losses and lots of position gains. Since 2008 I have not had any losses. I do not keep a position more than one or two weeks. The positions that I like to have is one and most of capital employed. Most of the times I am into cash. So if you look at the risk, it is close to zero. However all I need are two to three good trades in a year to get a 20 to 30% return. As for now I am 92% cash, with only 3 stock positions that am looking to unload prety soon. Roger, this style has kept me out of trouble and only generated positions with positive gains, during the down market and now the up movement. I analyze each position that I take in many different angles. I allways read about stocks to be ready when I take a position. If I do not know so much about a stock and my confidence index is small then the position may be only a small percentage of my holding. I have taken full position into jblu, ms, cop, yhoo, ko, bei.de, fro. If I do not have cash then I could not take such positions, and do not want to borrow any funds for such operations. I wanted to take full position into Tin bach in march thinking that 200 million capitalization was so low and would have been correct to back up the truck. Now I think that Merger and Aquisition will come back again and am ready with the cash to take advantage.
Best,
Jeff from Milan, Italy
At the end of july I spoke to a friend who is an analyst back in late july. He was telling me that he did not like the market at all and asked him why. Well, he sayed, the economy is picking up but most of it is coming from the public sector. He is correct. But as time went on an thought about his statement, I relized that many people have seen the green shoots but as my analyst friend have seen this as a bogus recovery and market rally because it had come from the private sector to be real. I relized that the market did not care where it came from. All of sudden we had a sudden burst, massive infusion of liquidity and in Italy the start of goverment projects. The current goverment has even announced a massive project to build a road connecting Lybia with Egypt and many other projects in Lybia for the WWII War payments due to Lybia. So here in Italy, the market has come alive due to such announcement. But again,the market doesn not see where that growth is coming from, it only sees that is coming. My calculation back in june-july was that the S&P would touch 1166, back when we were trading 800-900 level. Back in July my program was showing lots of buy signals. Today there are very few. So we are approaching such that peek level. IMO even if we are in a long term bull market at some point, Roger, we will get a 20% drop from the high. So if we go to 1166 a 20% drop represents a 250 correction. From 1166 we will see low 900 level. At that level we will see what to do next.
Best,
Jeff from Milan, Italy
jeff from milan,
your analysis couldn't be more incorrect, please stop predicting where the market is going, we have enough of these loons on tv.
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