A reader left a question asking what I would be looking for to think a bear market has ended and to become more bullish. He seemed to want to know if the reversing of the things I cite as reasons to get bearish would do the trick.
The short answer is mostly yes.
The slope of the yield curve is an important determinant for the fate of financial stocks. A part of the equation (so not the entire explanation) in the blow up is that a flat curve made normal lending less profitable. This caused banks to be willing to take more risk--I'm sure there is some element of Hy Minsky in their too.
When the yield curve normalizes things should get better for financial stocks and the broader index will have an easier time going up if its largest sector is healthy.
When the market is below its 200 DMA it is signaling a problem with demand for stocks. Perhaps we can figure that problem out or maybe not but still, demand problems is a reason for defensive posturing.
The manner in which the market has danced around its 200 DMA for the last six months or so requires looking a few more pieces of the puzzle which is where things get complicated and so the risk of being wrong is clearly on the front burner which is why I always talk about not making big bets.
One contributing factor to my near term outlook has been the length of the current (or recently ended?) bull market. If I somehow turn out to be right and we have a normal bear I would start to expect a bull market to start in 12-18 months if not sooner. So if the market were dancing around its 200 DMA after 18 months of bear market I'd be inclined to think a bull was starting.
As far as sectors, yes, the sectors I am overweight are generally ones that should do well at the end of a cycle (expect for energy which is obviously doing very well and media which should be doing well but isn't probably because a lot of it is likely to die; BTW I have no exposure to media). By the same token I would expect to be overweight things like discretionary when the bear starts getting long in the tooth.
I have disclosed being underweight volatility for quite a while and I would expect to increase exposure at the start of the next cycle.
Let me reiterate that these changes that I expect to make in the future will not result in huge lopsided bets. Most of the changes can be accomplished with a few tweaks. Shaving off two staples stocks in favor of one or two discretionary names, as an example, would not be a lot of trading. Swapping out a big pharma for a small biotech can make a big difference on the health care exposure of a portfolio.
That reminds me, I would be looking to reduce the average cap size of the overall portfolio when the next cycle starts. It only takes selling a couple of mega caps to make fast progress in this regard.
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9 comments:
It would be interesting to see a 200 dma for the S&P ex-financials. Whether a bear market has started or not, that sector is clearly in bear territory and pulling the overall average down. IMHO a reversal there will be the tell that a recovery is in the offing and it may well come before the whole market recrosses the 200 dma.
Roger, after seeing the Xmas photo I have to ask, "did you use a dogsled to get out?" :-)
we had a foot fall, then some melting yesterday, now it's much colder so yesterday's slush is today's ice sheet making driving impossible.
so we will get the dog sled out to mush into town for jerky, whiskey and of course shot gun shells, lol.
I am trying to find your recent articles that discuss mutual funds with 'expected' or lower risk returns. Can you point me in the right direction?
here's one
here's another
here's a third
Roger,
I am having difficulty understanding the importance of 200 DMA. It sound like technical anaylsis to me which is of limited use at least in my opinion. It would not be better to study the product you want to buy or maybe I do not understand.
Bernie
i think my take here is rather simplistic. demand for equities is either healthy or it is not. This is something that I think is important.
Historically the 200 DMA has been a reasonable way to assess whether demand is healthy or not.
I believe in it, headfakes in the last couple of years notwithstanding, but it is not right for everyone.
HI
Just thought i would add, the large traders say they dont use anything other than the soundness of the security,,,Well why is it that every time a stock hits a trigger point in a trend,,,everybody hits the "same" button at the same time...lol
Mac
Mac is actually on to something, in my opinion. There is WAY WAY too much information, and way too many variables to synthesize/analyze to effectively "know" which way the wind (in the markets, or for a particularly security) is blowing.
If, as Roger implies, tech analysis at least gives a backward looking synthesis of where trading behaviour has been, it can be useful. And as Mac points out, that conclusion appears confirmed in the trading behaviour around the most commonly followed/understood signals. Self-fulfilling, particularly where there is fear of "missing out" (as Roger frequently points out, with respect to big moves up, at least).
If you have patience (like Buffett?), you sharpen your pencil and let the market come to you. It's during times like these that you come to the true nub of it: what is true value? Is Citi "a great buy" at 27.12, or will it next see that number in 2012 (representing a long bit of waiting?)
If you agree, at least in part, with the truism that the correct price for a stock is what someone else will pay you for it, you have to pay attention to the "someone elses" and their behaviour.
Hence the (at least partial) value of technical analysis.
Rick
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