Both Barry and Adam touched on differing aspects of indicators that offer glimpses into market sentiment.
Reading things like put call ratios starts to get tricky if you believe this is a bear market. This is a point in the cycle where it is easy to get fooled. The market is down almost 20%, I'm sure if you looked you could find an indicator or two to tell you the market is oversold (I don't really look at oversold or over bought as it tends to be shorter term in nature that the way I invest), stocks that are down 20-30% do have some appeal and many of the historical every time the market does such and such statistics give a bullish conclusion because the market goes up almost 3/4 of the time.
The media (print and TV) seems to spend so much time exploring whether now is the bottom all the way down, is it safe to buy fill in your favorite sector and it seems that most of the experts are not worried about whether the market is in a bear phase and they have found good values and think those values should be bought now.
These sorts of things can be very compelling and enticing.
Compelling as they may be, if it is a bear market all of these things will be wrong. Bear markets last longer than five months and on average go down more than 20%, closer to 3o% actually. So anyone giving in to a compelling case for buying now is fighting a big cyclical headwind.
I would add that the suggestions of buying staples stocks is a good idea in a way but not a good idea in another way. Staples usually go down less than the broad market in a bear and that is the case now (so it is a good thing) but they still go down a lot (a bad thing), I believe the crew at Bespoke came up with a 21-22% average decline for staples in a bear. So the expectation needs to be that of hopefully going down less not staying even.
The question this begs is why not get completely out. The reason I do not get completely out is for all of my this time won't be different comments, what if it is different? What if the 1293 close on Friday is the low close? What if it is just a five month decline that is a hair less than 20%?
There is no convincing me this is the case but it could be nonetheless. As a matter of philosophy (based on reading the numbers in the Trader's Almanac) I do not want to completely miss big moves up. Going up 14% in an up 20% world, especially if I can engineer going down less during the decline, is no where near as bad as just collecting money market interest in an up 20% world.
As I say though this is a philosophical matter and some will either take that sort of miss or will take a stab at when to get back in--some will be successful with that and some will not. It's all fair game but I am trying to find the easiest path possible.
Wikinvest Wire
13 comments:
Roger,
Another good post. FWIW, IMO, the last few weeks you've had some really good ones, and contrary to one commenter, I don't think it is possible to be too repetitive on some of the themes you stress which are very important to not making huge mistakes.
Judging from some of the recent comments, it seems like more then a few people are starting to worry about some type of Great Depression scenario with the market down 75%+. The closer we get to the ultimate bottom, this sentiment will probably pick up, and these will be the people panic selling and going to 100% cash at the absolute bottom.
Hussman had some interesting comments this week that kind of echo what you've been saying (maybe he reads your blog?)
http://www.hussman.net/wmc/wmc080310.htm
"My opinion is that the current market cycle will probably be completed with at least a standard, run-of-the-mill bear market decline that achieves a loss of about 30% from the highs. That's a plain-vanilla bear, and assumes that stocks do not move to what would historically be considered “undervalued” levels.
A run-of-the mill bear runs about 15 months, so if we mark the highs somewhere about July-October of last year, it would not be unreasonable to brace for the possibility of continued market difficulty for the bulk of 2008. If that is the case, we can also expect strong intermittent “bear market rallies” as we saw off the January low.
In any case, I don't think it makes alot of sense to manage a portfolio worrying about financial Armageddon, and the more sensible approach is what you've been advocating as far as a typical bear market cycle.
oh, i think we can assume Hussman has never visited this site but i will say that while his opinion seems similar to mine i am surprised the this time will be the same theme isn't a little more crowded.
I am mostly in cash and will wait for the market to go down at least 30% before going 50% back in in my portfolios. Here are a couple of reasons why:
http://tinyurl.com/yowx2s
http://tinyurl.com/2l2u6q
Then I will work in the other 50% as I watch how the market moves. If it goes up 5-10% I will still average 25% down as my entry point. If it goes down another 10% I will average 35% down.
The market always has it's best year coming out of a bear market, and small caps do the best. But there is more pain ahead IMHO.
Great post Roger.
Nuanced discussion of a difficult subject.
thank you FF
How do you decide when to buy a short fund on any index? Do you use technical analysis, if so, what are you looking for?
the tipping point is a breach of the 200 DMA so that is technical analysis-sort of.
I have disclosed the times i added to the position i also disclosed selling it into the rogue trader news and buying it back after the pop.
this all belies a combo of TA, my perception of sentiment and my own experience with the markets.
i have disclosed having a lot of cash and an evergrowing SDS position which has created the effect I had hoped for.
Re: The use of the inverse indexes (SDS, TWM - both double inverse, btw). The former (SDS) is a bit thicker in the options market, but I've found that selling calls against underlying has, despite its simplicity, provided a fairly steady income during these high volatility days.
At these levels (retesting Jan lows), the April and June calls are juicy, and fast. Selling calls at this level leaves you with two possible outcomes, both of which are fairly positive: on a market rally, the OTM calls will retrace rather significantly, allowing an easy round trip - reducing your entry basis for the underlying, and on further selling, you face being called away - profitably.
If this is a "standard" bear, and we are looking at some sort of firm bottom around down 30%, there will come a time where the sold OTM calls will expire worthless, and the entire position will need to be unwound - possibly at a loss.
But, if the motivation for the use of the inverse instruments was to hedge your portfolio, that loss is/should be (depending on your ratio) offset by the portfolio's gains.
Dangers are in unwinding prematurely (during a bear market rally), but the 50dma and the oscillators (and the volume, and the economics, etc) have been helpful in discriminating the bear rallies from the true reversals.
R in NY
A great read, thank you :)
Roger,
I need to send you an attachment of an article. How can i do this?
BWJR
My timing model actually shifted into slightly more bearish stance precisely because several sentiment indicators dived into deeper levels of pessimism.
Extreme pessimism can be bullish, however, its better to wait until you see sentiment rising from OS levels - especially in a bear market.
Now that the indexes have comfortably dropped thru the 200 day MA, would it be best to wait for some bounce, which may not go as far back as 200 day to consider another short or just do it on the way down now?
the question seems to be framed such that there must be one way to go and if there is i don't know what that would be.
there are too many variables to give a real answer.
i have been hedged so saying would i hedge now if i weren't is--well i have no answer for that.
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