Yesterday the S&P 500 closed below its 200 DMA for the second day in a row which is an important milestone for how we navigate market cycles. A breach of the 200 DMA indicates that demand for equities is not healthy and when demand is not healthy it makes sense to consider defensive action.The reason I wait until the end of the second day is to try to reduce the chance of getting whipsawed but if we get whipsawed so be it. The priority is not to be correct down to the last basis point it is to avoid the full brunt of down a lot should it happen. The specific trade was to triple up the existing sub-1% position in SDS that many clients had or to buy a suitably sized position for any newer clients who did not own any shares. If we flirt around the 200 DMA then I will be more tactical with the trade this time coming out completely if market circumstances dictate. If it had to be unwound and then it went back below very soon thereafter I would probably use another broad based double short ETF to allow taxable accounts to keep the tax loss.
As far as a read on the market action, I tweeted yesterday that the fact that emerging market stocks and mining stocks were down more than the broader market on Thursday and up more on Friday leads me to believe that the sell off thus far has not been cathartic. It may turn out to be so if it goes back down further of course but not at this point.
David Lutz (he is on Erin's show all the time but I don't recall the firm he works for) said on Thursday that if the SPX did not take back the 200 DMA on Friday then the current breach would be significant. Obviously I'm favorably disposed to the idea as it jibes with the action we took yesterday.I would tell you at this point to not get caught up in which animal best describes the market or about official corrections (one of the most useless terms ever). The stuff I write about and implement focuses on signs of unhealthy demand which is not perfect but I don't think it has to be. The modern track record for the few occasions where the market does end up going down a lot is to warn very early with the last two important breaches coming in November 2000 and late 2007.
The pictures are from two different places we've been in the last year. Up above is Deep Cove which is maybe half an hour from downtown Vancouver. The ridgeline in the background has a great, and easy, hiking trail that we came back for on a nicer day. The other picture is of course Bryce Canyon which is absolutely worth the time it would take you to get there.
13 comments:
this may be asking a bit too much info, but would love to hear the mix on how your "average" client is positioned (no specific investments, just general percentages in stocks, bonds, etc.).
very few out of the ordinary target allocations
Well I think it is important to follow your discipline and I commend Roger for that. I to am following my discipline and it still tells me this is most likely a correction in a bull market. Sorry you do not like the animal reference, but it seems appropriate and is widely used.
SEG
the animal references are definitely widely used
Interesting trade, however if an inverter didn't care about the portfolio up and down ride through the various cycles why increase the positon?
I don't understand the question. An inverter?
Sorry investor.....
Still not crystal clear on what you are asking but we manage for a result that hopefully adds value over an entire stock market cycle. Anyone hiring us knows that coming in if they came to us via my writing or that is explained to them. If that is not a fit then presumably they do not hire us. One way to add value over the entire cycle is to go down less when the market goes down a lot. The 200 DMA breach is an early stop on the path to down a lot. We may not go down a lot but if we do then the trade from yesterday will hopefully help us go down less.
Thanks for a candid post, Roger.
So far, this doesn't feel like the end of the world to me. Maybe it's because it's still centered in Europe or just that each shock after 2008 is simply less painful. In any case, the 200 dma breach is agnostic and ought to be obeyed, if that's one's discipline.
Interesting. I coulda sworn that when I looked at the charts last night that the uptick at the end of the day Friday took market a spit above the 200.
DE
S&P closed at 1087.69. My chart shows the 200 day SMA @ 1076.69
Question did we just miss the action point?
Also, I get the feel out of this latest "correction" that the so called traders want to see a drop to make money on the volitility?
Am I paranoid?
yahoo finance has it at 1102.91 but the interday chart is wrong you need have a longer chart. big charts interactive doesn't give the level but the index is clearly below. Google finance shows 1102.9something the last digit is partially obscured as I look at it.
Two comments:
First, although I did OK with SDS in the last big drop, I noticed at the time that Roger's timing was better. That makes me inclined to follow his lead now.
Second, there have been lots of warnings about SDS, which unfortunately include a lot of misinformation. I've gone to some trouble to go through the algebra and come up with some rules about when the tracking error is a problem and when not. If you are interested see here. (And if you are not comfortable with a bunch of equations, just skip to the end of the post for the rules.)
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