Well that was some puke down yesterday. I have conflicting ideas about exactly where we are and what to expect in the immediate future.Is there a lot of fear out there? Yesterday the Stallion chided (maybe he was joking, I don't know) Don Schreiber from WBI Investments for not being aggressive enough and for having boring stock picks. He went on to declare that he thinks a recession will be avoided. Is Bob a proxy for sentiment or an outlier?
The S&P 500 is down 10.9% since the close on Dec 26. That is an awfully fast decline. The market action feels more like summer 1998, clearly though there is pretty much nothing fundamental in common with that time.
If similar market action matters then we could see a meaningful feel-good rally coming. This would not change my thoughts about a bear having started.
I'm not planning to play a bounce with clients' money (or mine for that matter) and I might use a big lift to sell another name or add to my double short but I think mentally bracing for anything is very important.
Yesterday's post tried to convey why emotion needs to be off the table. I have been writing about a bear coming for so long now that hopefully even if you took no action you have mentally prepared for it. Thinking about something like this ahead of time and knowing it is normal is a way to lessen the blow even if there was no action taken.
The MarketBeat Blog noted several breaches on the way down that foretell of ominous things coming. On the other hand the crew at Bespoke put together a table of every time the market closed more than three standard deviations below its 50 DMA. Most of the time that this has happened the market has been higher 50 trading days later; 3.12% on average.
Maybe this matters or maybe it doesn't but one thing that I was struck by was that when this happened in 1982 the market rallied 31.84% over the next 50 days. I have talked in the past about rallies coming from nowhere when no one expects.
The people that try to go all cash would likely miss that type of move which is a perfect example of why I don't believe in having huge cash positions. Lagging something like that in the name of caution is not a bad thing but missing it would be.
If you have been reading this blog for the last few months and seen my thinking on all of this unfold you hopefully have gleaned that most of the opinions formed and decisions made were predicated on how things have historically worked. I assumed this time would not be different and I simply hoped to be down less. This seems like an easier path to take.
I looked back and the first reference I made on this blog about getting defensive in light of an inverted curve was October 10, 2004, about two and half weeks after my first post. I made a reference to the 200 DMA before that even. Point being that I spelled out a couple of simple ideas that I felt were important and then stuck to them when they started to matter and as others in the business offered up reasons why they did not matter (here talking more about the yield curve).
I don't think copying me is the right move but keeping it simple and staying disciplined is.
7 comments:
Although it’s increasingly difficult to stay unemotional, looking at percentage changes year to date makes me agree this momentum is way too far too fast. It feels like a ride in Universal’s “ Tower of Terror”. The doomsayers – some of whom surfaced from your writing yesterday, will of course scoff. However, when I look at some of the declines they’re just not supported. Look at XLE – oil . As I write, it’s down close to 14% since December 31 but crude futures are down about 9.5% to 90. Yes, oil is particularly volatile and experts are split anywhere from 50 – 200 but the current change based on recent activity is overdone. Look at the ultrashort oil DUG – it’s up over 30% since December! Getting away from the more volatile areas, the drops in the indexes, in less than a month, just don’t make sense. Is the sky really falling? Will business as we know it cease to operate? With softness in the U.S., most of Europe, and Japan, I agree a bear is coming but with the Dow down over 8% and 14% from it’s 2006 peak in less than 30 days, will we average this type of decline every month, taking the market down over 80% by year end?
I'd like to think 80% is off the table (insert nervous smile).
To you point about energy, the stocks lagged the commodity on the way up. Makes me wonder if the stocks think the commodity market is wrong.
Roger,
I have been reading your blog for over a year, and your ideas about diversification have finally registered with me. I admit to being a slow learner. I developed a suitable defensive plan involving the various asset types … US stocks, global stocks, EM stocks, preferred stocks, commodities, gold, bonds, cash, and inverse index ETFs. Right after New Years I put my plan into action with my main retirement account (I am 61 yrs old). So far, I am down like everybody else… but DOWN LESS than the market. I am here to tell you I am sleeping better already. I used to micro-manage my retirement accounts. This is definitely easier and I hope better.
As an aside, you also influenced me with your comments about your annual hike in the Grand Canyon. My kids and I did the 16 mile “Loop Hike” this past summer (from the South Rim down to the Colorado and back. Now that the pain is forgotten, the memories are great. I couldn’t find anybody who would try the “Rim to Rim Hike” that you do every year. I haven’t given up on it though.
Thanks for all your valuable instruction and positive influences on my investing habits.
thanks bill, that is very kind. great to hear about the canyon too. hiking the canyon no matter where, how or when always creates lifetime memeories.
thank you for again for the kind word and for reading the blog.
It is splendid to be mentally prepared for a Bear Market
If this is a super-cycle Kondratiev Wave then the Market might take 25 years to recover.
Dr Mark Faber aka Dr Doom seems to suggest that it is not unthinkable for the Dow and/or Gold to go to 2500 . . . that is DJIA 2500 &/or Gold $2500 per troy ounce.
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i struggle to wrap my hands around a dow jones industrial/gold ratio because the of the extent to which coming off the gold standard was such a game changer in the 1970's that many say contributed to the run to $800 that happened back then.
am i wrong or missing something??
Dr. Doom's distant cousin says:
http://tinyurl.com/pnpn
I think the thing with oil is that in the winter months people don't travel by cars much, and a recession hurts energy in all areas. It was also overdue for a sell off.
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