The quest for where and when a bottom seems to be a big topic on The Network these days.It seems like most of the guests are trying to figure out how to answer the question without telling the interviewer that it isn't such a great question four months from a top (but maybe I am just projecting my own beliefs on to these other people).
I mentioned a few times my belief that every aspect of this bear market has been very textbook so far so maybe the rest of it will be textbook too.
If so then we can expect quite a few more months and maybe another 10-15% down. Obviously if you think it will be worse than textbook my time horizon and percentages will not jibe with your thoughts.
I would say that if in June or July the SPX is 25% from its high (boy that really would be sticking to the book) I would be inclined to put on more equity exposure. The way I am positioned now that could mean selling some double short, buying some stock or both. I am not talking about going 100% invested on one day but taking one step in the direction of less defensive.
Another tool for me (and maybe you have something similar you rely on) is the 200 DMA. The market is way below its 200 DMA ( a sign of unhealthy demand) and the 200 DMA has started downward. At some point in the future the SPX will cross above which probably means healthier demand and probably another reason for less defense.
Note this requires no accurate predictions. If we are down by 25%-30% that would make it easier to justify wading back in, ditto when we the market goes above the 200 DMA. These things could happen next month and then the month after or some point far into the future. There is no need to be right about when.
If things do not play out so simply a plan B will need to be thought up. I have a couple of ideas which I'll write about in a future post.
The picture looks like it could be in New Zealand but it is the snow covered volcano on the big island. That is a lot of snow up there.
11 comments:
Roger: I over corrected in early December by moving everything into triple A bonds as a result of which I have not lost anything in real funds but can see where am not improving much either. So I get all wound up wondering about what to do and when, That's when then you come up with a blog like this one and I think to myself: He's right! Don't get exited! Take your time! There's no hurry! Watch was is going on and take a few steps in anticipation of a recovery when the times is ripe.
Thanks again,
Willy
Sigh. The more I read about this, the more confused (or wistful) I become. I appreciate the Zen-like simplicity of the 200 dma. Yet three of the four timing indicators that Stein and DeMuth post say that the S&P is now undervalued. So should I take the plunge? No, Merriman shows only one of four timing signals to be positive. What's the smart money doing then? Well, Warren Buffett is making moves in the financial area these days that will probably make him another bazillion dollars.
For now, I've settled on a diversified portfolio that is down a little (thank you Roger.) But like I said, sigh...
thanks for the kind comment Willy.
anon great question that makes for its own posting for tomorrow.
The Buffett bid may be fueling the pent-up desire of the permabulls (and may also support the conclusion that the market is [temporarily?] oversold) but upon closer inspection it is not the all-clear signal of a bottom - despite understandable wishful thinking.
Buffett is bidding for the safest portions of the bond insurers' portfolios. We called it cherry-picking at the rating agencies. The rump portfolios left behind will require downgrades, and thereby reduce the diversification benefits of both the bond insurers who sell and the muni-market exposure.
It does signal the potential for market-based approaches to serve as a meaningful part of the de-icing of the credit markets.
But I think the coming week's economic numbers deserve consideration before confirming that the tune in one's head is the fat female (ursine's) song.
Rick in NY
I always love random wacky portfolio ideas like this one.
Seeking Alpha had a bit on some Jeremy Grantham quotes from a Barron's article:
"For equities, Grantham suggests a combined position of 50% long U.S. quality stocks, 50% long emerging markets hedged with a 100% short position in the Russell 2000."
50% emerging markets, when everyone is saying they're overpriced. Odd.
guess I'll go back to researching the health care stocks or ETFs I'd like to add at "the bottom."
I think Grantham's thesis is that the forward correlation between EM and RUT will justify the hedge from here. (Further rise in EM will decrease correlation, while the widely expected decline in EM would be positively correlated - profiting the short position).
Roger, I agree with your take on this bear market. "Textbook"...at least so far.
Anon 9:32, here's a thought: Keep x% of your assets in your diversified portfolio and use a timing system to manage the remainder. This is a great way psychologically to keep disciplined to both strategies.
I would also encourage you to find a timing system that uses both trend and counter-trend indicators OR use a method the isn't all or nothing (e.g. Merriman's 4 indicators = 25% positions).
I think the bottom is in -- I wish it would spike down quickly for a few more purchases, but oh well.
Junk never got quite cheap enough for me to buy it unfortunately. There are probably still plenty of value plays out there, but all the positions I am building I think have bottomed out, and I will stand pat for a while. I would still like to buy some junk and some assets, but I will have to wait for those to pull back individually I am afraid. When assets/collectibles crash, there might be some good opportunities there. But I don't know when metals and assets will get affordable again. If not this summer, then I might have to wait until 2010.
2009 is going to be rough.
I would not discourage somebody to think safe, but current move of SP 500 will continue in March and likely April. If the level will not pass 1400 in the end of February, one can expect something 1550 in April.
June-July probably the last two months with negative dynamics (down to 1350-1400 from 1550) in 2008, except December, as always.
Tom K--Thanks from anon 9:32. I'm very much with you. I leave my "core" index holdings fully invested, but time my "edge" holdings by either moving to cash or market sectors that I think will outperform. In the current environment, that puts me more heavily into cash, healthcare, defense, and utilities, for example.
When I talk about taking the plunge, it's not all or nothing. It's more a matter of putting some cash to work or adjusting my sector bets. I favor a value investing strategy, so markets like this make me salivate and naturally, want to pick up cheaper merchandise.
I guess I know rationally that I'll never pick the exact bottom, so everything that I read goes into the blender and I make adjustments accordingly. The downside is the paralysis that sets in when the signals contradict one another. Act too hastily and one loses money; wait too long and the best values are gone.
That makes the Merriman strategy attactive--one can get whipsawed by frequent changes, but putting 25% of cash to work when the market is down this much isn't the dumbest move in the world.
Appreciate your thoughts.
I have been traveling, but the clarity of your post today is so refreshing from most of the stuff I read.
I see a little more rally and then things playing out just as you have said.
seg
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