Yesterday I talked a little about a possible bounce coming, what I have been referring to as a feel good rally. Jon Hussman this week also talked about the possibility of some sort of bounce in the offing.
Hopefully as the months have worn on in this cycle you have taken that market cycles end with bear phases and that during bear phases there are bounces that come along. I talked about it during the winter then we had one start in March and it makes sense to expect another feel good rally, at least one more, during this bear phase.
So think about that ahead of time, hopefully you thought about the last one before it happened too.
Why might a feel good rally start soon? The decline from May 19 has been swift. While I don't look at too many things along these lines I'm sure it would be easy to pull out all sorts of stats that "prove" the market is oversold. I suppose it would be fair to say sentiment has also spiked down, the action on Monday is a good tell for this. These sorts of things are short term trend changers not big cycle changers.
If there is a feel good rally it will be appropriate for some people to trade and for others to leave it alone, know what camp you fall in to. If there is a feel good rally there will be plenty of commentary on TV and in print telling you that the bottom is in and that now is the time to go back in.
At some point a bottom will come but in bear markets people get faked out by these sorts of rallies. From a common sense standpoint how can a bear market that results from whatever is happening in the housing market/financial crisis (you can quantify the reality if you want to) be milder than normal?
I talk about pre-planning an awful lot and while no one can account for every variable that might come, stick to your original plan for re-entry--that is if you took any defensive action earlier.
For me that means wading back in when the market takes back its 200 DMA. If we are down 30% at some point maybe I'll add one name but the focus is health of demand (or more correctly my perception of it based on the 200 DMA) for equities.
If you still believe that stock market investing will still work, even if that means investing more in foreign markets, for the long term you do not need to nail the turn around no matter when it actually comes.
The point of this post was not to predict a bounce but to realize that another one is likely at some point (based on how bear markets tend to work) and it makes sense to think now so that you remember later.
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11 comments:
I agree, we'll probably see a bounce soon, but it may be much shorter than the March-May rally. Typically bear markets include 2-4 feel-good rallies, the longest lasting 2-3 months. Most feel-good rallies last only 2-6 weeks. Trading them requires a good deal of nimbleness.
Question: You've mentioned before that you use 2x inverse funds as a portfolio hedge. Do you ever dump them when the market gets excessively oversold as it is now? Just curious.
i have done that once. I sold SDS into the Kerviel panic and bought it back later that week.
Roger,
I have most of my investments in money markets at this point. Seeing the state of the financial markets,in a worst case scenerio, is there any reason to fear for the safety of that money? Thank you for your advice, I have learned much over the last year.
i would imagine your brokerage is insured? if you have a discount firm they probably don't have IB like problems?
realistically I doubt there is a problem but I don't know you or your firm.
if you are worried put the cash in tbills. the yield will be less but safer by definition.
Roger, could you clarify/expand on the "IB like problems" comment. Thanks, JCarr
Roger, I checked a few alternative and absolute return strategies, some which you've discussed before.PASDX NARFX RYMTX RYFOX RYMQX ASFIX. I simply did a comparison chart for YTD and 3 months. On a YTD all the funds have performed well but only RYMTX (+4%) and RYFOX avail since March (3%) were in positive territory. The rest were negative, only about -3 to -5%. I then checked a 3 month period and the only fund in plus territiry was NARFX, the rest were only negative by less than -1% to -2.5%. They all are doing what they should be. But what is the best way to decide on which to use? I see there is a hedge fund index but only available on Bloomberg HHFD. Is there any other benchmark to consider? Any other funds I have not included?
Ron
Anon 7:51.
Roger probably means investment bank problems. Scottrade, Fidelity, Vanguard, etc. are not investment banks (I hope), and don't hold mortgage paper like the investment banks do....or did in the case of Bear Stearns.
Ron.
Which absolute fund has the lowest maintenance fees and maybe pays a dividend or capital gain that's better than the others? That's the one I would use because they all can change their strategy on the investments they hold.
Roger,
My SDS hit my limit order in the sell-off this morning, after I'd bumped the limit up by a couple of points a few days ago. I pretty much did as you did....(except bought later, after hearing you discuss it, and watching it for few months). I sold it once....bought it back...(rolling over the profit earned on the first go-around)....resulting in an 85% gain in just under 12 mos., which helped me get to "down a little", instead of "down a lot" (2X SP% exposure to financials, countered by 3X SP% exposure energy, via Canroys).
Owe you a beer...
jan
Roger,
I've mentioned before that the inverse ETFs offer a good opportunity to serve as a versatile (and potentially permanent) hedging vehicle, particularly when you use their listed options.
I have a long term holding now in SDS. I have only added to it over the past 6 months.
Per usual, I sell OTM call options on the near and intermediate month. When the market falls (as it has in the recent past), I "roll" the options to the next expiration date for a credit - and a higher strike, when possible. (To any options trader, they'll see that I am effectively selling volatility by selling (shorting) the calendar spread: buying the near month, and selling the far month. To be specific, I'm shorting the diagonal, when I buy in the lower strike and sell the far away higher strike... for a credit.)
The benefit of this strategy is that I continue to hold the SDS position. For a portion of it, I will have long term capital gains. And, I will be collecting the 2.5% dividend yield along the way. And of course, the sold premia.
And what if the market rallies? One way to mitigate the risk is to buy relatively cheap OTM put options as the written OTM calls move in the money. If the stock market "melts up" (snap back rally, bear rally etc), premia should widen with the increase in (inverse) volatility.
General portfolio management can be used as well, and when the SDS proportion of your portfolio grows larger than you'd like (which it will do quickly, given it is a double inverse, and it is increasing just when your non-inverse longs are decreasing), you can let a portion of your exposure get called away (just keep an eye on dividend schedules)!
Inverse ETFs do represent undefined counterparty exposure, however, so if Armageddon is 'acomin, the value of your position may remain forever "on paper". (One might prefer to trade the options only, and therefore face the exchanges rather than a structured finance vehicle.)
I share this strategy in a totally self-serving way: the biggest downside to these products is the relatively wide spreads, and low open interest on the options. SDS is perhaps middle of the bunch, (5-20c bid ask) while IWM is trading penny-wide at times.
Good luck.
R in NY
to R in NY,
before you start to buy puts against the SDS, you should make sure to read and thoroughly understand the tax treatment of such a position: for tax purposes you have created a straddle and you should be aware that you can't take any losses on the puts until you have taken most of the gains on the SDS position. just thought you might like to know.
--gjg49
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