No video this week.This chart is a YTD comparing SPY to the healthcare stocks I own for clients.
The names are irrelevant and I doubt these names are any better, collectively, than any other six healthcare stocks.
This strikes me as more of a confirmation, or if you prefer an uh-oh, of what more and more people are coming around to; that the chance that a bear market has started is much greater than it was a couple of months ago. Obviously I believe a bear has started but that could still turn out to be wrong.
I also looked at a chart comparing SPY to a couple of tobacco stocks and a food stock and SPY lagged them too.
Two weeks of this sort of rotation either matters or it doesn't but if it does it is consistent with the type of rotation that usually happens at a time of fear about the economy.
Conversely four out of five of the industrials I own for most clients are lagging the SPY YTD. Again, nothing out of the ordinary there.
In trying to navigate what might be a bear market it doesn't matter that the industrial stocks I, or more importantly you, have are down what matters is how much industrial exposure you have. This is not a time for an overweight exposure, at least I don't think it is.
The cyclical nature of sectors is a pretty reliable over time. It may not work every time which is why my focus is on overweighting versus underweighting as opposed to zeroing out a sector.
This is not the easiest thing to get a hold of but stocks go down in a bear market. Finding the ones that that will somehow go up is difficult to do. So if you can realize that the stocks you own will go down in a bear market you can then focus on cutting back overall exposure as opposed to finding the equivalent of the tech stock that went up in 2001.
The obvious question that always comes to these types of posts why not get completely out. I think this is a huge bet. A couple of bets actually. One is you are betting that it really is a bear market. Another bet you are making is that you will know when it is over and so will know when to get back in. It is these turning points in the market where crucial mistakes are made. Avoiding extreme bets in either direction takes this type of mistake off the table.
From the always planning ahead file Todd Harrison (with a hat tip to Charles Kirk) is predicting that there will be a one week 10% drop at some point during 2008. That sort of narrow prediction is way outside my wheelhouse but if he is right that would cause a lot a fear, probably set the stage for a very fast and big snap back, even in the context of a bear market, and so I expect I would come out of my double short position if just for a couple of weeks.
27 comments:
I heard a rumor that Citi Bank is in the process of selling Smith Barney. I was told that the London Times reported this recently. Can anyone confirm this info?? I was not able to find the article.
BWJR
Times of London Link via 24/7 Wall St.
I did not read the Times article you can if you care and can draw your own conclusion.
We are definitely setting up for a quick 10% drop in the S & P. I feel strongly about this and expect it to come by March. I will continue to sit in 90% cash until then.
hahah. I just completed my yearly affirmation of "A Random Walk Down Wall Street."
I have a well diversified portfolio. Lots of international exposure, a sector or 2 I research and get a bit of over-exposure in, etc. I use index ETFs and funds, plus 2 managed funds.
My wife has about 25% of our total portfolio in various accounts from before she was a stay-at-home mom, and she runs those. It's all individual stocks except for her old 401k which has not-well-known managed funds. Her method of picking stocks is "I like Home Depot" or "I've seen Microsoft in the news a lot." She never sells losers; it took me days a few years ago to convince her to sell some stocks she had from a spinoff that were about to go bankrupt.
My performance? 7.99%
Her performance: 11.67%
90% cash to try to defend a 10% drop? that's a proportion I wouldn't take.
Stephen, i am sure you know that there are countless studies that corroborate your experience.
interesting what temperament can do.
Hi Roger,
I was wondering if you'd seen this and if you have any comments:
http://tinyurl.com/yv89xz
I've got a really lousy crystal ball so I'll just mention that, historically, housing and/or credit driven bear markets tend to have longer resolution times than normal cycles so my strategic positions are moderately biased towards a rather prolonged 'muddle through.' I haven't increased hedges much and am probably more net long in equities now w/ some growth names but the predominance is preferreds, high-yield or call-writing even with international. I've taken profits on some commodity positions but still hold gold and some ag
Bear markets usually have sharp drops followed by very strong rallies that eventually fail to reach new highs -- rather exiting in a bile-inducing sort of way I suppose -- but I've got a feeling this bear (and yes I do think we're in one) is going to feel more like getting your head pushed through a bowl of oatmeal: Not a great deal of drama for the most part but we'll all feel rather short of breath before its over. JMO
Go Packers!!
I was at a client site all day and came back to find all my shorts have hit their limit orders and were covered... good run while it lasted, but i'd rather be long than short going into the 2nd half of january.
The short side trade is getting too crowded.
Go PACKERS.
I remember that article about the leveraged ETFs from when it came out. My take all along has been whatever flaws there are; point conceded.
I have been very pleased with the effect they have helped me create.
RW, nice imagery. My thought all along has been a normal bear market are you thinking a little worse than normal?
Similar experience here: my SO's portfolio, which is all in a retirement strategy actively managed by those mid-tier dinosaurs at AG Edwards, and invested in Oakmark, Davis, and a bunch of other large-cap, growth oriented, US-centric funds, that collectively charge 1% in expenses, is up about 9% since the start of 2007.
Me, with my efficient index funds, ETFs, broad global exposure - I'm underwater for the last couple of quarters, barely breaking even since the start of 2007.
Roger.
On what stage of grief would you say we at currently?
http://tinyurl.com/2p4bqv
RW noted that... "but I've got a feeling this bear (and yes I do think we're in one) is going to feel more like getting your head pushed through a bowl of oatmeal: Not a great deal of drama for the most part but we'll all feel rather short of breath before its over. JMO"
Or perhaps more like quicksand...
http://tinyurl.com/2da39u
(with thanks from 2nd-ave at Bill Cara's)
Jag, I would love to see the names of those large cap
growth funds up 9% ytd. I use Brinker's aggressive
strategy ( 6 MF's and ETF's managed and index mix of 50% total market, 10% tech, 10% small, 10% mid, and 20% foreign) as a reasonable diversified benchmark and he is down about 6.5 ytd, I am down about 1% ytd
and was feeling ok about that all things considered. Exposure to the neg inverse ETF's,
Ag, bonds, and gold has certainly helped.
To Roger's point about getting defensive, I bought
Coke, Pepsi, and MCD a couple of months ago, and
they have done a good job, then along comes the
big boom Friday with MCD down over 6% in a day dragging staples down with it. Was that a Black Swan, or just a swan dive? Don't they go up in recessions generally? Thanks for any and all input.
Scoot
my guess is we are collectively still in denial. I do think more people are coming around to the possibility but i'd say denial.
I don't think staples are broken as a place to hide, I'd say it was a bad day.
Roger, my thinking has been this will likely be a 'normal' bear in terms of depth but it will last longer than usual; not a really deep hole perhaps but probably a rather wide one. That pattern seems fairly common in downturns involving credit contraction that isn't primarily rooted in the business cycle. A housing contraction complicates that further and since these cycles tend to have different rhythms and durations I expect a rather mushy outcome.
FWIW, I could be wrong of course.
JackS: Dug the giraffe in quicksand; now THAT'S a predicament. It might have been Bill Gross or some other financial heavyweight but ISTR a prediction that those near or currently entering retirement could find themselves in a rather similar fix as that giraffe given expectations for index returns over the next decade or so.
In past articles you have mentioned the use of short etfs such as SDS to moderate volatility. However, in these days of a possible recession with 10-15% down a possibility why not look at such vehicles as an investment alternative. With double down etfs, your return could be up to 30%+. Not too shabby. Thanks
The prevailing direction of capital markets is up. US stocks have an up year 72% of the time. The idea you spell out is far more aggressive than I want to be.
you know, I really hate predictions and whether they end up right or wrong, they are useless to me. I might read one here or there for entertainement and to toggle my mind but is there really a "best predictor"?
the other side of that coin is to read the not just the prediction but the reasoning behind the prediction. take in as much of that as you can from as many people/sources as possible. then sort it all out for yourself to draw your own conclusion.
steve: I just realized that the last time I saw her numbers was end of december. Given the way that the tech sector, for instance, has trended in 2008 so far, I wouldn't be surprised if the large-cap US growth strategy has had an awful start to the year.
Well it was said Q1 would be 'difficult' but I didn't think difficult meant the start of a bear market! That's not difficult it's stunning. Unless I'm grossly mistaken the Dow will proceed downwards, in an disorderly fashion, for a number of years from now.
This will be the test for the uncoupling that's been talked about for the last 8 months. Will have to start looking at what a bear market means for different sectors - I bet Halliburton does well.
Last Tuesday's result on the Dow confirmed this for me, breaking through a very strong resistance level. I'm new to investing and reading charts but that moment seemed obvious, in respect of recent developments.
And greetings from the UK, this and Nouriel's blog I try to read as often as possible.
thanks to you in the UK. compared to Dr. Roubini I might appear to be downright giddy!
The bears, the media, Roger, etc make a very interesting case. To quote another reader, I have a lousy crystal ball. I see recession and even depression news at every turn. Nearly every blog I read and every story is about the impending bear market. The only thing that's keeping from getting fully on board is the fact that everyone is expecting it. This would have to be the first bear market that everyone got right. Seems like an odd reason to doubt a bear, but it truly bothers me. Either way, I've always got some defense on. But for the sake of speculating, I don't feel a full fledged bear ... maybe some churn for the next few months and then we'll see how things shake out.
You once again have shown that this is a blog that helps investors make money. So many of the so called financial blogs are just gloom and doom propagandists for the liberal left. Diversification is such a hard concept for the human mind to grasp.
thank you for the kind word but i think of it as just trying not to screw up too badly.
Well, this site really helps me.
Thanks, I'm 23 just opened my
Roth with XLF and plan to buy more.
I'm also going to buy homebuilders
shortly. I have all the confidence
in the world that the market will
be up by the time I retire. Bring on the bear:-) Oh, did I mention
that I still live in my parents
basement;-)
Just posted my models here: www.regimenia.com
I think we're very near some sort of bottom (short or intermediate term, take your pick. Two of the four sentiment models I follow are signaling big pukes and the other two are very close to turning OS.
I believe we're in a bear market right now, but I'll hedge against my heavy cash allocation with small 2x long positions when the market seems to be over doing it.
did anyone watch Bulls and Bears?
Did Tobin pick the 2.5 times inverse fund?
Humorously that could be a call for a bounce.
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