The shots of the crowd at the inauguration were awesome--no real investment implication that I know of but still.I heard somewhere that before yesterday the worst inauguration decline was 2% when Ronald Reagan took the oath in 1981.
I think the 5.28% decline yesterday was about more than just normal inauguration market activity. It seems like worry about the financial sector has intensified, not saying it isn't justified, after RBS news on Monday and maybe StateStreet (STT) news on Tuesday.
I'm sure this little nugget from Nouriel Roubini didn't help either. I certainly don't have the answers as to how to fix anything, it is a little easier to be skeptical or critical of what has been done thus far of which I am guilty but in terms of investing my entire point through all of this has been that you don't need to have the answers.
At the close yesterday the S&P 500 is down 10.8% for the year (in only three weeks?) but the financial sector as measured buy the Financial Sector SPDR (XLF) is down 35% ($12.52 on Dec 31 to $8.08 yesterday). Since the start of the bear market on October 9, 2007 XLF is down 77% compared to 48% for the S&P 500. Put another way the decline in the financial sector has accounted for a disproportionately large 1/4 of the bear market decline (the sector has dropped from about 22% of the SPX to about 10%--that 12% is 1/4 of the 48% drop in the market).
Forgetting the inverted yield curve as a warning from several years ago, sectors growing to 20% or more of the S&P 500 is warning to be heeded. 30% is a clear danger sign but I'm only aware of that happening twice--tech earlier this decade and energy in the early 1980s. This sort of thing is very important to how I try to look at constructing the portfolio and I why have written about this sort of thing many times in the past. It tends to work but it may require patience as the financials hovered around 20% for a very long time.
I realize there are plenty investors (pros and do-it-yourselfers both) not comfortable with investing at the sector level but I am convinced this will make the task easier over time and contribute to missing some pain in the future.
14 comments:
Roger, could you comment on the short/double short sector etfs. You've written before about smoothing out the ride being short the market when it's appropriate, but I don't recall you doing so at the sector level. Financials would be the obvious case in point.
Thank you.
Hmm, I didn't know about energy in the early 80s. I'll have to investigate that.
Would you please tell me how to track the yield curve without all of the mathematics?
i wrote a couple of theoretical posts for TSCM about pair trades using double short sector funds but for hedging i prefer broader indexes.
i think energy peaked at 29-31% in 1981, it then went to 5-6%, stayed there for a long time before building up some in this decade.
i don't think there is any mathematics in monitoring the yield curve. There is arithmetic however. You can quote three month yields with ticker IRX and ten year yields with TNX. Also Barron's has a picture of the yield curve every week and CNBC has the yield info on the screen all day.
Anon 7;27 AM. Here is a link to a great tool for tracking the yield curve:
http://stockcharts.com/charts/YieldCurve.html
JCarr
Thank you for the yield curve info.
"I'm sure this little nugget from Nouriel Roubini didn't help either. I CERTAINLY DON'T HAVE THE ANSWERS AS TO HOW TO FIX ANYTHING....."
This guy does... has a lot to say about the mess and solutions.
http://market-ticker.org/
Read the last months posts.
Hahah. Haven't heard that name in a while. I'm glad he can leverage his expertise as an internet service provider to straighten this out!
>> sectors growing to 20% or more of the S&P 500 is warning to be heeded. 30% is a clear danger sign but I'm only aware of that happening twice--tech earlier this decade and energy in the early 1980s.
Interesting.. Does it work the other way round? as in, if a sector drops as a % of SP500 to a certain level, it means it has bottomed out, SP500 has bottomed out, or at least that that particular sector won't lead the market further down anymore.
i think about it more for defense and it does not happen a lot but energy at 5 or 6%, noted above turned out to be a buy but telecom, materials and utils have been low single digits for a long time.
In a sense, this is an application of reversion to the mean, kind of a fundamental principle of investing.
Good Evening Roger- I have been waiting for a VIX product to come out for some time to use as an alternative investment strategy and would appreciate your thoughts on these two new ETN's?
http://seekingalpha.com/article/115773-two-vix-tracking-etns-on-the-way
Roger- you may find this article by Indexuniverse interesting in which it discusses the need for the advisor to deliver alpha using ETF's and other instruments.
http://www.indexuniverse.com/blog/5255-advisors-using-etfs-to-build-portfolios.html?Itemid=3
That article is silly. In many cases those things could be done with mutual fund (with exceptions of course) years before they could be done with ETFs.
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