Apologies for using such an overly sophisticated chart to make my point, ahem.For ages now I have been writing about taking defensive action in hopes of smoothing out the ride for my clients ideally preventing them from succumbing to fear at the worst possible time. Then hopefully value would be added over the entire stock market cycle.
Although the bear market is now 19 months old the action YTD is a great microcosm of what I'm trying to do. At its low point on March 9 the S&P 500 was down 26% for the year. A diversified portfolio with a large cash position would have likely been down a lot less than 26% at that point. If a portfolio was heavy in cash on the way down and remained heavy in cash on the way up then the chart above might capture the net effect YTD; down less, then up less and coming out about the same. If you went down a lot less would you be ok going up less in this context? For someone interested in defense this might be a satisfactory result.
I talked about trying to capture this before the bear market started so I thought it would be useful to talk about it now that we are far along in the bear market process.
Another aspect of this is taking defensive action based on an objective measure, for me the 200 DMA. By using an objective trigger point it removes the need to be right or the consequence of being wrong about what you think will happen. For me, when the market goes below its 200 DMA I begin defensive action. When it goes back above I begin re-equitizing.
Opining correctly about what will happen in the market on a consistent basis is very difficult, obviously, and beyond your control. While being disciplined enough to heed your own indicator may be difficult at times it is completely within your control.
A good example to tie in with this discussion is a post I wrote for Seeking Alpha as part of their Positioning for 2009 series last December. The post was titled 2009: Expecting A Massive Rally. The post is both very wrong and somewhat right. Where it is wrong is that I did not expect the market to get as low as it ultimately did. Where it is right is that there was a massive rally off of a low and make no mistake 36% in two months is massive, even if it is not historic. I specifically wrote about bracing for a 30-40% rally which is what has happened thus far but it started from a lower point than I thought and a little later than I thought.
Despite the truly hateful comments left on that post it is a pretty safe thing to predict a huge rally after a massive decline but the tone of the post was more wrong than right. It is what I thought would happen but faith in the 200 DMA indicator dictated the action I took not my opinion. Obviously smaller more tactical decisions need to be made along the way but in subscribing to top down theory taking defensive action and then going back on offense are the most important decisions that get made.
I think this sort of things makes market participation much easier. In case it is not obvious, the picture above is a freehand drawing which captures no data.
25 comments:
Roger,
a very good article on seeking alpha. You were correct about a 30% rally and love to see the faces of those that made such comments that it could not happen.
I like to ask a question on cycles due to a new high in two months. Back in march you were looking for a bottom. And as always you had a very good call. Now at 900 two months past that S&P low of 666 approaching the 200dma what are the cycles saying on an intermediate basis.
Roger – Great work!!
Jeff from Milan, Italy
Jeff thanks but really that post was off by a good couple of months and so plenty wrong.
The nature of very fast moves is that they reverse course for some period of time and percentage points. It would shock me if, after topping out there were not at least one more decline that scared the hell out of people. It doesn't need to go back to 666 to damage people's psyches.
This seems to have been too easy, too textbook.
Roger, the drop you suggest could it not be avoided from all the stimulus kicking in? After that kicks in I would think stabilization then "inflation" worries?
Keep saying its been to easy if you want, but there is no reason this can not go higher with all the stimulus being pumped into the system. Of course after the rise you very well may be right. Still I think this rally/bull has a ways to go.
most of the components of the econ stimulus are not intended to take effect this year.
Roger - I agree with the thought that we will pull back. I thought it was going to come much sooner though. The thing that concerns me the most is "we" are all thinking the same way as far as a pull back. Group think is usually wrong.... Thanks for all of the foder you supply to keep us thinking.
Roger,
My question about the 200DMA is as follows: 19 months into a bear market, the 200DMA will necessarily dip down to low levels, thereby making it more easily breached to the upside. Is that upside crossover valid, or is it likely to make an investor re-equitize too early?
the slope can matter yes. the 200 dma has been headed lower and will likely keep doing so for a while. it may result in a false signal. notice in the post I use the word start. I take action slowly, I start punctually but move slowly.
"Bye-the-bye, what became of the baby?" said the cat. "I'd nealry forgotten to ask."
"It turned into a pig" Alice answered very quietly.
"I thought it would." said the cat and vanished again...
..."Did you say pig or fig said the cat?"
"I said pig," said Alice "and I wish you wouldn't keep appearing and vanishing so suddenly: you make one quite giddy."
"All right." said the cat; and this time it vanished quite slowly, beginning with the tail and ending with the grin, which remained some time after the rest of the cat was gone.
"Well! I've often seen a cat without a grin," thought Alice "but never a grin without a cat! It's the most curious thing I ever saw in all my life."
Jeff from Milan--I've noticed that your market seems to be picking up momentum and a few bloggers are paying attention. Can you share any insight as to what's going on?
Thanks very much.
Roger--you said you would be inclined to fade the type of quick and hard rally we've seen over the past two months. Are you still so inclined, or has anything about this rally changed your mind? I've seen you write about thinking this is a bear market rally, but wasn't sure if you were taking any action or if this was an example of your having an opinion but not needing to be right about it.
check back tomorrow
LOL anon 7:53am
enjoy!
http://www.youtube.com/watch?v=lUnqbBgYZmI
In case anyone missed it, Bill Hester's piece is a must read in terms of the "bear market rally" versus "new bull market" discussion:
http://www.hussman.net/rsi/rallyvolume.htm
FWIW, here is what the R-man (Richard Russell) had to say yesterday who has called a few bear market bottoms the past 50 years:
The same analysts and economists who never saw the bear market and recession coming, are now announcing the arrival of a "new bull market" and a " revival of the US economy." As for me, I'm sticking with my studies of the Dow Theory. First, I saw no indications of accumulation around the March 9 low. I saw nothing in the action of the Industrials and Transports that hinted of a bear market bottom. I saw a two-month bounce in the market following a 25-year bull market. Most bear markets tend to last one-third to one-half as long as the preceding bull market. I saw economists and the public turn optimistic after a two-month rise from the March 9 low. Normally, the public and the analysts remain stubbornly pessimistic for weeks or even months following the final bottom of a bear market.
All of the above fortify my belief that we are experiencing an impressive rally in a continuing bear market. It takes more than a sudden two-month rally that came out of nowhere -- to reverse the trend of a primary bear market. My guess is that this bear market rally will continue higher until it convinces almost everyone that a new bull market has arrived, and that this is the time to buy.My own view, and detailing this is well beyond the scope of this comment but I believe the most likely scenario is that we are in for a number of years of just choppy sideways action that frustrates the hell out of both bulls and bears. I believe the 2007-2009 bear market parallels the 1937-1938 bear market for many reasons. From 1938-1942 the market just went nowwhere in an erratic fashion before making a big upmove from 1942-1946.
Considering all the fundamental economic headwinds (housing, deleveraginig, consumer spending weakness) I think it will take a number of years to work through before sustainable economic growth resumes and the next secular bull market arrives.
RW, if you read this, I'd be interested in any feedback/thoughts on this thesis/view.
Real quick point is that this time frame is consistent with the Kondratieff supercycle theory which says we are in the Kondratieff winter and the last time that happened was the 30s. I continue to believe the 30s/40s are a more relevant time frame for comparison then the 70s.
Roger,
I follow only a few stocks. Mediaset(ms.mi http://www.mediaset.it/investor/home_en.shtml) - it gives a yearly dividend ; this year .38(should be declared this month) the stock has gone from 3 to now 4.41. Last year the div. was .41 and the prior year .45. It is controlled by the Berlusconi's. The stock was rated by scredit swiss as under perform and target first 3.80 then 3.60 allway down to 2.60. I would say that under 4 is a value play bellow 3 is a steel. Bulgari(bul.mi http://ir.bulgari.com/bulgarigroup/glance) - a fashion and luxury and . They have started a luxury hotel chain a prior to that they have build a high fashion watch factory in Switzerland. Again they have gone a few weeks ago to euro 2.80 and now Bulgary started to hit Euro 4. The previous business cycle Bulgari hit in the high 2 Euro. Then it went to go to 9 in 2007. This time they are more prepared to weather the storm better then the previous cycle since this is the second time around. Under 3 euro is a steel and under 4 is a value play. Long term they both are very, very, good investment. Mediaset is runned by second generation and Bulgari is runned by third and forth generation. Mediaset is a local play with the biggest competition news corp(sky) and Bulgari is a global play in luxury. I own both companies. These are great franchises that are hard to replace. There is lottomatica lto.mi (manages lotteries), Generali (G.mi) insurance. Parmalat (plt.mi) – milk products. PLT.mi is a local play and sales have gone up this period. Parmalat under the Tanzi family was involved in a fraud bond case. The tanzi’s have been prosecuted and the company is under a new management and is doing well. I would buy on dips into euro 1.40. Roger – I concentrate and study companies. Very little economics, look at trends so not to get into trouble. However if I have an interesting company if you want I can post it.
Best,
Jeff from Milan Italy
Roger
I work with young people (18-35yrs) on a daily basis. There is a deep pessimism about investing. The general indication is that it is all rigged, manipulated and unfair. They usually site the last 10 yrs of a go-nowhere market, and the dishonesty displayed by business leaders.
This does not make me too optimistic for our future.
Your thoughts?
Roger,
Love your articles, thought process, and the fact that you respond to comments.
You mention the 200dma defensive trigger a lot, and the general idea is clear. But I wonder if you could address specifics of how you implement this strategy? Prices tend to flirt with 200dma several times a year, and one can lose a lot of time and money during those times trying to constantly be on the "right side" of the trade. The closest I can get is that perhaps one could use options creatively at such times?
Of course, maybe that information is proprietary :). Anyway, thanks for running this site.
anon 2:36, thoughts on what? what to say to them? to the extent they care there are have been two other instances of ten years or so of lousy returns triggering the same thoughts that they have now and then stocks went up. additionally other countries are growing, expanding and modernizing making them attractive long term investment destinations.
Scotty don't (Dr. Evil reference). I have addressed that many times including my comment at 7:16 this morning. going on offense or defense is done slowly. I start punctually but move slowly.
Inflation after the Obamazation of the economy? What, me worry??
There will be precious little to invest.
The 2:36 p.m. post. Tell them fear not. BOH will fix everything. There will be no need to invest.
Shoot -- thanks for replying; sorry I missed your previous answer(s).
Ha ha ha, this will soon be known as the great sucker rally of 2009.
US government printing money and giving it took banks so they can pump and dump the stock market to milk the last few pennies out of the baby boomers before they die broke.
"I work with young people (18-35yrs) on a daily basis. There is a deep pessimism about investing. The general indication is that it is all rigged, manipulated and unfair"
I think this is optimistic, these kids understand "investing" and understand the stock market is a big speculative casino and do not plan to be as stupic as thier parents where.
These kids are buying CDs at 5% not stocks.
5% CDs??? Where?
Anon 2:36. I remember an old Calvin and Hobbes comic where Calvin was going to be his dad's investment adviser and he was picking stocks with the comment "Stocks can go down?!?". That obviously was pre-2001. The first time that something happens to a person it holds a lot more weight and impact especially when compared to theoreticals.
So I am sure that the 20 somethings believe that the market is rigged and worthless. They have probably lost a lot of money and don't have much if any experience in growth and profit. I would tell them that the stock market existed before 2000 and if you plan to invest for more then 8 years to perhaps look at a larger view.
Roger. I enjoyed your articles from Seekingalpha and they have good information contrary to what many posters there think. The posters there are way too concerned with WHERE the bottom is and who is right in calling it as if there is a blue ribbon for guessing correctly. A lot of guesswork was done in where a bottom is... I didn't see very many comments about what to do when one gets there nor, far more importantly, what to do before it gets there. I think they missed the point of your article.
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