An important thing to remember, and I say this a lot, is that an actively managed portfolio is a series of decisions and some of those decisions will be wrong. What matters more is whether a decision is wrong over some reasonable period of time as opposed to a few days or a week. That being said anytime I place a trade for clients I think about whether the trade will be immediately "wrong." This is more of a personal amusement thing as no trade I have ever placed for clients was done so with the intention of getting out in a week.
The purchase of SDS last week was not immediately wrong but of course the market could go up to take back the 200 DMA and as mentioned when I disclosed the trade I would act in a very tactical manner. To the title of this post a breach of the 200 DMA is sometimes a short lived thing and not a precursor to down a lot.
It does seem that the 200 DMA does matter this time. The behavior since the breach has not been that healthy--panic buying is not healthy-- and as Dennis Gartman might say the chart wants to go from the upper left to the lower right. And again if I am wrong I will simply come out of the position.
If you watch a lot of CNBC, I do because even if you don't like the commentary it is a great way to get news right away, you will hear all sorts of support and resistance numbers thrown around. I don't make a huge priority out of these number but I imagine some of these opinions are correct and some not but they strike me as a more difficult way to navigate the cycle. Deciphering whether SPX 1085 really matters or not is an interpretation not an objective trigger point. Not that an objective trigger point can't turn out to be wrong but the more interpreting one does the more room there is for reacting in the moment as opposed to planning ahead of time when emotion is much less likely to play a role in the thought process.
The chart is similar, in terms of appearance and the line I drew in, to a chart I put in a post called Send In The Bears in December 2007. The chart mattered then and we'll see if it matters now or not shortly.I am not implying that we need to go back to the March low to get healthy. The market can have the hell scared out of it long before the SPX trades with a six handle. My hope is that after a good scare there would be a slow, tepid move higher. I think another round of panic buying from SPX 900, or whatever, would mean yet another scare coming.
16 comments:
Hi Roger: Off topic, any thoughts on managed timber? As u likely know this is the asset class that Grantham thinks has the highest return potential 7 years out (followed by high quality U.S. equities and emerging markets...) Also am wondering what your thought are on how to best get exposure to this asset class...PCL, WOOD,CUT or something else? Thanks....
I used to own PCL for this reason but i think as time has gone on it and the others don't work as well. I think the ETFs are more proxies for industrial activity not timber.
Hi Roger: thanks for the reply, I am wondering then if u know of any timber proxies or is this just a game that the endowments and groups like GMO advisors (Grantham's co.) can play?
thanks..
go to seeking alpha and search for an author George Fisher (Fishcer?) he recently wrote an article with many names mentioned.
i am dubious that the effect you seek (I'd like to see it too) is available in a stock or ETP
NOT saying I'm right and you are wrong because neither of us have crystal balls, and all you can do is follow your process, but here is what I wrote last night (for me the 200 DMA breach is just one of 5 factors I am watching to trigger defense):
Recently I posted a message on The Motley Fool (an online investment discussion board) outlining my technical analysis (which is price patterns and trends) and essentially listing the metrics I am monitoring to trigger going into "DEFENSE" mode. Instead of retyping that entire post, here is the link:
http://boards.fool.com/Message.asp?mid=28529355
Here is the quick summary. I have 5 primary indicators I am following to identify whether it is more likely that the recent drop is just a correction in an ongoing bull market (similar to March 2003-October 2007) or the start of a bear market (similar to 2000-2002 and Oct 2007-March 2009). As of right now, 2 out of the 5 have just recently flipped to "bear market/play defense" mode.
In my view, it is more sensible to err on the side of "bull market correction" because most 10-15% drops do turn out to be bull market corrections (where the market is higher in the subsequent 6-12 months) and NOT the start of bear markets that take the market down 25-50%. That said, if indicator 3 flips bearish which is the S&P 500 breaking below the 1040-1044 level (see attached chart) I will start to take defensive action which means some combination of selling stocks and raising cash, switching from stocks to the Hussman fund, or hedging with puts and/or inverse funds. If and when all 5 indicators are bearish, then I will go into "BATTEN DOWN THE HATCHES" mode.
To be clear, no system or indicator is perfect or never gives false signals. Unfortunately, the stock market just isn't that easy. That said, heeding and acting on some of these indicators would have protected against most of the bear market declines of 2000-2002 and 2007-2009. In my view, we are still in a very uncertain economic environment with an arguably fragile recovery largely supported by government spending and stimulus. In this environment, I am trying to do my best to balance the opportunity for further gains against the risk of loss, and it is impossible to do both 100% simultaneously.
As a side point, any level below 850ish on the S&P 500 is a price level I would consider as a good value for buying for the long-term so in the event of a bear market decline, I would begin eliminating hedges and increasing stock exposure at that level.
It still looks like a correction in a bull market.
It still looks like a correction in a bull market.
Care to expand here?
Do you have specific, quantifiable metrics, indicators, statistics in support of that assertion? Or this purely a subjective judgement/gut feel statement?
Mike C: how did your system work during the last major correction?
Sam
Mike, Anon 9.07 is SEG. He has been saying all along, "This is a bull market correction." must be him.
Mike, I had mentioned that we would go to 1166 witch we did(1150) and then a correction. I mentioned that there might be another leg up. I posted on march 4 that after this last leg up the correction would be more pronounce than 10% - http://tinyurl.com/2um9e56 .
So where do we stand now?
Here are the retrenchments S&P targets for this correction:
1008.37, 943.00 or 877,63. In terms of taking defensive position, my opinion is to have taken such positions as the market went up in the final leg. I still think that we are in a bull market but this correction is the most peculiar and I think it is not going to be a standard 10% as we have seen so far. The tip off point was when Roger posted April 25,2010, I felt that the next day was going to be the top of that leg. However, I cannot short indexes and could only short Stock issues, so most issues top out before April 26.
This is my opinion, we have completed a portion of this correction, stay tuned for more after this upward move. The numbers and charts will confirm this opinion.
Hope for the best for you Mike C.
Jeff from Milan, Italy
27/5/2010
Mike C: how did your system work during the last major correction?
Sam
Sam, don't you know it is BAD form to answer a question with a question.
Which "major correction" are you referring to? I've been mostly long during this entire 14 month rally. I did get faked out a bit in the June-July 09 correction, and sold some of the Berkshire I bought at the November 2008 low for basically no gain or loss. I sold my XTO basically on the day of the Jan 1150 top. I recently bought ATPG at 17 and exited at 15 on a 200 DMA breach. I bought GLD in Sep 09 at 98ish on the triangle breakout and still own it. FAIRX is 25% of my portfolio, and Bruce Berkowitz has been lighting it up the past 14 months. I sold my CHK position a few months ago at 24 after having owned it for years at an average cost basis around 30ish. I reduced equity exposure in 2006-2007 based on Hussman's valuation warnings but not enough. I am well ahead of the market for ALL timeframes.
After the 2008 collapse I spent alot of time refining what it would take to go from no hedging to a little hedging to fully hedged ala Hussman. With the Shiller P/E being where it is, we are in the danger zone of valuations.
So I'll repeat my question and hopefully THIS TIME YOU WON'T DODGE IT. Do you have some solid quantifiable reasons or compelling reasons for your belief or are you just guessing/hoping?
BTW, in my OWN personal 401(k) I went from 10% equity to 80% equity over the previous 2 days on the hammer reversal and 1040 support holding. Whether a bear market or not we should get a nice bounce rally to 1150ish. I will sell into that.
BTW, forgot earlier but Dow Theory per Richard Russell and Jeff Saut both issued a bear sell signal for the primary trend.
Mike C
multiple people are speaking to you, but you seem to be speaking to a single combined entity
Hi Jeff,
Here are the retrenchments S&P targets for this correction:
1008.37, 943.00 or 877,63.
Not sure how you derived those, but I'm with you on them all. They are all key Fibonnaci numbers, and both 940-950 and 870ish are areas of prior price congestion/support.
I'm just not sure I'd call 870 a "correction". That would be a 29% drop from peak. I'd much prefer to try and sidestep that if it is coming.
In terms of taking defensive position, my opinion is to have taken such positions as the market went up in the final leg.
Like I said, I did some selling, and honestly, not to brag but I f'en nailed it in my 401(k) and some client 401(k)s where I drastically reduced equity exposure in late March and mid April and bought back the last 2 days. Honestly, it was basically nothing more then assessing sentiment and fading that. Record call buying 4-5 weeks ago morphed to super high VIX the last week.
I'm open to all opinions as I am trying to figure out the optimal probabilities here, but it really isn't useful at all to just make a declarative statement with absolutely zip, zilch, nada behind why other then I was right the last 2-3 times I said it when clearly the magnitude, volume, and many characteristics of this "correction" are quite different then every other the past 14 months.
Mike C.,
those are fibs. You are correct. The march 4 post actually called the 1228-1300 for the last upleg. We went to 1219-20. We could retrace to 870 and still be in a bull market. I think that we have completed an important top. Now is going to be difficult. Because retracements are hard to figure out. Back in july/09 I was the only one in this blog to say stay in , we are going to make another leg. On Jan/10 I called it correct about a correction. However this correction is the worst one since we will correct 14 month uf upmove. I think that we are not done because the time is short yet.
By the way, I like the 50day Breach. It is a great tool - thanks.I just put it upon excel and it rocks. Thanks! Thanks!
Actually I blame RW for not giving me the long answer on shorting this market. I am just kidding (LOL).
Best,
Jeff from Milan, Italy
P.S. If there is anythink that I can help, please let me know
multiple people are speaking to you, but you seem to be speaking to a single combined entity
My apology to Sam. I just assumed he was the same anon with the 1 sentence "it looks like a bull correction"
Jeff, major props to you. I remember you correctly nailed the summer 09 correction and Jan correction. As to retracing to 870 and still being in a bull market, well I suppose it depends on how you define bull and bear markets. Again, that is a 30% decline so if the market did recover and take out 1220, I wouldn't view it as one bull market but a bull followed by a bear followed by another bull. But that is word games. Bottom line, I DO NOT want to be mostly long or even half long if it looks like 870 is the high probability move coming next.
Mike C.
We have just made a correction. Take that length. I will tell you, how to figure out the bottom in two weeks time. For now remember the distance - 180 S$P
Ciao,
Jeff from Milan, Italy
We have just made a correction. Take that length. I will tell you, how to figure out the bottom in two weeks time. For now remember the distance - 180
Jeff, same reason for 180 or a different one?
http://www.ritholtz.com/blog/wp-content/uploads/2010/05/DOW-HandS.png
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