Looking Down Another Road

As a follow on to yesterday's post about looking down the road, today is another type of road to look down.

As the market flirts with "official," ahem, bear status there are a few truthisms, as my friend Charlie would say, about the current state of affairs.

First is that stocks are down a lot. They may drop more (as I think will be the case) or they may not but they are down a lot.

As we are nine and a half months and 20% from the peak we are obviously that much closer to the real bottom and then the real upturn (which I think will be Q1 2009 using a liberal adaptation of the 2/3 1/3 rule).

The other truthism is that there will be a bottom at some point, maybe when I think it will come or more likely at some other time and then there will be a new bull cycle of some sort.

That we know these are truthisms but not when any of them will come into play it makes sense to think about that next bull cycle and think about what you will do when it comes.

To be clear my trigger point for meaningful reequitization will be when the S&P 500 takes back its 200 DMA which appears to be a long way off.

For now I have a list of stocks, going sector by sector for sectors where I do need add once the bear ends (for clarity, I have been overweight utilities and so as of now not looking to add there).

I have been underweight financials for a long time and will need to add exposure there. As of right now that will mean a publicly traded exchange (these are down a ton and the mortgage crisis doesn't really touch them) and a foreign bank (many of them have fewer moving parts than US banks).

With industrials I will need to increase the volatility, reduce the cap size, increase the foreign exposure and wade further into a couple of themes.

In tech the plan will be to increase exposure, add emerging and introduce a little more single stock exposure.

If energy continues to correct it will make sense to increase volatility within. Over the last couple of years I have disclosed moving to a little less risk and selling down some Statoil a couple of times along the way. At some level (eye of the beholder) ratcheting things back up becomes the right thing to do. Here I might swap some ETF exposure for a service company and more of a theme play.

In telecom I would expect to swap some developed exposure for some emerging market exposure. Over the last couple of years I have taken a little EM exposure off and this is an easy sector to add it back in (plenty of stocks and even a CEF that I have used in the past).

Discretionary has been very underweight for a long time and so it needs to be beefed up a lot. A retailer or two and something that seems like an obvious beneficiary of baby-boomer spending makes the most sense right now.

Staples probably need to come down a little, I'll probably just sell one name.

I think I am ok with healthcare, utilities and materials.

Embedded into the above is the need to add China back in, add several themes that I have been writing about, as touched on above, more emerging markets, reduce the average cap size, increase the volatility, possibly let the yield go down, maybe change the style tilt and remove the double short.

This is just a game plan that obviously (or maybe not, lol) I have thought about a lot and can change if circumstances dictate. I am looking forward to moving ahead with this and reequitizing. The job of managing a portfolio becomes easier when you're just managing exposures and not wondering is the bottom in? How about now? What about right there now? The reequitization question would be off the table because you'd be in (assuming you had a well thought out and disciplined exit strategy and have a well thought out and disciplined reentry point).

My approach of using the 200 DMA means I will not catch the bottom but by never going 100% cash I won't miss it which as I have mentioned more than a few times missing a big bounce off the bottom is far worse than lagging it.

The picture is a road in Iceland between Reykjavik and Hellnar.