Escalating violence in the Middle East? Fuggedaboutit baby, buy stocks!
Days like yesterday are clearly driven by emotion. In the last couple of weeks concern was mounting about the near term prospects for stocks maybe even to the point of there being fear.
One reader left a comment related to the 2% rule asking whether this was shaping up to be a fast decline not a slow rolling over which is how bear markets tend to start. Remember we are about two months from the market's peak and the 2% rule pertains to an average 2% monthly decline for three months in a row.
People always want to hear predictions about what will happen and while a couple of weeks ago I said on CNBC I thought there would be something of a back slide in the market in the immediate term I don't think the next bear will start until well into 2013 or maybe 2014.
To the above question about the 2% rule, more important than predictions or guesses in my opinion is discipline to whatever it is you do. If you hold on no matter what then you should hold on no matter what. If you use some sort of trigger point for defensive action then you should stick to that. The time to change what you do is not on the fly after your trigger point has been breached as chances are you were less emotionally involved when you mapped out your defensive strategy.
The defensive action we took so far in large accounts amounted to getting rid of names that had not been doing very well but served to increase our cash position allowing us the flexibility to take more serious defensive action or if things go the other way to get more long the market.
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15 comments:
Hi Roger: I left the comment about the 2% rule. As you likely know, Fisher clearly states that a drop of over 3% in a month is a correction and NOT a bear market. This is a non-trivial distinction, as a correction implies new highs in a matter of weeks or months, whereas a bear market implies new highs in years, and perhaps many years. I am wondering what YOUR thoughts are on this distinction; specifically, do u agree or disagree with Fisher?- note: as u may know Fisher did not invent this rule, rather another FOrbes writer, before our time, by the name of Joe Goodman did. (of course I understand u will have taken defensive action based on the 200 day sma anyway in a waterfall decline..) Now maybe this is not the forum to ask you this, so if you choose not to answer I understand. Best, Andrew
Andrew,
Generally I agree with Ken on this. Three months could look like down 3%. down 3% and then down 0.3% which would obviously be very close to 2% average for three months and sufficient for me to not give the market the benefit of the doubt.
I think the defensive action I have taken so far DID give the market the benefit of the doubt as it was more of a cleaning up of positions.
I will still prefer to make the 200 DMA the top priority with things like the 2% rule being supporting indicators.
As a side note I believe that Fisher did not heed the 2% rule in late 2007/early 2008 but perhaps you know more about that than I do?
I read yesterday that Treasury Secretary Geithner commented that we should have no debt limit - it should be infinite, and forever.
Did anyone else catch this, or am I in error?
T
T, here is a link:
http://www.thenewamerican.com/usnews/congress/item/13703-geithner-as-buzz-lightyear-on-national-debt-to-infinity-and-beyond
Yes, just what Obama wants: tax, borrow, print, spend, no limits. Take that, Republicans!
Is this what we voted for?
Never trust news reports, particularly if they appeal to your prejudices, always go to primary sources whenever possible: The letter in question is here at http://www.treasury.gov/connect/blog/pages/letter.aspx
Nothing about "infinite" or "forever" or even non-existent per se: Geithner is stressing the need to avoid even the slightest intimation the US could repudiate its debt (default) by refusing to match the debt ceiling to previously approved spending.
AFAIK no other country on the planet has a debt ceiling because to voting for a bill that requires spending is unified with the obligation to pay for it. And, yes, that obligation is exactly what I voted for.
Personally I believe any legislator attempting to take the economy hostage with threats to the full faith and credit of the United States is guilty of violating the 14th Amendment of the Constituion -- "The validity of the public debt of the United States ...shall not be questioned." -- and, eo ipso, their oath of office but I'm willing to settle for just stopping these idiotic power games and getting some work done.
As far as no other country having a debt ceiling, so what? The US does, and we are talking about the US here, not some other country. As for the 14th Amendment requirement, I would interpret that as requiring the administration to pay the debt first from its tax revenue, making cuts where necessary in other, preferably non-defense, programs. Perhaps we will see what Obama's real priorities are.
Make that "service the debt first from its tax renenue."
On Sept 21 , 1998, Fisher wrote about the rule in a Forbes column in which he said the market must decline by 1.5-3% (average 2%) PER MONTH for 3 consecutive months to trigger the rule. In his book he changed the number to 1.25-3%. I don't recall him saying anything about a 2% average over the entire 3 months, but that would make sense too, I guess. I met him in 2001 at an investment conference in Gainesville, when he was heavily in cash, correctly anticipating the bear market of 2000-2002. I spoke with him personally, and he told me at the time something along the lines that he was most uncomfortable and in fact stressed when he moved to cash, because being underinvested and wrong is a sure way to go out of business (versus being invested when the market goes down, as you are at least with the herd.) I subsequently contacted him in 2007, when I thought the rule was triggered again, and was shocked (since he was already an institution) at the time when he answered me by a personal e-mail (which I should have saved!) He basically said that the 3 month rule was an ALERT, and then you had to look at other factors before making your own call if a bear market was imminent or not. He said in 2007 there were too many positives, and in his strong opinion no bear market was forthcoming. SO he didn't follow his own strategy!This from a guy who is in the Forbes 400 and is one of the wealthiest and most successful money managers on the planet, with billions in AUM. Unbelievable. ANdrew
I remember it so well b/c I listened to him and it cost me a bundle in the first half of '08. Fortunately I ligthened up that summer, but had I followed the rule initially I would have come out much further ahead than I did.
@Andrew (Anon 8:30 & 11:14), thanks for expanding on that. It looks like Fisher has set a range -- 1.25% to 3% per month so a straight 2% average over three (3) months might not confirm; e.g, a 1% + 4.5% + .5% would equal 2% but two months would not meet Fisher's range threshold.
So which is the 'real' indicator? Interesting that it doesn't seem to be a primary indicator for Fisher any longer ...maybe it should be (after some suitable refinement?).
As to the side conversation, somebody isn't recalling their 9th grade civics: The administraton (executive branch) cannot unilaterally alter spending on a congressionally approved program, that is strictly the responsibility of the legislative branch so it is their priorities that are at issue, not those of the POTUS.
That was really Geithner's central point: he was reminding lawmakers what admistration could and could not do and what would necessarily happen if congress did not match the debt ceiling to its approved spending; i.e., it would lead to default, a collapse in confidence, chaos in the financial system, etc.
RW, you are more of an academic than me, so I am sure you would score more points than me in a civics debate; therefore I will re-frame from such. I will point out, however, that the House has fulfilled its duties by passing and forwarding budgets as required by law to the Senate, but the Senate led by the POTUS' party has refused to even consider House budgets (debate, amend, pass its version, reconcile, and forward to the POTUS). Perhaps the POTUS should use his influence (leadership) to get Senator Reid to comply with the budgetary law and negotiate with Speaker Boehner, such that Congress can express its priorities. I suspect that until and unless the POTUS fulfills his leadership duty and the Senate Leader complies with US budgetary law, we will continue to play brinkmanship with the so-called fiscal cliff and debt ceiling. I had hoped for better after the election, but paraphrasing Einstein, to expect different results with the same leadership is the definition of insanity. But, we will see. No one but the players know what is going on behind the closed door of the negotiating room. I am hoping for compromise and real movement toward resolution of the current government deficit spending and debt disaster both parties have allowed to come about.
@RW: SInce he wrote 1.25-3% per month x 3 months I am going to speculate that he meant precisely this, and not a 3 month average of 2%. It is also interesting to note that the dirty little secret in the money management business is that it is way more costly to miss upside than it is to avoid downside. Clients don't leave if they are losing provided they perceive everyone else is. However they will leave if they are not making money in an up market. My guess is he still believes the indicator (since he wrote about it in Forbes and in his book), but in 2007 he was not willing to risk losing clients in case it was wrong (which of course it wasn't...)
Andrew, good points. Thx. Maybe Fisher became wise in the way Keynes observed: "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
Anon 1:08, fair enough, but the budget the House passed (and the Senate rejected out of hand) was the Ryan budget and, if this election proved anything, it proved that particular budget is political poison -- even if it added up mathematically no one will touch it now -- so we have to hope that leadership are working on a new budget bill that (a) the House can successfully pass, preferably on a bipartisan basis, and (b) the Senate will accept as an opening bargaining position.
A correction is when you're in the market and it goes down. A bear market is when you're out of the market and it goes down.
I think moving averages are better indicators for market timing than things like the 2% rule. And anyway if we go into a real bear market, all of the indicators converge fairly quickly.
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