During the recent selloff emerging markets and materials felt a lot more pain than the broad market. This makes some sense on two levels. One is that both areas have outperformed the broad market for ages and the other is that in averting risk people sell things that are thought to be risky.As time goes on and declines of varying magnitude come and go you may be inclined to trade around these declines. If you do there will be some declines that you trade well, some that you trade poorly and some that you miss altogether.
The accompanying chart shows shows that coming off the bottom from last week that emerging markets, as measured by iShares MSCI Emerging Market (EEM), and materials, as measured by WisdomTree International Basic Materials (DBN), have come back significantly faster than the S&P 500.
Neither of these funds are all the way back, not even close, but the extra decline felt before is now being made up with extra snapback. If the market indeed takes back essentially all of what it gave up earlier this month it makes sense to think that these other areas will take back most of their respective declines as well.
To be clear this post is not about predicting what comes next. The point is to create some context around fast declines and what happens if you miss them or maybe to point out that some folks will be better off not trading them. A recurring point on this site has been that fast declines are usually followed by fast snapbacks which is what we have had so far. That is not to say that a slow decline may not be next because some sort of decline could be the next thing but panicking into fast declines is the wrong trade because there is some snapback.
Anyone who struggled emotionally earlier in the month with their portfolio might want to think about some changes now before or in case the market panics again. I have no trade to make in that context but some folks might.
19 comments:
Thanks, Roger. In the web world too many experts shill the hype and cherry-pick the data. You simply call it from experience. John
Indeed, Roger. I did a lot of buying during the decline and I'm now sitting on some cushion thanks to the snap back. Did I know it was going to snap back? Nope. I took the risk while everyone was fearful. I could've just as easily had my ass handed to me. Also, buying during that fearful time was a difficult thing to do. There are no sure things, only probabilities. You need to have a plan either way the trade goes.
I wouldn't bet the farm on this, but when the markets were really declining the $ went up. Now, that they are steadier, the $ is declining almost in tandem with the pace of the advance in equities.
I suppose it all makes sense in a flight to safety, but I just foiund it interesting.
Rick C
Yep. Stuff that has the least to do with subprime - energy, metals and emerging markets - had the ugliest selloffs.
That's just how it works.
I was buying too.
Bill, You are lucky because you technically should have lost that money you risk. I am still negative on the year like everyone else.
ytd....hardly negative on these broad based index etfs...though I know roger does not see his top down world from these asset classe
iShares S&P Latin America 40 ILF 18.87%
PwrShares Dyn Mid Cap Grow PWJ 18.56%
iShares Pacific ex-Japan EPP 14.18%
iShares Emerging Markets EEM 12.07%
iShares Morningstar Mid Growth JKH 12.02%
I think this is an excellent point to unload part of your portfolio if you are over weight equities. Next week may have a better day, but we should be going back down soon.
This will not end soon.
This is not looking good. Paraphrased quote below
growth in U.S. private financial debt is outpacing GDP growth, 8.7% to 1.5%
Who ever wrote the above actually should not have used real GDP growth but year over year including inflation for the comparison , but still inflation is only running around 3%
Bottom line is individuals debt is high and growing faster than GDP (or unsustainable)
The Fed will most likely ease but I think they are going to want a wash out of individual debt to wash the slate clean. In other words lots of foreclosures and bankruptcies are coming.
This may be painful but somebody has to clean up Greenspans easy money credit expansion.
The solution can not always be lower the Fed funds rate and pile more debt on the consumer to avoid a recession. Consumers eventually have to pay for things. If we do not do it now it will be worse in a few years from now.
I would get ready for decreased earnings by corporations which will make the low P/E multiples soar in coming quarters or stock prices fall significantly or both.
anon 12.16
And, when would you buy back? If one didn't sell at the first spike in July, which means doing extremely good timing, then there is increased risk of whipsaw damage. A lot of passion on each side of the bull-bear argument. And, actually, find both very convincing. Since the mkt is rising as I write, the bull view looks better...which is that the financial mkts are now bigger than the all mighty u.s. consumer. It's about sustanined global growth. While I do not manage my portfolio as Roger does, he is one of the few who share a more important process....PORTFOLIO MANAGEMENT. Sorry for yelling.
anon 12.52
"And, when would you buy back?"
I am expecting a significant decline so the length and depth are difficult to predict at this time. I do not like mechanical rules but for those that like them you could wait for the decline to become obvious to all and then wait for the S&P to break above its 200 dma. I just flipped Rogers selling rule and added the obvious decline because you might get whip sawed here for a while (I do not know).
The initial clues to the next bull market are difficult to predict, but I hope to buy back in before the 200 dma
You may feel better on this rally, but look at the volume of trades during the decline versus this rally. Much less volume on the rally.
I did sell in July, but This rally does not look like a bad exit point either IMO.
Buy and hold is not a horrible strategy. I use it a lot my self. I just do not like it for major declines. Last time I sold everything was 2001. Bubbles are no fun on the way down. Housing and associated credit bubble seem very real and very nasty to me, but you are entitled to do as you please.
Roger:
What is your favorite emerging market ETF? Do you consider it a buy at these levels?
Thank you.
BTW if you do not believe my perspective on the real estate bubble check out what Ken Heebner manager of CGM realty mutual fund said in April.
http://tinyurl.com/2nxdhv
Mr. Heebner has an excellent track record in real estate and you could have been warned in April.
Me I try to stay in the market until the liquidity runs out :)
If you want to see some of the worst of the housing market look at miami condo prices per sqft
http://www.zilbert.com/hot_condos.asp
Florida housing is better, but still rather unrealistic versus peoples salaries IMO.
This, by Ken Fisher at Market Minder:
"The lightning-swift shifts in short-term sentiment are why you should never, ever try to time short-term moves. You cannot predict what will overwhelm investors next, nor can anyone guess when mood will shift again. (Which is why surviving as a profitable day trader requires an absurd amount of luck, a masochistic god complex, and an understanding or absent spouse, or alternatively, a Faustian deal of some sort.)"
The SPY has closed above the 200 dma for the last three days.
Anon 12:52 commented:
"Since the mkt is rising as I write, the bull view looks better...which is that the financial mkts are now bigger than the all mighty u.s. consumer. It's about sustanined global growth."
I still believe though that if the US sneezes, the global market gets a cold. Remember back in February when China's market went down, most all other global markets followed suit. Just think how they will react to a US recession.
Mark Gilbert at Bloomberg's commented: "At least the ridiculous claims that the subprime crisis is confined to the U.S. mortgage market have subsided."
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_gilbert&sid=aby6oZLK3dnE
Well, not with everyone on this blog I suppose.
Wih the election cyccle being compressed, I do not see the Fed doing anything to induce a recession - or to rock the boat significantly one way or the other.
Sub-prime will be on the ash heap of history in a few months. The challenge is to think ahead as to what the next crisis will be which will have an impact on the 2008 elections.
I have been buying securities more than selling - and adding to my physical real estate holdings on a cash basis.
There is only so much that the Fed can do. If they could always stop recessions we would never see them.
Gee,
Do you think Ken Fisher is "talking his book?"
Talk about having a God complex...
Sorry, the guy just drives me nuts!
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