You may feel like doing this but the drop today is far from unprecedented, we had a similar (but worse) sell off on February 27.The market is capable of big declines on any day and when it happens you may be inclined to act on your emotions.
It is days like today why I prattle on so much about picking an exit strategy ahead of time before you might be emotional so all you need to do is stick to your plan, whatever that may be.
My plan calls for some sort of defensive action at 1450 on the S&P (that is roughly where its 200 DMA is).
The market will either get there or it won't and I don't really care. A bad few months (if that is what is starting) will happen over and over in our investing lifetimes. This is one of those times or it isn't, I don't know. Really I don't have to know and neither do you. If you are disciplined over and over you will add value to your returns over the long term even if you don't manage this situation exactly right.
To further stress how unimportant this is, how does the LTCM selloff from 1998 impact you today? It doesn't.
If your exit strategy had you reduce at 1510 or will have you reduce at 1420, it doesn't matter, just stick to whatever your strategy is and don't worry about it being exactly right or exactly wrong. If you are right this time, great but you might be wrong on the next go around and vice-versa.
24 comments:
I like to consider this more of an entry point than an exit point.
I share billb's sentiment. Have been buying my ass off. Lucky I was 50% in cash today.
Entry point will come eventually, but I would not try to catch a falling knife. Liquidity issues will not be resolved overnight. Last summers correction took a little while and this one will too.
Very true, that's why I've only been buying strength, Apple & Baidu. Hardly trying to catch a falling knife, more like trying to catch it going up.
Definitely a buying opportunity if you see good value somewhere, even if it skids a little more. What is destined to go up, will go up. It's all based on true value. This is one of those times when patience bears fruit; it isn't necessary to speculate.
My exit strategy? I'm going to Oshkosh to look at airplanes at the Experimental Aircraft Association annual Airventure gathering.
Time to forget the market for a night and double my Viagra dose.
My timing model fell to 2.5 today but that still puts me at 100% long. Unless the market puts on a huge rally tomorrow it looks like my model will fall to .5, forcing me to sell positions until I get to 60% long.
My gut tells me this is probably a head fake but I never try to out-smart my models.
Roger, your sound seasoned counsel of
having a plan made ahead of time is so refreshing and useful and I do appreciate your advice.
I thought I saw a top last week on the DOW and I was pretty darn close. I'm not convinced the bulls are done. This may stagnate the market for a bit and I expect volatilty. I think the real damage will come when unemployment presses higher. That will be my key indicator to go short with all i've got. I also think when the troops start coming home and LMT BA and NOC start cutting production we will see major layoffs. Lets face it, the war machine is keeping this economy afloat. IMHO
the defense spending angle is very insightful and one that a lot of people have drifted away from, including me, but I think it is very important.
I tend to doubt defense spending would ever get cut. It's the ultimate pork for the folks back home. Try to cut it and you'll be accused of loving terrorists, etc. Maybe it will take more a domestic security angle. The stuff you need for a low-intensity infantry war like Iraq has lousy margins anyway. Bring on the $5 billion submarines. Who knows, Hugo Chavez might be planning an amphibious invasion.
War machine spending??????
You have got to be kidding. This is a 13 TRILLION dollar economy. what is the increase of NORMAL defense spending for the Iraq war? You are living in the past. WWII, Korea, and Vietnam were significant percentages of GDP. This is not.
If you want to object to the war on moral, political, or various other reasons I will accept your position, but if you think that the war is propelling the economy you just do not understand how things have changed.
No I'm not kidding. it my humble opinion. I am a big believer in the trickle down effect. Some day go visit Schenectady NY and see how GE (40000 employees strong at one point), pulling out effected the entire city. Maybe you don't see how much goes overseas such as food everyday, which is one reason our food prices are sky rocketing....again IMHO
I read this blog regularly, and I enjoy Roger's commentary very much. But I'm not fully getting the concept of an "exit strategy" when the market drops below some point. Aren't we supposed to "buy low and sell high"? If we sell after the market dips, aren't we putting ourselves at risk of a rebound while we're in cash? It certainly makes sense to me to sell if the market is about to go bearish, but how could we know that... wouldn't it make equal sense on a correction that we have a buying opportunity? I'm not trying to be disagreeable here, I just want to understand this better so that I can develop my own "exit strategy" if I need one.
Is there any statistical or mathematical basis for such strategies?
the context for exit strategy is the attempt to avoid a chunk of the next down a lot period in the market as opposed to watching a normal 25% bear market decline unfold without doing anything.
I try to be fairly consistent with not worrying about down a little but wanting to try to miss some of the down a lot. My exit strategy revolves around the market signaling a problem with demand for stocks.
Quite simply there are times where being net long is not ideal. Buying low and selling high is the goal but to do so blindly with no strategy (not saying you have no strategy) is lousy performance waiting to happen.
I agree that this is a good time to look at certain individual stocks that were innocent victims of today's carnage.
And it is also a great time to look at purchasing real estate on the cheap and actively managing it to further diversify your portfolio.
Regarding war machine spending.
The volunteers serving in our military deserve the best equipment money can buy. That will save many of our liberal friends from having to sweat in a desert or jungle as a draftee (sent by a Democratic President, perhaps).
Policy may change, but a robust military cannot be compromised.
By all means, feed the M-I-C with tax dollars. Forget those people who earn less than the median income in this country.
sometimes to need to open your eyes and learn new tricks.
The new trick is called an obvious once in a lifetime market crash on the way.
I am very thank full for folks like yourselves as it allows me to keep adding to my short positions on the way down to the bottom.
LOL.
The median income in the US is a King's ransom just about everywhere else. I especially love client's on Section 8 subsidized rent with a plasma tv on the wall and an SUV in the driveway.
Actually a return of the draft would be ideal and not just for military service either: there are too many cooks stirring the pot on both sides of the isle who have little or no skin in the game and too many citizens with a dedication to national service that frankly appears somewhat less than robust (apologies for the mixed metaphors and allusions). It doesn't hurt to consider the possibility that the proportion of GDP available for discretionary purposes is probably smaller now than in the past.
But never mind that, the topic is wealth and how to keep it so: (1) a strategy for regulating risk is inherent in seeking reward, doing one w/o the other is unwise; (2) there are a number of quantitative strategies for regulating risk, controlling position size using Kelly's equation is a good one; (3) the national real estate breakdown is accelerating and that is a recipe for overshoot, particularly since (a) funding/credit problems are being conflated with the object of credit deployment AKA acquisition and control of real property and (b) national dynamics may affect that funding but real estate remains regional or local in character and so, io ipso, does acquiring and managing it; e.g., I'm worrying at fading home builders and mortgage lenders like a dog stripping a carcass but keeping my eyes open for a nice yard to bury the bone too (so to speak).
Hang in there, could be a relief rally tomorrow to give folks a chance to do some adjusting if they've a mind to. Good luck to all.
I read this blog regularly, and I enjoy Roger's commentary very much. But I'm not fully getting the concept of an "exit strategy" when the market drops below some point. Aren't we supposed to "buy low and sell high"? If we sell after the market dips, aren't we putting ourselves at risk of a rebound while we're in cash? It certainly makes sense to me to sell if the market is about to go bearish, but how could we know that... wouldn't it make equal sense on a correction that we have a buying opportunity? I'm not trying to be disagreeable here, I just want to understand this better so that I can develop my own "exit strategy" if I need one.
Is there any statistical or mathematical basis for such strategies?
As Roger puts it, the question/issue is one of not worrying about "down a little" but trying to avoid "down alot". My own view is that I agree with the use of the 200 day moving average (along with other things I personally use) as the "line in the sand". There is some good evidence the 200 DMA is an effective indicator
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461
My personal strategy is NOT to sell or reduce stocks, but to simply become more defensive by hedging with puts and increasing the allocation to defensive funds like Hussman Strategic Growth. Each person has to come up with their own strategy.
In any case, I think Roger's main point is 100% correct which is to have some plan in advance rather then rely on emotion and your gut in the moment.
Some people get really touchy about this war that Bush started.
I was merely stating my opinion on the economics of war.
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