Something to ponder.This came up in various places earlier on during this event but is worth thinking about again.
Simple question; historically when do the biggest bounces in stock prices occur?
While I have opinions as to what will happen the bigger thing is making sure to not get caught off guard by the things that potentially do the most harm. A decline, even if it were to be big would not do the most harm. What would do the most harm is panicking in the face of a decline.
The realistic consequence of riding a big decline all the way down is that you have to wait for it to build back up. The build back up, as I often say, is either at a pace that is acceptable or not but waiting is the consequence. However if someone panics out after a big decline then they will have done themselves farm more damage than simply failing to take defensive action and having to wait. This of course assumes proper asset allocation.
Based on how the market tends to work, big and fast rallies often occur during bear markets. This little nugget either applies now or it doesn't but this is a guh-olden opportunity for people to get completely blindsided by a large decline.
I believe a big part of success in the capital markets is avoidance. Avoidance can mean several things like avoiding the wrong sector, avoiding the wrong country or avoiding certain situations that could cause the most harm. For many people emotions create situations that could cause the most harm.
We are currently in Maui. On Monday I am going to the first two games of the Maui Invitational Basketball Tournament but this year I will leave Bill Raftery alone.
8 comments:
While I've seen several possible explanations, the paltry yields on 90 day bills suggests that safety is a major concern right now.
I'm certainly no better than anyone else at predicting the future, but I suspect we'll see some profit-taking into the end of the year. Investors must have some offsetting tax losses on the books from 2008?
I think emotion could play an even more important role next time around. It's the "fool me twice, shame on me" syndrome; with some recovered money to protect, I think investors may be quick to sellout in a sharp decline. It might look panicky, but investors will feel they're just being prudent.
Thanks for a wise post.
Bear market rally
preservation of capital
people will be quick to sell
The wall of worry is a live and well. This bull will continue with normal corrections, that seem to scare the heck out of everyone.
Shiller back in march sayed that stocks were overvalued. Even though the economic front has improved somewhat we have stocks like amzn at pe of 78. I love to sell that baby at 144. So I have a list of sells that I feel confortable. Also like to sell aapl at 233. Is this a bubble. When I look at such PE well, are we close?
no matter where we are in any cycle there are always popular stocks trading at high PE ratios.
This is certainly the biggest bear market rally I've been through, and it has proven quite profitable, but we're into the 3rd and final stage I think (discounting the fact that I'm usually early); e.g., http://tinyurl.com/yklttfp
What remains to be seen is if all the central bank pump priming helping to fuel the rally initiates more significant growth; the economic engine must not only catch and start, it must run at better then 3.5% GDP.
If it does, we should start to see more normal-looking charts -- nothing particularly spectacular but increasing sponsorship and steadier growth in indexes overall (possibly after a relatively non-scary retracement) -- if GDP growth is anemic OTOH then unemployment will hardly be dented and a second recession becomes more likely as slackening domestic demand will put the weight on exports in the face of competitors who are willing and able to peg our currency and drive their workers so they can continue to out-price us. JMO
NB: China is the most significant of these competitors of course but most of them face the same problem: They remain primarily export economies and, while they are increasing exports to each other, their middle classes are not yet a large enough percentage of population to foster sufficient domestic demand for them to really fuel growth internally.
RW, I hope you have this called right. A 3.5% GDP after a soft fall would be a gift for the next several years.
Roger, RW,
some stocks like Rimm and Apol have broken down.We are close to 1166 on the S&P. Perhaps we need another up to 1166 and then go down to 800-900.
Best,
Jeff from Milan, Italy
What is the PE for the S&P? Is it historically high? I doubt it, as the screamingly horrendous headlines have stopped and 'we all know' we will have some years of difficultly. Probably a good time to sit on your hands or maybe drip-feed new funds into your choice of market, eh?
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