Yesterday the stock market opened strong and got stronger taking the S&P 500 noticeably above its 200 DMA.Then it sold off (but closed up a point on the day) to close just a whisker below the 200 DMA and obviously this morning it is down a quite a bit on a few things including inflation data.
Does yesterday's turn around combined with today's open add up to something meaningful?
Given my bias toward a normal bear market and my reliance on the 200 DMA I obviously think it is meaningful.
Yesterday I did some work to figure out the first step of re-equitizing which I would have done today if we held the 200 DMA yesterday and were following through today. It took a fair bit of time to figure the amount of shares everyone would buy which is maybe why the market turned around (hey, we are all entitled to our little paranoid delusions, like why anytime I turn to the Celtics game the other team goes on a run).
My opinion about the market has not changed but sticking to my exit/entry plan I would have bought in today with one stock if we kept the 200 DMA and maybe this will occur later this week. If it is off to the races then adding one stock means a smaller lag, if we in fact have failed at the 200 DMA that I am where I have been all along.
You should notice that the focus is not nailing this, it is simply to stick to a plan set out ahead of time whose goal is to avoid a chunk of down a lot. If you appear right, fine, if not that is fine too. You should probably care more about your money than your track record for calling turns in the market.
12 comments:
Thanks for your analysis, Roger. You addressed precisely what I have been thinking about today. John
thanks, John
In my case, I would call it luck. I would have had to dump my 2x inverse position if we had closed above the 200dma and add to the long side.
I think we're ready for the next leg down in this bear.
Roger,
Last year I followed Nakoma Absolute Return and was amazed at the consistency of it's price chart. Regardless of the market's performance, NARFX kept rising at a strong, steady rate. Then on December 26 somebody threw a switch and the price chart reversed, forming a Mt. Fuji lookalike over the last year-and-a-half. Apparently their formula stopped working. Maybe a large inflow of assets they couldn't effectively deal with? Now, their high expenses are a real drag for investors making a low cost, more passive approach look good. Any thoughts?
Not crystal clear on what the problem at NARFX is but within the fund they had offsetting positions in energy (they were paired strategically against different things) and also they were short discretionary which is right for this point in the cycle going by the book but if they still have that position it probably hurt them too.
sorry, i own NARFX for a handful of clients.
Roger, if you are such a proponent for sticking to a plan, why didn't you re-equitize back in December when the S&P traded above the 200 DMA?
Roger,
I admire your courage and consistency in "sticking with a plan" (re: 200 DMA).
I've been reading a number of blogs however that suggest not simply a 'this time is different' posture, but that a lot depends the yardstick.
There was recently the thread on Mish's site re: ex-Energy, where is the S&P - and its earnings? That sort of led to a discussion of where is the price of oil measured in gold? (I think you provided a link to the blog arguing Gold is cheap.) And it seems that this week everyone's jumping on the "Greenspan was the Devil" bandwagon (re: monetary policy). All good topics worthy of some thought.
But the thoughts that stays with me are, "if everyone stands up in a room, does anyone see better" (re: the utility of the 200 DMA which in blogosphere terms, is almost considered a given as a signal to buy/sell).
The other thought/question is how to tell when it's a bear rally, vs. the real McCoy.
I read one interesting comment on some website that noted that there [probably?] are a surplus of "holders" out there who bought into the 2007 rally and have put off selling stocks that have since been beaten up. Those "holders" may - in light of the ton of bad news on the credit front and in the consumer/inflation discourse - see the return to "break even" as a source of liquidity. Volume has not confirmed the leg back up to the 200DMA, if another financial shoe should drop, I'm anxious that those holders might turn into sellers en masse. (And in that first leg down, manifest a bit of panic if they think they're missing the last boat to breakeven...)
As for the economics supporting a recovery, one blog referenced article showed that going back to mid '80s consumer confidence only turned up with or AFTER a recovery in payrolls. If the US consumer truly has gone on holiday, earnings are likely to struggle, and even foreign producers will be losing their best customer.
Still and all, history does suggest that buying/selling on the cross of the 200 DMA outperforms the buy and hold. I fear the churn short term, and prefer a Delta neutral/bias negative strategy - especially as the VIX may be turning up.
Rick
Rick, a couple of things. I think the risk of everyone standing in the theater seems like it would lead to more false alarms but still work. I view it as a measure of health of demand. In a one ETF portfolio the consequence of all in and all out would be small inopportune fake outs but when the real thing came it would do what it is supposed i think.
What you noted about people selling to break even is really the definition of supply/resistance; sellers waiting for a certain price (whether that is spefically a break even or not is unknowable) and then selling into that price.
Roger,
This maybe fully off the point but I would like to give it a shot. I believe I read somewhere that the margin on oil futures is only 3% where the stdandard stock margin is 50%. Is this correct and if so would a 50% margin on oil lead to less speculation and less wild swings.
?
Thanks, Mark
Roger, you mention a one etf portfolio and this is something I've been looking into for a while. Or specifically using a mechanical strategy to invest a large percentage of a portfolio in one etf only, choosing that eft based on its performance over 6 months. I've noticed that the league tables don't change on a daily basis although 2 similar etfs could of course swap places, so this information would be taken into account and the strategy not be quite so mechanical then.
The main advantage I see in this strategy is you can ignore the noise of the market and concentrate on relative performances. You will also not be exposed to staying in a market like the Nasdaq in 2000 or Japan over the last 10 years. Of course in a choppy market this might be a problem so perhaps having a buffer zone where less than a 1% difference in performance wouldn't count as warranting a swap, or possibly looking at 3 month history as well could be a sustainable option? I notice a strong surge in oil etfs (stocks not commodity) in the last 3 months, is this often the sign of a blow out and could, on the basis of probability, end in tears more often than not?
I wouldn't like to use this strategy on my total portfolio as surely an unfortunate set of circumstances could lead to a well below performance for me. Although I see this strategy as being fairly successful over the last 12-18 months I haven't done any back testing, and wouldn't know where to look to do so. Do you know of any research into this strategy or have you looked at it yourself, at all? Thanks.
Mark,
I do not know if 3% is exactly right but it is certainly close. There is far more leverage available with commodities. Raising the margin would impede speculation until someone figured away around it. To be clear speculators play a role in these markets and anything that discourages speculation would have severe unintended conseqeunces and so I don't believe it should be curbed.
Anon 401, it is really 180 degrees from what I am comfortable doing that I have not sought out anything on the topic. I was just illustrating a point with my comment.
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