The market is on quite a roller coaster (this picture is funnier than a random roller coaster picture).Was there despair on Monday? Is there glee now? Is this a bear market or just a dip that should have been bought?
If you have been reading this site for a while you know where I stand.
In assembling a thesis, which I still absolutely believe, it makes sense to think about what will tell you if you turn out to be wrong?
I have a firm opinion that could be wrong. The rally closed Wednesday right at the exponential 200 DMA and a couple of points below the simple 200 DMA (according to BigCharts.com). As RW mentioned in the comments last night a new high made with conviction damages the bear case. Much was made that the lift on Wednesday came from Donald Kohn's comments that seemed to put a rate back in play. So either the rate cut rally is now done (not a good sign) or we get another one if they cut in December (which I would take as a good sign for the market).
One other point I have tried to make a couple of times in the last few days is that this type of rally in a bear (if that is what this is) is far from unusual and actually thus far unremarkable. In 2000 there were several rallies exceeding 10% after the peak in March (sorry Jasper I said one was 20% in the comment but it looks like the biggest rally was more like 15%). From April 2001 to mid May of that year the market rallied from about 1100 to 1350 and from mid September of that year to mid November it rallied from 950 to 1150 as it snapped back from 9/11.
The 62 points from the low close on Monday seems like the kind of move that relieves some people but I don't think it is significant yet. It it turns out to be so, great, but for now I am skeptical.
One last thing is whether you are bearish or bullish making big portfolio changes when the market is this schizophrenic is probably not a great idea.
31 comments:
This snap back was telegraphed a mile away. To quote myself from last week:
"i would suggest that the market is getting oversold here. If anything i am going to be covering some shorts today and Friday.
After next week's rally, when everybody starts saying the correction is over i will go back to net short in my trading account."
I think this is definitely the time to make changes to one's account. If you buy the bear argument, which I do, then now would be the time to add to your hedges. I bought SRS and added to shorts yesterday.
If you are still a bull then you need to look at the stuff that went down last couple of weeks but did not recover with the rally. Those are your laggards that you need to trim.
This type of volatility occurs all the time at inflection points. It helps the commercial traders to sell to (or buy from) retail investors. One should utilize those moves to make adjustments.
Here's an article I was reading last night basically saying stocks are too expensive and we should expect a bear market.
the article
I'm not sure whether I buy in or not.
sami, your sort of contrarian bent seems to make sense in the immediate term. at times being contrarian is right and other times not. seems like you have a good feel for it.
SD, i saw this yesterday, I think JackS left the link for me.
One thing about the article that does not resonate with me is that most valuations are not very predictive. Markets often turn for no reason at all, they just do.
From the Taleb book, this article is a great example of the need to explain things.
I am adjusting my portfolios (about 20%), adding a few more targeted ETFs and holding a few less individual stocks. I am retaining dividend-rich securities in both dollars and non-US currencies. Adjusting is like turning a battleship in a canal, but it needs to be accomplished from time to time.
I think that some investors would dogmatically stick with their portfolios even if a burning bush told them to adjust.
Oops, sorry for the link double post.
not at all, i think the reasoning in the article is good for pondering even if one disagrees.
roger, great article...in concept that one can have a holy grail of underlying fundies, my thanks to our readers...but, my head hurts trying to follow it....and, I want to understand any holy grail that will deliver the big picture. Are all the data points acceptable? Is the math clear? My read from you Roger is that it's just an exercise for the sake of exercising need to explain a bearish position?????
Jasper I don't think i follow you at all, sorry.
what data points? If you mean the gov't stats, i tend to agree that it does not quantify things like employment and inflation accurately but I do think it captures movement up and down most of the time.
On fundies, I don't think they mean much at big turning points but can matter, for example, in a recovery. a financial company with no, or very little, fundamental link to the crunch might go down a lot in sympathy but might come back a little faster.
As for the reason for this post. A major building block of my approach is that I turn out to be wrong, I have a counter strategy embedded in case I am wrong. The post today is to explore what would threaten my thesis.
Let me know if I missed your meaning which I think I have.
Talk of recession, a falling market, a falling dollar - to me it reinforces what I was already thinking of doing.
Look out for the occasional cheap buy (a bank?) that has a great dividend. And add a materials sector play with a good dividend, perhaps Wisdomtree's DBN.
Stephen.
Why do you think that materials will do well in a bear market? Is it the dividend or the sector, or both?
This article for may of this year stated: "Material stocks have the third best bull market record, roaring ahead by about 142%. The sector badly underperformed the benchmark from late 1994 until late 2000."
http://tinyurl.com/2cxo3s
Readers; what sector(s)do you think will do best in the next bear market? (one is coming even it's not in early '08)
My guess is energy and maybe utilities since these are things that we will still need.
JackS
My personal take on materials (and somewhat on energy, too) is that, bull market or bear market, demand is going to do nothing but ramp up over the next few decades.
I'm not really doing it because we're going into recession. I'm looking at DBN, for instance, because 1) I materials long term 2) international - less worry about a falling dollar and 3) dividend rate of over 4%, helping boost performance. Heck, you could even call it a China play if you want.
Lots of good comments. The big picture sure looks
bearish, although buying blue chips with P/E's <12,
above their 220DMA, and trading at a low point in their trading range seem attractive as longer term holds.
I don't see how heavily overweight in energy, commodities, AAA bonds, cash, with a smaller
weighting in foreign is not a good strategy.
Why there are no bond cheerleaders on the
board at this juncture seems a bit befuddling, but
I am a bit older and and have a 40% fixed income
allocation.
Cheers,
Scoot
Sami,
"After next week's rally, when everybody starts saying the correction is over i will go back to net short in my trading account."
I do not see how you can be so sure. I was hoping the decline continued a little further, but it did not. Now we have been oversold but not as much as previously. I see both a Santa Claus rally or a significant decline a both plausible at this point. I do agree that in the medium term it does look bearish, but that does not mean it can not rally into January from here.
Are you really that sure we will fall? We did get relatively oversold, just not enough to convince me this rally will not fail.
I have mostly cash at this point but was considering some spy for a December rally. I just do not have sufficient conviction at this time.
that was my statement from LAST week, before ThanksGiving, when Roger added to his double-short. I stated that we are due for a Rally and that I will re-position afterwards. a 550 points move qualifies as a Rally in my book, and i did adjust around the high of the day yesterday.
I do NOT know what will happen next. But in my opinion we are starting a bear market that will retrace about 50% of the move from the 03 lows... which will be about 25% from the recent high.
As such, I want to be short the weakest sectors, IYR (via SRS), IWM (via short IWM) and short retailers (like JCP, RL, which i have been for weeks). I want to be long utilities (DBU), staples (XLP), Yen (FXY) and natural gas as a seasonal play (UNG).
My views are based on what i see in the charts and the fact that
1) this bull market is old.
2) the US economy is in a similar shape to the subprime borrowers. Overextended, burdened with debt and losing purchasing power all the time.
3) the small caps are falling apart.
I am making incremental changes and I am still long the market in my "strategic" account. So this is not a full blown directional bet.
i am also in my mid 30's and can afford to be caught on the wrong end of the tape...
sami, what the hell are you doing here?
you got bigger fish my friend, that is if you are one of the seven homes in america to get the NFL Network.
Back to work; 5 hours and counting
oh, and to answer your specific question about why i thought a rally was coming.
We were indeed oversold, i do not look at indicators, just the price chart and my pain tolerance. When i am feeling the pain in my account and itching to sell, we are oversold :)
plus we were setting up for a bunch of "cute" events. A 10% "correction", a retest of the recent lows, etc...
it all seemed to fit very nicely with a Wall St. rally to keep people hoping for a bull market.
Sorry Roger :), i am actually on the phone with Comcast trying to add the NFL network to our subscription...
will cancel tomorrow after the game.
Go PACKERS!!!!
and, if my post got into too many details for your comfort then please go ahead and delete it. i did not want to get too specific but got carried away.
Roger,
My head is swimming with information and stock volatility. Overload. What's your take that there are designated money powers/people that are manipulating a bull rally in order to have someone to sell their shares at higher prices so as not to be stuck with them when it becomes clear just how poor the earnings picture really is?
Jasper,
that sort of thing does not play into my thinking at all. Perhaps I should be labeled as naive but one, i don't believe it happens and two if it does it is way way beyond my span of control or influence so worrying/thinking about it becomes, in my estimation counter productive.
Jasper.
You mean investment bankers and hedge fund managers? They wouldn't do that, would they?!
JackS
Jasper.
Hang in there...
http://tinyurl.com/2unqyj
JackS
Sami.
I hope you're one of the lucky ones.
http://tinyurl.com/2euovw
JackS
Comparing the low in August vs the low in November, the recent low of VFINX(Vanguard S&P 500) is about 2.6% higher than the previous one. However, for VGTSX(Vanguard Total International) the number is 11% higher. Assuming connecting the lows gives you a trend line, then it appears the S&P 500 is falling further behind from the recent trend. Any conclusions from this?
I have never looked at VGTSX. How much emerging does it have? The snap back in emerging has been fast and furious.
That could account for a chunk?
I love the picture Roger. I wish I had the poster!
The current market action is very similar to what we saw in 2001-2002. A lot of money can by made on the long side...if you're a nimble trader.
My timing model is still stuck at 30% long but I think I made a more timely "prediction" than Sami :-)
Tuesday, November 27, 2007
"I wouldn't be surprised to see the market recover a bit from here, at least temporarily. I think yesterday was a short term selling climax."
Posted by Tom K | 6:46 AM
Tom.
You mean a short dead cat bounce or a Santa Claus rally?
JackS
One thing about the article that does not resonate with me is that most valuations are not very predictive. Markets often turn for no reason at all, they just do.
Just my opinion, but I think the degree to which "valuations are predictive" depends on the time frame you are trying to predict.
The biggest mistake IMO and I see alot of pros make this as well is that they use some valuation statistic or measure to forecast stocks over 6-12 months. In my view, valuation has little to nothing to do with what stocks do over any arbitrary 1-year time frame. 1 year time frames have more to do with technicals, price and earnings momentum, and sentiment.
I think where valuations become predictive is over much longer time frames like 5-10 years. There is an abundance of research that shows 10-year returns are highly correlated with starting P/E ratios 10 years prior. Hussman has posted a ton of research/analysis that shows a tight fit between his valuation measures and subsequent 7-10 year returns.
When people say valuations are not predictive, they are not matching the tool with the proper time frame for measurement.
"Readers; what sector(s)do you think will do best in the next bear market? (one is coming even it's not in early '08)
My guess is energy and maybe utilities since these are things that we will still need.
JackS"
See 11/16/07 issue of Investech Research which cites Ned Davis Research
Top performing sectors in bear market in order starting with best - Energy, Utilities, Consumer Staples, Health Care
Worst performing sectors in bear in order starting with worst - Tech, Consumer Discretionary, Industrials, Financials
If we are in the early stages of a bear market, I think this one might unfold a little differently in that energy might not be the absolute best and tech won't be the absolute worst. In my view, staples likely to be best, and discretionary worst as I think the consumer overall is in weak shape, and any incremental weakness will hit discretionary spending.
More on valuation, the market, and long-term returns. I cannot emphasize more strongly that one should check out in detail all the charts on Crestmont's site
http://www.crestmontresearch.com/content/market.htm
Specifically, be sure to read and study these 3:
Stock Market Matrix
Generation Returns
The Truth About P/Es
I agree with Mike C. - Valuation indicators only provide value in the context of a longer time frame.
Thanks for the info Mike.
JackS
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