They showed this bit the other night on the SNL in the nineties show. I saw this one when it first aired, it might be the funniest skit they've ever done.
A reader left a comment quoting a very bleak outlook by Bill Cara. I could not find where Bill posted but you can click here to read it in the comments on this blog.
The flaw in the perma-bull case is that encourages no planning for a cold winter.
The flaw in the perma bear case is the risk of missing too much normal upside movement.
The flaw in my belief of being moderate, letting the market show signs of rolling over before taking action means there is no realistic shot of getting out at the top and probably no realistic shot of getting in at the bottom.
Personally I don't see the benefit in trading ahead of an Armageddon (intentional hyperbole) that has shown no signs of starting. This is not to say that the occasional trade or tweak should not be made; if you have read this site for a while you know I do make a few trades per quarter.
I also think it is irresponsible for the perma bulls on the various TV shows to never talk about exit strategies, what signs to watch out for or even acknowledge the bear case.
I tend to preach about preparing for a downturn and seem to expect it more often than not, while staying very invested, for several reasons. Knowing that a bear market will come at some point and having some sort of trigger point planned ahead of time greatly reduces the likelihood of a fearful reaction. Poor decisions tend to be a function of poor planning.
I also think it helps clients to acknowledge that down turns come, they should not be feared and that we have a simple exit plan to take defensive action when the next bear market starts.
Further, protracted downturns happen very rarely. The next time the market actually does cut in half (my hunch this is a long way off) I don't think it will be crucial to totally avoid the first 10%, which a lot of people seem very intent on doing, on the way to 50% down.
20 comments:
Bill Cara is probably depressed that the Socialist did not win the French election. Give him time to get over it while he sits in his tax haven moaning about social equity and scores of other perceived and imagined flaws of the United States.
There is data galore on his site. He is well-connected. But in total, pretty unimpressive on almost every other account.
The reason I'm a little edgy watching for a turn is I remember 1987 very well. About the time Roger ate his very first cone. Was working 18 hrs/day at a startup company and couldn't look after things. Slaughtered. There was no time to get out. Marti Zweig pegged it Friday night on Louis' show, and by the end of Monday, portfolios were smoldering carcasses.
Now after a 6 year stint to repair the damage my last money manager did in the 2000-2001 debacle, one thing is for certain, I'm never getting smashed like that again. I'll forego the last 5% thank you.
Everything is in a bubble. A global self-reinforcing credit bubble, with a lit fuse in the form of a parabolic Shanghai market and wanna-be parabolic Dow.
My timing source McHugh finds a Phi-Mate turn date on May 10 +- a couple days. Will the date be signifcant? It's all the Fib series ruler of the disturbances in the Force.
The Dow is losing the second derivitive ummph. The Dollar has nested massive H&S patterns. M3 is hidden and out of control. Jobs data is fudged. Inflation data is laughable. etc., etc. I don't see one single shred of evidence this is anything but a house of cards next to a window with a breeze.
I'm turning the corner and will skee-daddle until the two-step, double, 1987-like whammy has you all dancing to the cow bell.
Lets see what the Fed will stir up today. Appreciate all the fine commentary here.
DaveB, I was in the business in 1987, in college, cold calling at Dean Witter, lost my job.
So you are trying to anticipate a 1987-like crash? How long have you been trying to do this?
How long is your time horizon? The market made a new high in Aug 1989, just two years after its previous high.
You say you will forgo the last 5%. Declines of 5%-20% are very normal and usually take a short time to retrace; Asian contagion, LTCM, September 11.
All of the reasons you site are very troubling, I agree, but there have always been things to threaten the market, like the cold war.
I have a tough time thinking this is worse than the cold war or the great depression. I also have a tough time believing that a crash would be different or the that a slow rolling over (the thing that would lead me to take more action) would be different.
Been looking for a downturn at several junctures and the resultant ones were small. Last glitch, did quite well with small layer of double inverse. Think we will have a big dip, recovery, then the party will end.
Depends on what the Fed does. They will either sacrifice the markets or the dollar.
As far as the time horizon, between now and when I'm dead. And I suspect the market will rally on that occasion just to spite me one last time. ;)
McHugh is anticipating the '87 like scenario, double dip, sucking in the bulls after the first V.
My scenario is brader in scope, as I can see the dollar collapse and peak oil joining forces around 2009 - 2010 to take down everything. One reason I will probably be hoarding some bullion out of the country within another year.
Know I over trade compared to many. This was an issue when I used ML but now at Fidelity at $8 I can trade till I'm blue in the face. And they gave me a nice free slug of them.
Get 25 - 30% annualized, want 50%. But when the party ends mid-late year, will just ride down the double inverse ETFs probably clear into the 2010 debacle.
Patience... none here.
I have no advice for you as your methodology and thinking are radically different from mine. Why I read and enjoy the blog. There is something to learn every day.
First, Bill Cara gets more right than he gets wrong and the queer notion that he is a socialist sympathizer because he thinks current national policy in the US has done harm to economy and markets alike is a non sequitur at best and goes logically downhill from there.
Second, I seem to be somewhere between Roger and Dave B on this -- clearly I became too cautious too soon and while I have continuously been net long I've also hedged heavily and the opportunity cost has been palpable -- I do not plan to change course now nor chase after greater yield at current risk levels so I will only add one thing (and those who experienced 1987 may have seen different sides of this): It was not just that the crash was big and fast, it was that the market system froze; in many cases you couldn't get out even if you wanted to, the system would not act on an order even if it accepted it, and you often couldn't even get an accurate quote to tell you if you were financially alive or dead.
With circuit breakers in place and other policies designed to ameliorate sudden, large changes in price and order flow, there is some reason to expect it won't be like that next time (if/when there is a next time) but complex systems are what they are -- the unexpected does happen -- so any exit strategy must accept the possibility of error and/or delay. A rather left-handed way of saying there is at least a possibility the investor may have no choice other than Roger's gradualism.
In the meantime, might as well enjoy the continuing market rise. If foreign central banks continue to be significant contributors, what me worry; the big tide of money that created this lovely swamp may be ebbing but it's not gone yet.
Roger, Your 3 flaw model statement is spot on. Refreshing open eyes no glitz sensibility. I can not say I practice the investment religion of moderation but I do admire your steadfast idea of where you are going and how you are getting there. Find the right quant guy to colloborate with on your strategy, and I would seriously want to send you an account...not that you need it or anyone's suggestions. Whatever, I detect your star is on the rise.
Another refreshing post is on Mr. Cara. Great guys do have flaws. Anon, do you go there often and post? They could use some divergent opinion.
Hi Roger,
Thanks again for your commentary (it's appreciated). You have mentioned that market tops tend to make "a slow rolling over". Could you be more specific regarding your method of how to tell when a top may have occurred (i.e. do you use changes in moving averages of price, P/E ratios, etc.)? Thanks for any additional information you can provide!
Rich
Provacative comments on this post today.
Cara fits nicely into an old adage:
If you can't dazzle them with brilliance, baffle them with bullshit.
He runs a data rich website with an occasional crafty idea, and like many on the left wants desparately to remind the reader that he is wiser than the rest of us at all times. I read him occasionally and an not impressed (though many bloggers and news hounds would take issue with me on this).Long ago, I stopped equating a good pen and a spellcheck with a superior mind.
Ken Fisher observed that an average 2% decline 3 months in a row is one form of rolling over which sound good to me and actually does not happen very often.
That sort of thing, even if not exact is what I would look out for combined with TV giving us the all is calm reassurance.
I agree with Dave B that Shanghai has gone parabolic. Take a look at the SSE 3yr weekly chart and suggest that it hasn't.
I was actually thinking about this last night. I've recently started to hear more and more the bull argument that this market needs to go into a blow-off prior to the next downwave. The nimble bulls think that they'll be able to catch this parabolic blow-off and go short at, near, or just after the top. Good luck boyz.
If one is going to argue that world markets are shrugging off a US slowdown, because of globalism, then it is intellectually dishonest to ignore the parabolic Shanghai exchange. Could it not be that Joe 6-pack USA is tapped dry, and that there's nothing to throw into the markets. Instead, we're getting this dumb money feeding the China stock exchanges instead? Dunno if I'm making my point clearly here.
As for me, I have learned to adopt the strategy of buying long the best possible companies I can find, and selling short the worst dreck at bloated prices. As long as you manage your leverage, and exhibit patience, this is a strategy that can work in any market conditions.
momo,
one aspect of china i cannot reconcile is that shares of companies dually listed in Shanghai and Hong Kong are trading differently. The A share versions are much higher than the H share versions. There is no arbitrage mechanism, an inefficiency of sorts.
This is not an attempt to say it doesn't matter but just to say it could make things different (different could mean worse, I don't know).
Globalization? There are some countries that will feel a US slowdown less than other. This is something I have tried to explore here with countries that are "in their own world" and countries that don't rely heavily on exporting to the US.
The key to this thought is the word less.
On balance I actually like Mr. Cara, though I do feel the caution of a cult following. For the first time, a post of mine at cara.com is being withheld for scrutiny of maliciousness....nothing close. Am I being paranoid to think that what I say here effects posts elsewhere?
I would add two points.
First, in a well diversified portfolio, something in your stable will make money even during a market correction (bonds, or real estate, or gold, or hell even cash is paying 6% right now if you know where to look).
Second, if the DIA or SPY drop 20% tomorrow, they won't even erase the gains of the last two years. Sitting on the sidelines rarely workds because one cannot accurately predict corrections.
I will add however the the Entertainment shows were very edgy yesterday with the news that David Hasslehoff is drinking again. Can the correction be far behind?
I don't see BC as being a permabear. I see him more as wearing a fluorescent vest and serving as a cautionary reminder to investors. I never fail to be amazed at how one's political affiliations matter in the least, but some prefer to make that an issue for whatever reason.
BC's week in review is fantastic, particularly if you like to watch sectors, as I do. I also appreciate seeing his CARA 100 and the RSI levels on a daily/weekly basis.
But, different personalities resonate differently to us, and that is the beauty of choice!
The problem is that forecasting or anticipating a downturn involves guesswork. In my advisor practice, I have used a trend tracking methodology along with clearly defined entry and exit points to get me out of potential bear markets before severe portfolio damage occurred.
I agree with Roger that the top 10% is not very crucial since it could simply be temporary pullback. A market top can never be identified until it has actually happened. A good case was the blow off in 2000 and the ensuing bear market, which caused us to go to all cash on 10/13/2000 and stay there until 4/29/2003.
On the subsequent turn around, the bottom could not be identified until it had actually happened. No big deal. Getting out at top within 10% of the high or back in at the bottom within 10% of the low is as good as you can do if you are trying to use a bear market avoidance strategy.
Ulli…
oh, please, Bill Cara is the perfect contrary indicator. Look at what he said at the bottom of the last intermediate low - summer 2006.
But try and remind him of it and your comment will mysteriously disappear from his blog!
I had a parabolic blow-off last night!
Predicting market direction is impossible and unnecessary. Market timing isn't a series prediction - a lot of people don't understand this.
Dave B., you don't have to be hero. I suggest you read the forward to Ned Davis' book "Being Right or Making Money". I would rather make money.
Btw, just read Richard Russell turned bullish. I just about fell out of my chair when I read this quote:
"My take on the situation is that the stock market (and the Dow Theory) told us that an unprecedented world boom lies ahead."
Tom K.
How would you define "market timing?"
My personal definition: market timing is a risk management strategy based on data series that
provide a risk/reward precedent for a market or security.
Market timing has little to do with increasing returns, but can help reduce risk by cutting losses short.
Think about it like this:
Market timing is your goaltender, security selection is your Forwards.
Here's a great article by Paul Merriman on market timing:
http://www.fundadvice.com/fehtml/mtstrategies/0104.html
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