This is a bear market. Bear markets eventually become very difficult for the masses and then at some point after that they end.All of those articles you've read telling you how 1974 ended up being a great time to buy stocks; late 1987, late 1990, fall 1997, summer 1998, late September 2001, late 2002 well what do you think was going on then? I was around for most of those and fear within the investing public was off the chart and in several instances the declines were smaller than the current bear.
In the future, late 2008/early 2009 will be looked at as having been one of those times. Late 2008/early 2009 will be looked at as one of those times even if the bottom is SPX 600.
For the entire life of this web site I've addressed this sort of thing. In early days I wrote about when I would take defensive action, then wrote about actually taking that action when the time came and in the last couple of months I've been talking about the slow process of redeploying the cash raised in my effort to be defensive.
In yesterday's ugly selloff I bought a small position in the Consumer Discretionary Sector SPDR (XLY). I've been very underweight the sector because discretionary always does poorly during slow downs. When the market turns, discretionary usually is one of the leaders but even after the purchase I am still underweight discretionary.
If/when we follow through with another step down (here I am thinking more than 1-2% for the broad market) I have an order for something else to buy ready to go.
This has been the plan all along, as written about, and I am sticking to it. I would still have enough cash even if I buy something today to meet any reasonable definition of defensive which will allow for wading in slowly as I have been doing.
At the point I hit the button on XLY the SPX was at 867 which is down 44% from the peak and 40% YTD. I believe that is buying low, it may not be buying at the bottom but if you believe no one can pick the bottom then all you can do is buy low. If down 44% isn't low, what is?
A real big risk floating out there that I don't think I've read elsewhere is that we get a huge rally that draws people in at, I dunno, SPX 1300 and then it whooshes right back down to 850. In that sort of scenario where will have been people that previously panicked out between SPX 1000 and 900 who get back in at 1300, or whatever, only to panic out again after another 30% loss. This sort of tail chasing is not uncommon and is the sort of thing that wipes people out.
40 comments:
Sounds like Maria Barteromo cheerleading. Same old, same old "we are near a bottom, what a great opportunity!"
anon, you haven't been reading this blog very long I don't suppose.
Roger, are you easing in more with ETFs or do you have your eye on some beaten down stocks as well? I have some stocks that are down a lot and I'm hesitant to add. ETFs OTOH seem like they really can't go to 0.
Looks like the stars are aligning for a retest of the lows. I'd sure feel better if there were some good news for an upside catalyst. Or maybe total pessimism is the good news.
bill b, the couple of things i've bought were i what i think are the best tools for the space. Disc was an ETF. The next two things i would buy, if we ever get there, would be common stocks. the concern you bring up is valid but my thought is repositioning for the upturn not finding the best stock this week sort of thing.
anon 6:49 one other possibilty is that it turns up for no reason at all, that happens often in these sorts of things, here's hoping that we don't go to 700 before no reason kicks in.
I too believe this is an opportunity to buy low if one has a long term outlook. But, what exactly is a LTO? 5 yrs?, 10 yrs?, longer? Is a LTO an arbitrary number?
I wish the pundits would speak in an unqualified manner. There are a heck of a lot of baby boomers who don't have 10 yrs before they need to start drawing funds. They can't take a hit to SPX600. If the answer is they shouldn't be in the market, well some are.
We constantly hear we should be in healthcare and staples. THEY GOT HAMMERED? Just not as much as the rest of the market. That's not relieving.
Ouch! Sounds like someone is bitter at losing money. Like many others I've not got much to put into the markets and I might need that to live on if the situation gets a lot worse with (un)employment. I think what Roger is saying here is don't assume the next uptrend will last for 5 years and pile in after the first 15% rise to recoup losses made recently. Be cautious or just sit on your hands and wait it out - as with all previous downturns it'll end at some point and your losses will only be on paper unless you sell.
Even if your stocks never recover completely the dividends, re-invested, should make up some of your outlay. Rather than risking further capital on equities, Roger, I think I'll be using my new savings for fixed interest boring stuff. If it takes the stock and commodity markets 10 years to get to last year's levels again I'll be a decade older and should be a bit more in bonds, no?
one deffinition of long term might be a full stock market cycle.
anon 7:00, no idea what you should do or how long it will take to get back to even but some sort of fast rally from whatever the real bottom that retraces a meaningful portion of what was lost is often what happens. after that (if it happens) it may be right for a lot of people to make changes. that might mean asset allocation but it might also mean a change in tactics, depends on you.
Well this brings up a couple of questions I've been mulling over.
I think the S&P 500 hitting 1300 would put it above the 200 day DMA. So, in theory, if you are playing the 200 DMA, you'd have bought in.
If you're playing the 200 DMA, in general terms, are you buying/selling every time it crosses the moving average? Or is there some guideline (being across DMA by a certain percentage) that you follow to avoid buying and selling and buying and selling around the DMA?
Are there any general guidelines around determining whether you tax-loss harvest at the end of the year aside from simply running the numbers?
from anon 6:59
I'm down some but I've been mostly cash. That's 96%.
I just don't believe the pundits should speak a language they can't define.
Where's Louis Rukeyser when you need him???
SD, i've been buying a little now. i probably would add SDS back in after a big pop but I doubt i would wait until 1300. if 1300 is above the 200 dma if/when we get there i would probably take sds off. if we then go back below the 200 dma i would put it back on. the tactic may or may not be a loser but i am trying to be defensive when demand for equities is unhealthy in order to avoid big chunks of down a lot. the dance back and forth around the 200 dma is the point in the cycle where my strategy is the weakest. this was more prominent early on in the cycle where there were a couple of "fake" breaches.
Remember, the market will do whatever it takes to make fools out of the majority of people.
NO ONE can accurately predict the market. The best investor over the long term (Buffet) doesn't even try to outguess the short or medium term market.
"I think I'll be using my new savings for fixed interest boring stuff. "
The problem is that yields on high grade bonds are low. The rating agencies have proven that they cannot be trusted. GE debt is rated AAA but yielding significantly more than AA rated bonds from Walmart or JNJ. Hmmm, what's that tell us about how much trust there is in the rating agencies?
Why I think this downturn is different.....1) virtually every area of the economy is affected 2)this is an international dilemma 3) the US will have incurred tremendous debt before this is over 4) there remains trillions in bond derivatives that nobody seems to understand.
There are 3 major areas concerning the US populace (Main Street) today: 1) jobs, 2)cost-of-living, 3)housing (not necessarily in that order). Concerning jobs, we need a long-term infrastructure re-building policy (including re-training), cost-of-living will become a large concern after this downturn is exhausted (time period ???), housing was a precursor for much of this economic downturn, so this has to be addressed first.
I have a seat on an academic business advisory committee. The following proposal was submitted to 4 Bush officers with no response. The Obama team responded but it is unknown if this passed his eyes/ears.
Drastic and draconian measures are required. If this downturn continues another 6-8 months, the US will enter a mini-depression. Unemployment may well exceed 10% or higher (this is not directly comparable to the 1930's because of a difference in meaurement metrics). The government needs to become a direct lender of mortgages. Investors or homeowners that have walked away from their obligation will not be included in this plan. This program will run for 365 days or 2 yrs (undetermined at this time). All current homeowners will be allowed to refinance their mortgage for 3% (plus a small insurance assessment).This will allow current lenders to receive their capital back and begin re-lending. Individuals that are underwater or having a difficult time with payments will be offered 4-5% terms from 30-40 years with a possibility of an appreciation clause to benefit the lender.
With this plan, the government provides a stimulus but also now has property as security. These mortgages can now be sold to institutions or individuals with a government guarantee.
Roger, sorry to go off so long.....but if you happen to agree...perhaps with your connections, you can help us sell this to our policy makers.
Ken, I looked at the same stuff yesterday and came to much the same conclusion. Then I looked at dividend-paying stocks--some nice yields, but a year's worth of payments get wiped out in one down day. So much for that saw about being paid to wait. Sigh...
lol, i have no connections.
i don't think we get to meaningful double digit unemployment (12% or bigger) unless the auto industry solution gets mishandled which I realize is far from impossible but I think that is the catalyst for something dramatic in the unemployment rate.
i do think 6-8 more months of economic downturn is likely but i lean toward not being mini-depressionary but as empty as it may sound now no matter what happens it will end (sooner for certain other countries) and hopefully everyone took steps early on to protect against what has happened.
I don't understand what steps could have been made to protect against this unless you mean being short? Everything else has been a losing proposition. Am I missing something?
i started writing in 2004 about a simple, clearly defined get defensive strategy that you would be able to stick to.
for me 200 DMA.
Roger,
You response to SD(at7:28) helps alot. For someone like myself who is unhedged (but also 50% cash), do you see any value in adding SDS or similar at this point to protect against further declines? I've been following your strategy for some time, and as I understand it you lifted your remaining hedges following the Oct. crash, and will likely add them back on a some large move up. It sounds like you're content to let the portfolio drop from here, while adding a few longs as it does. Just trying to gague the merit of adding downside protection here versus riding it out.
Thanks,
David F
add SDS here? not for me. i think the market is low and prone to a rally (feel good or otherwise). keep in mind that my cash level is quite high. yesterday's drop was in the ballpark of half that of the market so i am not content to let it drop with the market, that is not what is happeneing. there is less need IMO for a hedge at SPX 950 (i realize we are now at 850) than at 1100 or some other higher number.
We might get a chance to do what old Joe Kennnedy did in 1929, buy a bunch of great companies for $1 share. All kidding aside, I said the low would be 800 over month ago and it is 839 as of now so we hold that and I think we have a good bottom.
Ron
I think the U.S. defaults and what happens then, I don't know, but comparing ALL of the things that are going wrong at EXACTLY the same time with the one or two things that have caused crashes in the past just isn't right to me. I notice the chorus of "we've been here before" seems to have disappeared. I have felt that we have never "been here before" in the magnitude of the excess, speculation and all out corruption with both the government and private industry. I think going forward buying and hoping is going to net you 0% for maybe the next 10-20 years. This will be the great depression of the 21st century.
Remember that feeling you'd get in school when the teacher would say, ok class, close your books and take out a paper and pencil? That's how I feel right this minute.
Perhaps a picture of Bear Bryant would have been more appropriate. :->
The market is awfully cranky this afternoon. Here's a good one.
When a man on the street was asked about the recent turbulence in the stock market he replied:
"This is worse than a divorce. I lost half of my money but still have my wife".
Ba-dum-ch! I'll be here all week, don't forget to tip your waitress.
Bill B....lol
but what he doesn't tell you is
that he is "keeping" his wife
cause she's in 100% cash.
He is now working as a waiter...
Bush is back on the tube making it sound like he understands the financial meltdown. LOL!!! Why does he keep getting airtime? I always lose money when either he, Paulson or BB speak.
Speaking of LOLs ... the market is now up 200 and wobbling back and forth like a drunken old sailor.
Now a market gaining and losing value over time to me is normal. The bear market still doesn't have me spooked. But these hundreds of points gained lost in minutes makes the market feel fake (for lack of a better word). As a result, I lose a little confidence. Maybe it's because I don't understand how this can happen and why it's happening so frequently as of recent.
What about the theory that the last 20 years has been the anonmaly?
Another speculative baby boom area where "investing" equals "speculative trading"
The more I read your posts the more I realize you are just another "trader" trying to "speculate" on the future.
You theory of speculation has to do with unproven theories such as diversification, beta, alpha, and other "modern" portfolio theory hogwash.
anomaly to what?
Rog, I think the above post is making the same point as Hussman. (stocks were trading far above the very long term trend)
Of course, the remainder of the post engages in a useless nihilistic rant.
If the future is truly different than the past - totally new standards of value, growth trends, etc - of course there would be no basis for equity investing at all.
even if that is not his point other folks have made that point that you bring up (in addition to Hussman). I have touched on it as well, I believe getting close to normal returns will require more foreign investing than people have done previously (brought this up many times). capital will continue to be formed and flow someplace, the whole idea behind how this happens may or may not be changing and if is then we must change our investing habits.
Roger,
What do you think about an actively managed fund instead of an index ETF for the foreign countries you allude to? If those markets are less efficient and where growth is likely to bei n the future...would make sense as long as you keep your ER's as low as possible, no?
Not asking for a recommendation, just wondering your general thoughts.
I think you are correct. Unless we see the world turning away from the growth and progress of the last decades it is hard to see a way that the undeveloped world cannot outgrow the developed world.
It would really be a very dark world view that in essence sees only darker days ahead.
the difficulty for me with actively managed funds is integrating it in to other holdings.
you don't know what your actively managed fund owns right now (reports are very dated). In building a portfolio I overweight and underweight various things so choosing something that you don't know what it owns becomes problematic. none of that is a reason why you or someone else should avoid an active fund, just my take from where i sit.
This is the point that I have to disagree with most of you and be a contrarian. How about the “what if” scenario. What if this is not like 1974, 1987 or 2002. What if this is like 1928 and soon 1929 will be upon us. What if you keep buying at SPX 850, 812, 723, 648 etc. etc. and in 2012 we are down to 346. What will you say then? How often you people pay attention to Nikkei and see how far out is from its high 25 years ago.
Here are my contrarian facts:
- Record foreclosures in 2008 (936,439 homes)
- Reported unemployment rate at 6.5%
- Reported underemployment rate at 12%
- Real unemployment rate at 15%
- Lowest consumer confidence on record
- Large Dow component GM at 65 year low
- YTD major indexes at -35% range
A nice reading for all the optimists out there:
Why the economy is worse than we know:
http://harpers.org/archive/2008/05/0082023
Unlike your readers here, I am fully invested and did not go 98% cash last year and have paid dearly to the tune of 280k. I must be the only one who stayed long. The good thing is I still have a few years to make it back by leveraging a little here.
"What if this is not like 1974, 1987 or 2002. What if this is like 1928 and soon 1929 "
1. Well, credit peaked in 1928, correct? We've already reached that.
2. The market high was in 1929 a few months before the crash. We passed that point a long time ago.
3. Panic selling? Did that in October.
4. Government intervention around the world to inject capital and keep banks going? Oh wait, we have a lot of things now that we didn't have in 1929.
Hi Anon 7:08 don't feel bad, I bet a lot of readers on this blog were longer than Roger's clients during the crash.
I am not a great prognosticator but I might venture to point out that historically it takes the market a while to recover from something like this. You may have some time before the next bull market. This assumption could be wrong, if not then it might be more profitable to hold some percentage of fixed income investments instead of leveraged equities - until a bull market seems closer at hand.
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