A read left a "quick question" as to whether I thought a bear market has started or if this is just a correction. Well the question might be quick but can the answer be quick?
First I would say that my hunch is no. It seems to me that bear markets do not start as dramatically as what just happened last week. I said the same thing about the Q1 dip as that one unfolded too. Anything is possible of course but for now I say no bear market.
I wanted to answer the question concisely up front but I have to say I think it is the wrong question, at least for me it is the wrong question. The way I view it is that demand for stocks is either healthy or it isn't--here I am saying the market above or below the 200 DMA is the tell for how healthy demand is.
If there is a problem with demand it makes sense, to me, to be defensive and when demand is healthy it makes sense to be more invested. BTW demand for stocks is healthy the vast majority of the time.
To be clear there are times where the 200 DMA gets it wrong and there are several other ways that other people gauge market health, I am not saying the 200 DMA is the only way and it may not be the best way.
For you managing your own portfolio it probably is not necessary to worry about animal adjectives to describe the market. I also don't believe it is necessary to outguess the next bear market or correction. If you own stocks you have to be willing to endure down a little. Right now the S&P 500 is not down anywhere close to the 10% that usually defines a correction so still down a little, very little really.
My approach is simply to be invested most of the time, stay reasonably close to the market over time and try to miss a big portion of down a lot. For people that have saved enough this is sufficient and means that unreasonable risk does not need to be taken.
The market goes up enough over time to give people who save properly enough money when they need it so people do not need to take on as much volatility as it seems like they do. Further missing a chunk of one down a lot in your lifetime can add nicely to your average annual return.
This sort of approach or view of the market is difficult for a lot of people to grab on to. Ken Fisher talks about how human beings are not wired for investing and I think this is part of it. People seem to want to make big bets on volatile parts of the market and often do so with poor timing. The building block for this is that if you save properly, stay in equities and never take defensive action you have good chance to having enough money. In that context the things I write about are my effort to simply give clients a smoother ride to that end.
The picture is from the north rim of the Grand Canyon.
24 comments:
Perhaps you could rename the post to "Sunday morning Jello".
What the hell are you saying?
You don't think you should be a short term trader, yet you think you can somehow miss the big down moves?
Last week was the biggest down week in about 5 years. Did you trade it, or not?
To me down a lot does not apply to single digit moves. This post mentions the 200 DMA is a tipping point, IMO, to signaling down a lot might coming.
Single digits is down a little.
So, if I understand correctly, you go defensive when the 200 DMA turns?
Last time that happened was July last year. Going defensive at the time would have been a disaster, since the market went straght up right after that.
There have been quite a few 200 dma crossovers in the last 5 years. Did you take any action on them? What did you do in the 2000-2002 bear market when taking action on the 200 dma would have paid off bigtime?
Last week was bad for some as evident from the hostile posts.
Not every style will fit everyone nor every situation.
IMHO follow the trend, and right now I am cautious as I see the trend and senitment turning down.
Is this bad? Not for all. Money can be made in both bull markets and bear markets, knowing which side of the fence to be on is the trick.
Hostile posts?
No, just tired of mealy mouth, say-nothing platitudes.
Perhaps the worst is the suggestion that Roger has some sort of trading strategy to avoid the big down drafts. Its presumes that he knows not only when to exit, but also when to re-enter. Show me the trading records and I'll believe it. Over the long term, there are very, very few people who can outperform a buy and hold index strategy. I am highly suspect that Roger is one of those people.
You seem to be unfamiliar with this blog. Roger is not a trader. He is an investor.
i think Roger is on the right track
the buy and hold idea is a pretty concept, but it lacks one crucial input
think for a minute
INFLATION
back in 1972 20 dollars would buy you a whole shopping cart of groceries
today that same 20 spot gets you a six-pack and a couple of other items
buy and hold doesn't really cut it friend, you may feel rich but a million bucks is not what it used to be, period.
why almost every homeowner in metro areas are half way to millionaires with just their home equity alone
you need to add some gadgets and whistles to your investing or you are chewed up by inflation
back from a hike to find some real nastygrams, wow.
As far as when to get back in, I said this, when it goes back above the 200 DMA. As far as the false positives, look at the archives from when this happened last summer, before you cast stones I was very specific as I will be if it happens again. I started out making a couple of tweaks in case it was a false positive. It is a gradual thing in case I am wrong. This protects clients from getting whipsawed badly. A slight lag to a big move up is not the problem that completely missing would be. If you actually care, as opposed to just being a troll then check it out.
As far as 2000-2002, I was not yet managing money. I was still trading and then moved on to Fisher.
As far as empty platitidues, why do you have so little respect for your own time as to read an utterly worthless blog?
mOOm, I would ask you why you bother reading this site as well. I believe it was you who kind of crapped on me on another site. You are of course free to do but then coming back here seems like a waste of time, no?
Roger,
I might not be totally correct but back in Nov 1973 the SP500 hit a point and never got back up to that point until Jul 1980. A little under seven years from one high to the next time it closed above the previous high. Quite a dry spell. How would one approach this type of market??
Thx, Mark
So, you've only been doing this 200 DMA after 2002? Well, it certainly has hurt your portfolio then. A buy and hold would have easily bested what you so loosely describe as a defensive strategy based on the 200 DMA. And after accounting for the early realization of capital gains, your strategy really is bad on an after tax basis.
Roger makes some terrific points about investing. I have read some other blogs which are real downers. In their collective opinions, we are about a nanosecond away from a complete meltdown of the market, the economy, and the whole western world. In their opinion, the only way to be safe is store everything in gold, build your own homestead, etc. etc.
I find the notion of watching the 200 day moving average and then developing a slow and non panicky exit strategy, sound advice. In fact, I see a great deal of the "Fisher philosophy" here. It is good to know that 5% is not "down a lot" even if it seems so.
Ken fisher points out that down 5% is about 10 times more emotional than up 5%. It takes a while to learn this and to ride these small dips rather over react. I did that last May and basically missed all the up move over the summer.
I have appreciated Roger sharing his thoughts. Patience is still a virtue.
Rick C.
Mark,
I would say to go to Bigcharts.com and plug in SPX from 1970 to 1980 with the 200 DMA. The strategy worked pretty well then. I can't know exactly what I would do other than be disciplined to my strategy and implement defensive action slowly.
To the other guy, you still haven't answered why you are wasting so much time here. There is clearly no making you happy. Feel free to start your own blog and contribute something that would clearly be of more value than anything here as clearly there is nothing I can say to make you happy.
Roger,
Just wanted to thank you for your blog. I have learned a lot from your writings; some of which has contributed to my own portfolio allocation and asset selection. I can't imagine the effort that goes into keeping things up to date providing daily insights. On top of you have to deal with unwarranted "attacks" by random folks. I can understand constructive disagreements, but some of these recent comments lend little.
Thanks again. Keep up the good work!
"You seem to be unfamiliar with this blog. Roger is not a trader. He is an investor": This was my comment posted as anonymous.
Just want to let you know I appreciate your commentary. I suppose the hot head lost a lot last week and was venting. Ignore him. John
Roger,
As a long time reader (part trader/part investor), please continue with your nomal train of thought and ignore those that only come out when obvious timing errors have arosed them. Still enjoy your commnets as they sometimes keep me on course of not jumping one way or another without thought
Roger - I find your stuff interesting and have never commented about you on any other site as far as I remember. You say in the post that exiting at the 200 dma is a strategy tat might make sense. To me it looks problematic. So I'm just asking did you try it. It could work in the long-run by getting you out of a big bear market as in 2000-2002 - somebody would really need a lot of discipline to carry it out. I wasn't criticizing you at all. Just curious what your experience has been.
PS - I even have a link to you on my blog. Maybe you mixed me up with someone else?
apologies to you if I have you mistaken for someone else. that was no cool by me.
Models this week:
Timing Model = 1.0
70% long, 30% cash
Global Allocation of long positions
MSCI EAFE Index 40%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 30%
U.S. Sector Ranks
U.S. Oil Equipment, Services & Distribution 3.5
U.S. Semiconductor 3.5
U.S. Oil & Gas 3.0
Precious Metals 2.5
U.S. Technology 2.5
Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
FTSE/Xinhua China 25 Index Fund 3
MSCI South Korea Index Fund 3
MSCI Emerging Markets Index Fund 3
MSCI Germany Index Fund 2
MSCI Mexico Index Fund 2
MSCI Malaysia Index Fund 2
MSCI Singapore Index Fund 2
MSCI Canada Index Fund 2
MSCI Pacific ex-Japan Index Fund 2
MSCI Taiwan Index Fund 2
One sentiment indicator is tettering on the edge of OS territory but we're getting very close to the 200dma on both the Russell 3000 and the Value Line Composite. I'm taking my cues strictly from model readings this week.
I like the fact that you allow posts that contradict or question your strategy, as obnoxious as some of these may be. I am a true believer in allowing individuals to express their opinions even if at times they sound well, er, um....humorously idiotic.
The hosts of a few other blogs I visit are rather touchy about such posts. Are these bloggers self righteous or perhaps insecure?
Thanks Roger for a great blog. This is my 2nd comment on your blog... the first was last week asking if there was any statistical basis for exit strategies, to which someone replied with this link that describes the 200 DMA exit strategy and how it fares when back-tested:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461
This looks like good evidence to me that the 200 DMA is an effective indicator.
So now I'm wondering if this strategy is now well known. I do see the words "200 DMA" a lot... if such an exit strategy was employed by institutional investors, then could it be a self-fulfilling prophecy, so to speak? I mean if a significant number of investors are going to pull the sell trigger at 200 DMA, would that cause a sudden crash starting at 200 DMA? Just wondering if anyone has thoughts on that.
I can't find it now, but someone mentioned factoring in "sentiment" which adds a psychological dimension to the equation here.
I'm not a sophisticated investor and don't understand how short sales work... but what would be the effect of a lot of shorting of the market (a sentiment indicator) when on the cusp of going under 200 DMA? Does pervasive shorting tend to stabilize or destabilize the market?
Sorry for throwing out so many questions at once.
bird nut
Could the 200 DMA lose its relevance for being too widely known?
Anything is possible of course but I think the threat is more to people who try to actively trade using big bets.
I view it as a warning that there is a problem with demand for stocks that causes me to start out taking baby steps of defensive action so I don't whipsaw clients.
If the long exposure gets reduced by 3% and then the market goes up 20% there will only be a slight lag at worst.
If the long exposure was cut in half and then the market went 20%, yikes.
Hey Roger,
I came across your site recently via my friend Eric's stock blog over at TheFreshTrader.com. I really enjoyed your blog and I've added it to my RSS reader. I was wondering if you'd be interested in a link exchange with my own stock blog, at www.wallstreetmatador.com.
In any case, keep up the great work!
Mark
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