The S&P 500 is flirting with its 200 DMA which is an important indicator for me. While I say that the market breaching its 200 DMA is the trigger point for me to take some defensive action it is actually the day after it closes below its 200 DMA, if that next day is a down day.
If we are down toward the close on the day after I will take some action. For this go around I am still mulling between the sale of one stock, adding to my double short fund or both. I spent the last couple of days lining up my ducks so that I'll be ready if I need to be but maybe that I spent a couple hours preparing means it won't happen (insert nervous smile).
So to be clear the changes I might make at first would be simply a tweak. If, as has been the case the last couple of times this turns out to be a non-event I won't miss a rally, I would just lag a little. Invariably someone will call me an idiot for being wrong about this but I hope I am wrong. I am trying to protect against something that I hope never comes but realistically only comes along once or twice a decade.
If this turns out to be wrong I think the reason why might tie in with something Helene Meisler wrote about on RealMoney early on Wednesday morning. To paraphrase; she said that the market going below its 200 DMA is far less likely to be important if the 200 DMA is still rising, which it is. She says that a breach is much more important if the 200 DMA is falling.
This is helpful. For now I am not changing my plan. I'll take action as described above if I need to. Then depending on what happens next I will either reduce long exposure more or increase it back if the market takes back the 200 DMA and can keep it for a few days.
If I end up being wrong and having to increase net long exposure in a week or two, we are talking about 2-4 trades in total for accounts with 40-45 positions. The important thing is being disciplined without creating undue turmoil in accounts and making sure clients are not too leveraged to one single outcome.
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27 comments:
Is there a way to get Helene Meisler's daily comments WITHOUT having to sign up for Realmoney?
I am not aware of anywhere else she is published. I would suggest trying to access her archive at RealMoney, which I think can be done and try to find an article of hers that ran on the free site, if there is one, and then email her through that article.
"The important thing is being disciplined without creating undue turmoil in accounts and making sure clients are {not?} too leveraged to one single outcome."
Roger, not trying to be nit picky, but I think that you are missing a the work "not", above.
Thanks for your even-keeled postings!
thank you Leisa, change made.
Thanks for explaining more about this.
keep in mind that significant trend changes -- specifically having a down-a-lot scenario -- will always happen as the 200 day MA is still rising. The 200 day MA is a slow and lagging indicator. Thus it cannot decline unless the price has penetrated and is below it already.
if we go under a declining 200 day MA, that means that we have already been below it, had a relief rally and fell below it again.
In that case you should have taken action already, much earlier.
Alternatively, if the market has been flat for a long time then we can go below a slightly declining 200 day MA but then it is not a significant signal.
My point is that if you are being cautious for fear of a "Down a LOT scenario" then closing below a rising MA is the only case that matters.
Since the "Down a Lot" happens less than once a decade, then you will have few false signals, think of it as insurance.
This is too complicated Roger, why not just sell before the market goes down and buy before it turns up, like all the money managers say they do on TV.
OG
"I am trying to protect against something that I hope never comes but realistically only comes along once or twice a decade."
The one thing we can agree on and in my mind the most important is the above comment.
That said I was long from 2003 to early July 2007. Last time I sold before this was in 2000. I was traveling to europe a lot back in 2000 and notice the talking heads in America had a very different take on the US market than the rest of the world. Maybe you do not expect individuals to get on TV or write articles reminding you to buy and hold for the long term when they actually think the market is going to tank, but I think a bunch of them do it intentionally.
They just do not find evidence of many of them sending emails about known dogs to associates they just touted to the public.
Sorry, but if you consider how long the current bull market has gone, advance decline line, new hi's vs. new low's, and the current ever expanding credit crunch (country wide said there are problems with prime loans) the picture looks rather poor.
I still think this is going to be painful.
Sami, the answer for me might be a faster MA crossing over a slower or just sticking with what I am doing. This is simply thought process.
OG, I am trying:->
Anon, You may be right about pain. I am more focused on what the market says about demand for stocks be it for the reasons you cite or something else.
Roger - There is a NBER Paper out on moderation in Asset Allocation - Hulbert wrote about it in last Sunday's NYTimes it seems to right down your alley. In case you haven't seen it, check it out -
http://www.nytimes.com/2007/07/29/business/yourmoney/29stra.html?_r=2&oref=slogin&oref=slogin
OG
OG, thanks for the link.
Maybe I am wrong but that does seem close to what I write about doing.
The 200-day MA is a fine indicator for what it is - an indicator. There have been half-a-dozen penetrations of the 200-day over the past two years, but that's not a bad thing; you don't want an indicator that's "indicating" all the time. You want an indicator that makes you stand up and take notice! Which will probably happen today, I think.
Roger,
I just returned from a month in Mongolia, I think I was on the web four times, not reading any business news. Surprise! Surprise! my portflio barely moved, it was maybe up one percent. This after big moves in both directions. The conclusion be well divirsified and do not sell or buy on very active days. If it is confusing . . . not making a decesion is also making a decesion.
Bernie, some trip.
You isolate a crucial building block. If a portfolio looks kind of like the broad market and no trades are ever made it is likely you will capture the market over the long term though all the ups and downs and sideways.
In that context it makes adding value by trading a lot tough to do.
I think many of you need a lesson (or 3 in fundamental economics/finance). This market has been a resounding buy for new money positions in sectors historiclly favorable to late cycle outperformance.
I think the market is overvalued as Hussman has indicated. Of course Hussman has been saying that for quite a while now and the market has continued going up.
I believe the market, housing, commodities have gone up due to excess liquidity. I stayed in the market due to the asset inflation view point many believed in due to this excess liquidity.
Now the liquidity has gone away subprime, alt A, junk bonds, etc are all having a hard time in the market. This only makes sense low interest rate loans were given to high risk borrowers that are unlikely to pay it back.
The only way to rescue the market from here is for the Fed to step in injecting lots of liquidity remaking a market for this high risk crap. That is really the biggest risk to the upside IMO.
But does the Fed really want to inject liquidity to recreate a market for this crap that most people agree never should have been sold in the first place to people? Trust me if hedge funds, banks, insurance companies, etc. can unload this crap in the market again, they will just start making more of it. I still get 40 year loan offers with a 1.4% interest rate offers.
I do not think the Fed wants this to continue so the market for the crap is going to go away and that means liquidity issues and people selling the liquid stuff they have like stocks etc. Now I do think the Fed will eventually step in to insure things do not get out of control.
But I do not think the Fed is going to worry about a 15 to 25% decline in the stock market. That would mean we were back to the levels of late last year. I think that is much more acceptable than the inflation that would be caused by massive liquidity injections.
Of course I could be wrong and we could get the liquidity and go much higher than we have seen to date. This volatility we are seeing is not making it any easier to see the true direction for the market and I do not think that will change soon, but we can always hope.
So I am staying bearish because I just do not want to see this credit bubble expand anymore and I do not think the Fed does either. But I am going to pay close attention in case I am wrong.
Shoot! I've been watching the 200-day moving average when I could have just drawn a Lafler Curve, instead! I'm such a sucker.
Yesterday, CSFB published a thorough study and list of stocks for the present investing environment. I posted the list for those in search of a few individual stock ideas.CSFB research has been on my worth reading list for several years.
Ideas, not my personal recommendations.
Here is a link to T's post.
roy,
If you reject the liquidity argument effecting equities, how do you explain the Nasdaq going to 5000?
Roger
These last two posts about action to be taken in the face of a drop in the market are an example of where you shine! Readers could learn from your consideration of risk and the need to stay diversified.
You are looking at the market as an investor who is trying to make money rather than using your blog as a propagandist for a point of view
Tom Lydon, who posts over at etftrends.com, also uses the 200 day sma to play defense. In a post today about utility etfs, he seems a little more patient on the rebound, suggesting that investors wait to rebuy until the etf is 3% back above the trendline.
Tom's approach is more (maybe all?) bottom up. Preferring top down I think we view this much differently.
Roger,
I do not see how you get much protection by making adjustments to less than ten percent of your portfolio (assuming, as you have indicated, that you may make changes to a few positions, all of which represent a small percentage of your potfolio.) Is there something here that I do not understand?
I think you are missing something. I mention this is as a first move a tweak. At the end of this post I talk about cutting back further if things don't improve.
Model update: no change. My model is signaling 100% long. I don't see this changing unless we dip below the 200dma.
Anon 12:40
We do not appear to be in a normal business cycle so a little knowledge of "fundamental economics/finance," as desirable as that might be, could work against individual investors at this juncture; for example, traditional late cycle investing would have you reducing investment in commodity driven stocks and increasing exposure to financial stocks and quality bonds.
Contrary Investor offers a compelling argument that we should be focusing on the credit cycle rather than the business cycle here (http://tinyurl.com/d6sb) and the current credit environment does not support a late business cycle allocation model.
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