Barron's had a some interesting stuff this weekend. First up was a profile of Roy Niederhoffer who has a brother named Victor you may have heard of. A big thing in the way I try to do my job and navigate market cycles is to keep things very simple. I like diversified stock and bond portfolios, tend to heed very simplistic indicators for taking defensive action and am quite content to get what I need for the portfolio with exchange traded products (stocks, bonds and funds).
Read the profile of Roy and it is clear that his approach is not simple in the least. His is a high frequency trading model, Barron's said holding periods can be a few hours or a few weeks. His offices have 160 computer screens. About halfway through the article there was mention of his at some point having added 60 new (trading) rules in addition to however many he had previously.
His results have obviously been good (otherwise there'd be no profile). My point is not to bag on him in anyway but to point out that success is possible with very simple methods like just buying index funds to complex programs involving dozens of factors requiring very beefy computers to execute. If success can be had with many types of approaches then we can conclude that approaches different from our own are not wrong but perhaps wrong for us. Ray's approach is not wrong but wrong for me just as mine is wrong for him and so on. This does not mean we cannot learn from people who trade markets in ways completely different from what we do.
Alan Abelson had some interesting thoughts from Louise Yamada that we've touched on before and that some other folks have discussed about the current market being like 1938 as opposed to 1932.The idea being that the decline in 2008 was the second big decline in the decade. The chart I included has a big black arrow at the point back then that looks like the 2009 equivalent. I don't think this is useful for predicting percentages but in terms of certain types of behaviors repeating over time the notion of years of frustration as Louise puts it still to come is plausible and reasonable.
One thing to take from the chart is that from 1938 forward the market was more than halfway through the economic event of that day but there was still plenty of ups and downs (big volatility) yet to come. Some of those declines were straight down. For months I have been using the term stumble along the bottom to describe what I thought things would be like. I'm not sure if wide, volatile trading range that makes no progress for a couple years is aptly described as a stumble along the bottom but this sort of thing is what I had in mind but not lasting as many years as what happened back in the late 30s/early 40s.
For a while I wrote about expecting a bottom in Q2 2009 but things seem to be playing out on a longer time table. SPX 666 may turn out to be the bottom but if the SPX goes back down close to that number again does it matter whether another decline stops at 700 (not a new low) or 625 (would be a new low)? If we have another fast decline down to those types of numbers what matters is that it will scare the hell out of a lot of people and many will sell at precisely the wrong time.
Joellyn took this picture when we were at Kalawao where Father Damien built the church on Molokai. We're not rally cat people but I think it is a great photo.
11 comments:
Interesting post, Roger. I reviewed Yamada's thesis as well, and while it is thoughtful, I really don't think it fits. The tech bubble saw a severe drop in stock prices, but the underlying problem that caused the 30s Depression and our current (crisis/depression/recession/malaise/insert favorite phrase here)didn't materialize then.
During the Depression and our current situation, deleveraging from too much debt ruled the day. Once the market commands that we delever, it doesn't let up until the result is met no matter how hard the participants try to stop it.
The tech boom saw one asset class take a beating, but it wasn't delevering as money moved to other asset classes: real estate, commodities, Treasuries. Greenspan was able to keep the deleveraging cat in the bag. So I think that stock market drop was more about valuation and not debt reduction.
The bottom line is we aren't going to find a period that synchronizes exactly with what we are experiencing today. The 30s, early 70s, and early 80s, all had issues that don't apply to today and also parallel today simultaneously.
That said, I do think that the deleveraging of the 30s is probably the strongest correlation to the past compared to today. And, this scares me because this is the most painful problem to remedy.
The problem with these past-as-prologue models is they assume that we didn't learn anything the last time around. Is there more pain and volatility ahead? Of course. But I agree that our stumble along the bottom will be briefer this time because of the proactive financial programs that have been put in place globally.
Soon Alan will find a prognosticator with a longterm chart of inflation to scare the pants off us. Hopefully our financial gurus will address that beast with similar dispatch.
Unfortunately, I think Kirk Kinder is correct
Kirk, you are obviously correct about the reasons being different but as a technician Louise would not care about those differences. Technicians obviously care about patterns which show signs of emotion and behavior.
Roger,
the Yamada's of the world only fool me once. Here in this blog (RR) we where looking for an intermediate bottom and I think you and most of the participants had discussions on cycles. I remember we even went back into the 1800's and you asked a question about some market low of the period. I cannot believe that this person(Yamada) made such a call. If now she has changed her mind from 1929 style to 1938, I am sure she will again change until she gets it right. In the mean time I have some rudimentary indicators that I have put up, and if I die I rather die with my hand rather than someone else's. I am glad you have put up this blog that we can freely compare and encourage (which I have gotten from you and participants). I have not enough words of thanks for the sincerity of you and the participants.
Best,
Jef from Milan, Italy
funny how people want to argue between 1932 and 1938. What about 1930 or 31? Whats the big hurry? Remember, its the journey, not the destination.
its teh journey not the destination? people must never lose site of that.
given that we have just had our second 50% decline of the decade a comparison to the late 1930s is not unreasonable.
From a technical standpoint, Dec 2008 to May 2009 is looking quite similar to July 1998 to Dec 1998. Considering that the players in Washington are same (different roles), I wonder if the outcome will be similar. Interesting to watch.
CA
Two 50% declines in a decade may (or may not) reflect some technical/psychological similarities. However, I would also imagine that the psychological implications of the war clouds of WWII may have had significant impact on the markets in 1939-42.
I'm not sure how to compare today's global tensions to the world situation in 1938/9. However, I think it is very possible that the direction of the next few years in the market may be driven more by how the world evolves than US specific policies/markets. More global tensions ...more downside. More global economic cooperation ...more upside. Perhaps that is stating the obvious, but I think it means investors might want to take more of their clues from global metrics.
Roger, you often talk about the 200dma as a trigger. Have you ever considered using a 200dma signal based on some world stock market index vs. the S%P500? I realize companies in the S&P 500 reflect a large global presence. But since this trigger has a lot to due with psychology couldn't a global metric provide a better view of global sentiment?
we benchmark the SPX so we take defensive action based on SPX.
Currently there is NO free market, so it is easy to day trade if you understand that simple fact and what the goals of the Goldman Sachs run US Treasury really is.
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