That was a foul day for the market yesterday with all sorts reasons cited as to why but I don't think I heard the reason that makes the most sense to me which was there was no reason.Sure the Goldman comments, oil, the dollar, some earnings news and the like were negatives and obviously contributed but I think the story is simpler than that.
I have been saying the same thing for ages; this is a bear market (a normal one in my opinion) and bear markets go down a lot over long-ish periods of time.
Often the fundamental catalysts for bear markets have similarities but the market action is very similar time after time.
So far in this bear there have been a couple of nice feel good rallies which have so far ended up getting unwound. While there has been denial on the part of some market participants about the bear there has also been a real fear of how different this go around is. Both sentiments contribute to my opinion that this will be normal.
One recurring comment I have made for many months is how text book this bear market is turning out to be. While big declines often trigger an emotional response I would think people prone to emotion might find solace in the text book nature of the decline.
For ages I wrote about thinking ahead of time about what a bear market would look like and what it might do to a diversified portfolio. The idea was that by thinking about and realizing that that at some point the market will endure a bear market again and when that happens stocks will go down and doing so at a time when markets are doing well allows for an emotionless plan of what to do or at the very least lessen the emotional response.
I try to do this with clients and I think it has helped. I also wrote about planning an exit strategy ahead of time and then sticking to it when things hit the fan. If you've done this then you have probably avoided some pain and prone to fewer panic sells.
If you did not do any of this on the current go around you will get the chance in the next bear market. The reason why I wrote about this topic some many times over the life of this blog is for periods like right now. Market cycles are inevitable, planning ahead of time for defensive action is easy to do and does not require being right about about too many things.
I said ahead of time that the market warns investors when demand becomes unhealthy. If demand is unhealthy then it makes sense to expect that to be bad for equity prices. This process probably read as being very simplistic when I first wrote about it (here is one link from 2004 on the subject) but you can decide for yourself the effectiveness. I would add that while I do this quite faithfully in my practice I didn't come up with any of it, the point being that anyone can do it.
I guess the take here should be keep it simple, do what you have to to remove emotion (so plan ahead) and be disciplined.
6 comments:
At the least have a Tax Loss Harvesting strategy ready if investments start dropping below purchase price. Make Uncle Sugar share the losses!
Paul
According to Yahoo! Finance, the Dow low for today (so far) is 11,404.73. Again, using Yahoo! Finance data, the intra-day high on 10/11/07 was 14,279.96. Using my hand held calculator, I calculate an intra-day loss of 20.13% from the 10/11/07 intra-day high. Does this mean we are in an official bear market, as least as defined by the Dow? Thanks, JCarr
JCarr,
I don't have an exact answer as it is not really the question I care about. Demand for equities being healthy or unhealthy is far more important for me.
Maybe other readers will weigh in but I think either answer could be argued persuasively, I would note that SPX at its intraday low in the winter was below 20% for a few minutes.
Hi Roger--I wasn't aware of your blog back in '04, but maybe through dumb luck, I've managed to keep my losses down a little instead of down a lot. I realize there's no precise answer to this, but should we infer that you think it's too late in the game to take further defensive action? Your blog today is pretty much past tense.
Thanks very much.
that you are down a little is probably not dumb luck. the idea of some sort of recognition that a bull cycle might ending and that some sort of protective action would be warranted is far from unique to this blog--hopefully that is obvious.
a big thing here is to think about what all of this has looked like both in the market and in your account. the past tense nature doesn't necessarily mean it is too late. demand for equities is unhealthy as I look at it--when it is unhealthy that is a time for defense one way or another.
Getting defensive right here may or may not be the correct trade for the short term but over time heeding warnings from the market give a good chance of avoiding pain when it comes to the market.
With all the news about being on the cusp of a bear market the market is facing a strong headwind on Monday. Inverse EFTs have worked well for me last week. People are talking about a bounce; I don't know.
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