The market is clearly in an emotional state. It is during emotional times like now that mistakes get made. Selling now is not necessarily a mistake, nor is buying. Where I think mistakes come in is when you wake up, see what is going on and just decide to make serious changes.
Jim Cramer said something on TV about selling financials. I do not know the entire context of what he had in mind but blowing out all of your stocks in that sector yesterday in reaction to American Home Mortgage without having probably heard of that stock or having decided in advance how to handle a crisis, or studied past crises is probably a bad idea.
I think the trigger points for panicked sales are lack of preparation and being unaware of the current events that threaten or move markets. I write a lot about removing emotion from managing your portfolio. Over time the market is guaranteed to go down every once in a while, guaranteed. And a little less frequently the market will go down 25% or so.
You know this will happen at some point (this is not a prediction of when). It makes sense to to understand a little bit about what has caused huge declines, understand a little bit about the difference between fast declines (like crashes) and slow declines (like in 2000). It also makes sense to understand the current events that could move the market now and understand how similar threats have moved the market in the past. This will help you make better decisions.
I alluded to this on Sunday night, I was trying to point out that avoiding being blindsided will help you not succumb to emotion. A reader put it best when he said being aware of what is going on goes a "LONG way towards eliminating the 'WTF happened?' thoughts" that come along every now and then.
As I mentioned the other day, if you have an exit strategy planned out from before the market hit the skids and you stick to it you will be calmer and realize that days like yesterday or weeks like this one past just come along every now and then.
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14 comments:
Is all ok in Prescott? Looks like Scottsdale got pounded with rain
I didn't see Scottsdale but we have had a lot of rain but I am not sure I would say it is any different than any other monsoon season in terms of how much rain.
We get a lot everyday but this year most of it comes late morning which is a little strange. Usually the heaviest rain would be late afternoon.
Nobody laugh but I'm seeing some large-cap growth resilience and I'm actually lightening up on a couple short positions here; interesting ...feels a little weird too but then I look at my ongoing shorts in the financial and homebuilder space and wonder if I should double down ...strange days.
rw,
Are you talking about doubling down on the short side?
Friday should be a wild day with economic news
OK so are we at the 200 DMA? Does this mean we should watch some percentage of the public reduce the equities in their portfolio and just take a deep breath?
This is more than jitters, more than subprime, and is going to cause some pain.
THe exact way I do this is on whatever day we close below the 200 DMA I wait until the following day. If that is an up day (fingers crossed) I place no trades.
If the day after is a down day I would take action toward the end of that second day.
I have one stock I would sell across the board picked out and ready to go if need be and I am taking a little time to assemble how much double short to buy for each client.
I may do either or both.
"Actual performance of weaker Alt-A loans...Absent strong compensating factors, we will model these loans as subprime loans."
The above statement is from Moody's. So the problem seems to be contiually growing. It feels like drip, drip, drip at this point. I would plan on this continuing into the fall if I were you.
What a wild day.
I feel like a yo-yo.
Roger, thanks for clarifying the execution of your exit strategy. Others who advocate a similar approach seem more trigger happy, which could entail multiple exits and re-entries during volatile periods like this. Raises commission and tax issues, of course.
Anon 10:04 I meant doubling down short on homebuilders and mortgage lenders but the point became moot pretty fast and I wound up mostly taking profits this morning instead; the intraday price ranges and volatility between 10:30 and 11:30 in particular were simply astounding, full blown panic selling followed by big snap backs (but not to previous opening levels). Interesting.
I wonder if the last minute buying wasn't 401K buying, as it is August first. Then short covering as the shorts had to cover into the buying frenzy.
I say we head back down tomorrow into the close as I can't see how many people will want to hold into the economic data of Friday.
How can you guys stay calm in this meltdown, I was up 20% for the year two weeks ago and now I gave it all back in FIVE days. My portfolio is down 13% on the year now, arghhh. I hate markets controlled by greedy big bank$.
Greg
How can you guys stay calm in this meltdown, I was up 20% for the year two weeks ago and now I gave it all back in FIVE days. My portfolio is down 13% on the year now, arghhh. I hate markets controlled by greedy big bank$.
Greg
You were up 20% for the year and lost all the gains plus some more in 5 days on a roughly 5% market pullback?
You've got to be running a VERY AGGRESSIVE portfolio that is either using leverage, has big bets, high Beta, or loaded up on aggressive asset classes like emerging markets.
My advice to you would be to CAREFULLY think through what you are doing, and ask yourself, what if the market drops 10%, what if a bear market hits and the market is down 20%+. How much will you be down under those scenarios? Can you accept that? Use the past week as a potential learning lesson as to what changes you might need to make.
Frankly, last week was a NON-EVENT in my portfolio and those I manage. In fact, I was up in some portfolios. I have large positions in Berkshire Hathaway and Hussman Strategic Growth Fund which I consider highly defensive and performed very well last week. Additionally, I have a substantial allocation to commodities and one of the reasons is diversification and negative correlation, and commodities were actually up last week.
I think Roger often makes the excellent point about knowing what your portfolio is exposed to and how it will respond under different market conditions. In my case, I'll probably underperform in a huge up market but I'll outperform alot in a down market. That is a conscious decision on my part. Sounds like you are positioned to outperform in a rising market and get crushed in a down market.
My timing model is now at 2.5 signaling a 100% long stance. 3 of the 4 sentiment models I follow are signaling levels of extreme pessimism consistent with intermediate market bottoms. That doesn't mean we've seen the absolute bottom for the cycle, but the odds are now in the bulls favor.
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