I have gone on at length about why I think a bear market has started. At this point there is no convincing me otherwise.However no matter how strong anyone's conviction is about anything they could be wrong.
Just because there is no argument to convince me a bear has not started doesn't make it so. The market is down a little over the last few months, it could turn up on a sustained rally at any time for no reason at all. The ingredients that so obviously say bear market could just be wrong, again no reason is necessary.
Although there have been no recent comments along these lines, in the past some readers have shared having very large cash positions. Some of those comments were timely and some were not. No matter how sure of an outcome you are making too big a bet, like 100% cash, can have dire consequences. Anyone still scared of equities in 2003 missed a big chunk of this decade's snap back. Most decades (the 1990's as an exception) only have a couple of years of up 20% or more. How many people do you think missed the 31% rally 1975 after stocks cut in half the previous two years?
Making big bets, like 100% cash, is ok for some folks but unnecessary for most. Going down sometimes goes with the territory of participating in the stock market. While I strongly believe in some sort of trigger point for taking defensive action, being able to endure normal declines is part of the bargain. There can be no realistic expectation of topticking a turn in the market cycle but gradual defensive action based on a well reasoned strategy planned out ahead of time gives a good chance of not having to absorb the full brunt of down a lot.
The goal should not be down zero it should be down less, where down a lot is concerned. However, misfiring on a defensive strategy is not the worst thing that can happen. The market has gone down a lot before and come back. Regardless of when the next bear market is it will come back after some period of time--if that period is longer than you'd like that is too bad but they do come back.
25 comments:
Roger,
What do you make of the Nikkei's sell-off today (>-4%)? Particularly in contrast to HK's up>2%.
Can it be dismissed as a low volume event (Japan's markets were open only in the morning...), or is this confirmation that the world's [second largest?] producer economy is giving up on US consumption? (Auto sales down to levels not seen since 1998...).
Rick
a few things. one is that the market had been closed since last week, don't recall if their last trading day was last friday or last thursday but...so there was some catch up to the rest of the world for the US trading day on Wed.
strong yen clearly hurts exports--Nissan was down 9%, Sony down 6%.
I don't know how much to attribute to being closed for so long versus the yen but i see no getting better there on any kind of sustained basis.
Sell everything guy, has been mostly lurking. Still 99% cash and a little confused.
I think equities are still headed down and think things will spread globally. 5.0% unemployment just adds more proof to me and I do not believe in decoupling story. I do not think we can decouple from downturns in asia either.
Commodities are high and going higher, but I would expect a slowing economy to take some steam out of commodities which seem high to me. Of course if money supply is expanded like crazy I caould argue for even higher commodity prices. This has me confused as I see reasonable points of view on both sides of this issue. But, I am still rather convinced equities have a way to go on the down side.
Is this a big bet? Up 16% for 2007. Cash is relatively low risk. I still expect much better buying opportunities in the future, but kind of hard to time how long this will take right now.
Housing problems, predictions on both house hold and corporate delinquencies, recession, etc. all seem much more likely than a bull market to me.
I am still not predicting the sky will fall, but people still do not realize that stocks can go down 15 to 45% IMO.
How did you handle the 2002 carnage? If you did not sell alot, did you watch holdings go down
20%+? Or did you sell more when the loss was 10,15% etc? Or were you also buying. We did not recover all the gains until 2004 and 2003 and 2004 were great years.Alot easier to make money when you don't have to make up losses. Confused!
I was working for someone else in 2002.
this post is part of an ongoing thread. the point is not to panic in reaction, the point is to plan ahead of time and realize that when it does turn it will turn very fast and zero in stocks at that point is very risky.
i guess the tax-loss selling is still going :)
i think we are getting extended to the downside here... i closed my SRS and my JCP short which i had for months now... I anticipate to double down after a relief bounce next week.
my "prediction" for 2008 is that my biggest bet will continue to be against retail and IYR.
you've mentioned this before. it has been the right trade to be sure even if i don;t have the giblets :->>
I rarely leave messages but this is a great blog and I wanted to contribute my "experience" to the
mix. First of all my current asset
allocation is 52% cash 20% bonds(tax free) 5% gold(in coins) 35%
stocks(23 issues in varied industry groups, oil oil service,
semis, pharma 1 retail). I have
never had this amount of cash before but I saw this little
"buying" opportunity coming for a
long time. I was 100% invested in
stocks and bonds in 2002-03. Basically I had the same mix as
now. I can say with 100% hindsite
that if you have choosen good stocks, not nutty high flyers but stuff like GE PFE LLY HOG DELL INTC
you get my drift they will "eventually come back. I was completely whole 18 after 2002-
2003 disaster. But being invested
100% was a mistake I will never repeat again.(even dummies like me
learn) I just missed too many great
buys at the bottom and I see nothing but opportunity developing
right now in a lot of issues. The market has a great habit to really
drilling stocks. I view many things
going on complete sale. i.e. all
of retail, drugs, transports, oil
service and some tech. I will close
with my darkest day curled up in a
ball unhder my desk with the chart
screaming at me to buy IBM at 56
but could I? Oh noooooo! because I
was broke. I could survive the big
decline but to be busted and rich
stock instead of cash was not fun.
Lastly I use nooo margin and absolutely refuse to do so.
Ricky
great comment about not panicking.
thank you
Sami,
I am usually impressed with your comments. But, I also do not like margin and am reluctant to go short.
I think you are correct about IYR, but there can be significant rallies even if in the long run it continues down. I am not sure most people are cut out for that type of roller coaster bet. I am more comfortable with my cash and buying back in when things get cheap.
If I were more aggressive I would probably bet with you. In my fifties though cash seems to be as aggressive a stance as I am willing to take.
Even though this decline seems more obvious to me , we should never forget it is hard to actively manage and beat a buy and hold strategy.
Although I did side step the last bear market (debt bubble) as well. Hopefully they do not create a larger debt bubble to replace the current one. I still think focusing on house hold debt as a percentage of income or GDP is appropriate.
Good Morning
Looks as though i will stay short today, and it also looks as though the short term low of 2540 for the nasd. has been broken, if we close below,, i am sure that will trigger more selling..
I would never have thought 12800 was something i would ever see again for the DOW,,if this keeps up
who knows???
Luck everyone
Mac
If you're a market timer (I believe most people who post here time the market to one degree or another), it's important to establish a cycle orientation. My TAA timing model is based on an intermediate term cycle, roughly 6-9 months.
I don't necessarily agree that I'm making a big bet when I'm 100% long or 100% cash because my timing model is mostly mechanical and is sensitive to the cycle. The challenge for me is getting the right exposure without generating a ton of trades. I've found 2x funds to be a great tool to dial in long/cash allocation without running up big commissions.
anon @ 10:59.
Nothing wrong with cash. My equity portfolio is less than 50% of my net worth. I keep around 15-20% of my net worth in cash equivalents at all times. I make my money the old fashioned way, i earn it. In the market i try to 1) not to lose it, 2) grow it modestly.
Within my equity portfolio, i have over a third allocated to "endowment style" assets that i mostly do not time. Things like currencies, commodities, corporate bonds, zero-coupon munis, etc... I also own names that Roger often mentions like DBV, EDD, RYMFX, NARFX.
Another third or so i allocate to active managers that i like, like Hussman, Hennessey and Heebner.
That leaves about a 1/6 of my net worth for "timing trades".
I personally do not believe the myth that active management cannot beat buy-and-hold. I am not going to go into an explanation here, but let us agree to disagree.
For timing, i just go with the long term trend, I enter on counter trend rallies and I trim when things get extended in the direction of my trend. I only make small changes at a time. On a day like today, i closed SRS and one of my shorts and have a limit order to add to one my longs that may or may not get filled.
If (when) we get a 400-500 point rally next week, i will trim some longs and go back into SRS.
sami,
I like your style. This has been serving me well over the last 6 months for the speculative side of my portfolio. I think you can get into trouble when the market just continues to float up. I started some bearish option spreads on October of 06 when I thought we were extended and those got hammered (glad I wasn't short stock). Same approach netted spectacular results during the wild swings since summer. Point being, I don't think there is a strategy that works all of the time in all conditions, but like you, I like to trade more of what I see. I don't really believe in trying to predict where the market will be or what equities will return months and years down the road. I do like to add to long term holdings on days like today though. I'll be spending this weekend getting my shopping list together.
Oh, and P.S. to the person who doesn't like to short ... I don't blame you. I'll never short a stock again, but option spreads provide a great way to exercise your bearish sentiments without having your a@@ handed to you when you're wrong. They're not for everyone though.
Going for yield with mitigated risk is not the worst idea for a sorry market.
A somewhat reliable bear signal is when the market hits a bottom point and stays there for one quarter. Using the DOW index for instance, it hit a low of 12,846 in August and is now down to about 12,800.
I would add that the DOW holds some of the more desirable stocks to own during the end of the recent cycle but also quite a few of the financials that got hammered and continued their decline between now and August. (DOW up 6.43% for '07 despite the financials) Did anyone track the S&P bottom?
Sami,
I did not mean everyone could not beat buy and hold, but I did mean most people can not.
I keep my trading to a minimum because I am view it as hard to predict (for me). But even though I believe we are rolling over and headed down I purchased some QLD at the end of the day. I know it is speculative but things seem over sold and due for another rally before they break down IMO.
Still I think most of us should keep speculation to a minimum.
Roger in your 8:31 AM comment, you say "...when it does turn it will turn very fast and zero in stocks at that point is very risky."
If this is a bear that is a slow slide down over a few months, why do you think it will be a quick up when it turns? Or did I not understand what you were speaking about?
If this is a bear that is a slow slide down over a few months.
This is my opinion based on my interpretation of how markets cycles work.
What if I am wrong? What if Friday was the bottom and we go to SPX 1800 by year end?
Just because I don't think it will happen, it could.
Roger,
What do you think the chances are that we get a .50 basis point cut and Ben springs another surprise to blow out all the shorts like he did in August? That's my guess so be careful what you short this month.
BWJR
The line of thought from people that says the Fed won't wait until their next meeting (jan 31 i think?) to cut.
an cut b4 then might reduce going 50 in a month?
Roger,
I don't think he can wait until the 31 'st of this month. He needs to shock the market now and keep the verbage focused on the credit problem and a slowing economy - not inflation.
There are a lot of shills on tv and elsewhere. people should take early fed cuts or 50 bp cuts with a grain of salt. yes they may happen but historically the fed likes 25 bp cuts meeting after meeting after meeting. Ofcourse sometimes hey change their mind but do not let the shills fool you into GUESSING the fed.
"--if that period is longer than you'd like that is too bad but they do come back."
Sorry Roger, but the loser buzzer sounded when I read this statement.
Soberly reflect on the 25 years the market did not exceed the 1929 highs. That was way too much 'too bad' and could happen again, folks. Only high dividend, viable stocks held during that long depressed period would have proven feebly profitable.
But the eighty percent drop in 1929 could have been easily prevented by the following technique.
Use a sharp pencil and a straight ruler on a monthly SPX chart drawing simple 24 month (or longer if needed) trendlines. This technique alone can eliminate most all the directional guesswork and a huge chunk of the losses in a down market. Add to that the confirmation of a Bull Run when the monthly 13EMA crosses over a 34EMA, staying long until the shorter crosses down on the longer EMA(compliments of John Murphy). These two simple and easy methods of determining market direction should suffice to capture the bulk of gains, while eliminating ulcer causing volatility and depressing large drawdowns. Best of all, it's free of all the confusing pundit babble. Beware the Pile it Higher & Deeper(PhD) crowd.
Even the best of money managers have a hard time in a falling market.(only down -4% versus -23% for Lateef in 2002). Not good enough when to that -4% loss, add other losses from average inflation erosion
(-4%) and management fees
(-1%) and taxes. Best to be out of the general market when its falling hard. Most boats sink with the ebbing tide. Some exception can be made for the other 5 asset classes, but only if their bullish chart patterns permit, using the same techniques described above. Or just stay in cash and wait, if none of the other asset classes separately present opportunity.For those with the skill and huevos, short these asset classes too during their down markets using Leap Puts for limited risk and leverage.
As you might have guessed by now, I like to keep it simple. I'll bet you do too.
I'm now loading for Bear and drawing a bead.
Ciao and good hunting.
Post a Comment