A reader left a comment on a post of mine at Seeking Alpha after the panicked close on Monday asking at what point will this NOT be a normal bear market.At the close on Monday the S&P 500 was down 29% from the peak (normal is about 30%) and I gave an answer that I think Mater Po would have liked; How can it be worse than normal until it is worse than normal?
I thought it was funny anyway.
The big rally yesterday diminishes the shock value from Monday's crash. I think it reveals that fear is not where it should be to make me think we a near the bottom (here I mean more in terms of time than price). For now it just looks like another buy the dip trade that is probably fuel for a feel good rally, well until Thursday when our cracker jack crew on the hill makes another run at an hastily assembled bailout plan.
One thing to realize about bear market bottoms is that people do not recognize them when they come so perhaps I am not recognizing 1106 as the low (if it was, well then 1095 looks pretty good, lol). If somehow we leave all of our cares behind, which is possible even if not probable, will you capture any of it? For anyone 100% cash or close to it how do you decide when to get back in? It will be difficult because you don't believe 1106 was the bottom and at some point it might get away from you. FWIW, I will lag but not miss the first pop off the low.
To be clear I do not think a bottom is in, I do think defense is still warranted but I could be wrong.
A reader left a comment feeling betrayed by asset allocation, wondering if it is wrong and whether it is dumb to hold SPY, IWM, EFA, EEM, ICF and SHY as nothing seems to be working.
Above a certain dollar amount (talking portfolio size) using broad based products becomes a bad way to go. I don't think asset allocation is bad way to go, quite the opposite actually. This is a bear market with a good old fashioned financial crisis on top. At times of panic correlations go up. Some things have been working decently if not well; cash, gold and inverse index funds. Where there are three there must be others.
The drawback to broad based products is that the underlying components get blended away. Further there is no way to underweight anything. I've been nattering about financials stocks since I don't know when. The mix above does not allow for underweighting financials now or the "bad" sector of the next bear market.
One aspect of this blog has been my thoughts about how to navigate sectors and countries. Some have been right and some have been wrong. The mix above give no chance for this part of the process. If you do not go narrower than that or take any defensive action I'm not sure how you can be upset. Presumably you know the market goes up most of the time and down some of the time. This is what down feels like. The above mix felt all the bumps down and will feel every bit of the ride up...and then it will repeat. If that is not palatable then you need to change something after the next bull market kicks in.
7 comments:
Here is a chart comparing a few bear markets.
Roger, I see you are an optimist as far as Iceland is concerned and wanted to direct you to the article below... I would like you to comment on the analysis here, especially in light of the last comment. What would this look like for Iceland?
Oops... Link here
http://crookery.blogspot.com/2008/10/ireland-is-hedge-hund-or-noddy-does.html
Roger, I have read that when a new bull market begins it will be in sectors other than the previous bull. However, in my readings many "marketeers" still believe that industrials and materials will be the leaders. Then again...
some say the lagging sectors will be the ones to take off.
What say you? thanks:-)
Anon,
I don't think there are hard and fast rules as to how each bear market is supposed to act and how each emerging bull will. However, there are some similarities that we can draw from.
I never come here with the intention of plugging my own blog, but I talk about this today. Click if you want, I don't run ads, so it doesn't matter to me :)
But basically what I point out is that those who sold in May and went away are probably feeling pretty good about themselves. However, did you know that the Russell 2000 actually gained 2.2% during the period?
I postulate that typically the smaller caps lead the bull, then a transfer to big caps (defensive play) as the bull is fizzling out. During the transfer, smalls underperform and then during the bear, smalls get a shellacking. Is that an opinion you can take to the bank? Nope. My advice is worth what you paid for it and sometimes less.
I don't follow the Ireland Iceland comment. Iceland stepped in with Glitnir, it doesn't really have enough money if Kaupthing needs the same thing.
One thing about Ireland is they strike me as better capitalists than the US (low tax rate decision made quite a while back). Iceland might be better captialists too as both are much smaller and more nimble. Maybe I missed it but that link didn't really talk about the extent to which capitalism seeks a solution and further it read like an assumption that all of the money being guaranteed will be lost.
Anon 811, there is logic in that but there also needs to be a forest for the trees aspect too. Tech was the posterchild for the last bear and has not come back in such a way as to jsutify how much bullishness there has been.
Financials are the poster child now and I would expect them to be slow in coming back. I think an in their own world argument could be made for materials and certain industrials such that their story is far from over.
you are wise master (good advice as usual)
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