Thank goodness February is over, I couldn't have taken anymore (a little levity).I will reference for the second time a comment I made a week or so ago about the psychological impact of another big move down being worse than the financial impact.
The market has been doing some strange things in terms of how fast it has gone down and at the same time how much it has gone down (22% YTD, that's only 40 trading days). It is strange that the selling has not taken any sort of break and that it has now been a long time without some sort of feel good rally.
Regardless of whether you are a Roubinian or a Kudlowite the market action is odd. The biggest bears out there could have their thesis play out in a tape dotted here and there with sucker's rallies but the action since about one week into the year has been unrelenting in its direction.
A huge portion of the writing I have done starting in 2004 has been about how to cope with markets like this when fear is at its peak (or close to it). The idea behind using a breach below the 200 DMA is a trigger point for defense is to avoid some of the emotion that bear markets eventually bring out. The idea behind talking about this bear, the next one and the one after is to drive home the point that bear markets are a normal part of the process.
Way back in 2004 I wrote about having a defensive strategy devised then when there was no emotion to cloud judgment. By preparing a strategy and by preparing mentally you have lessened the portfolio damage and the emotional angst.
A reader on Seeking Alpha noted that in his 30 years in the markets people always think the world is ending when the markets decline a lot. I can tell you first hand for most of that 30 years that the reader is correct. Eventually the majority gives into fear and do the wrong thing. The world is not ending. If you have a lot of cash built up your account will not go to zero, in fact odds are very few stocks will go to zero (has there even been 20 out of however many thousands of stocks traded?) and no ETFs will go to zero.
I may turn out to be wrong about the S&P 500 dropping to the 600 level or lower (I don't think it will) but if that does happen, the psychological damage will be worse than the financial damage.
26 comments:
Aren't there times that the market trades around the 200 DMA which would leave you trading quite a bit? Is there historical data showing returns if one bought or sold a S&P 500 index fund each time the 200 DMA was crossed up or down?
You have been wrong on several big picture calls so far...first you said you thought the bottom would be 1092, then you were saying there was nothing unusual about this bear market until there was something unusual. The only thing you have been saying that is correct is that now you don't really know what is going to happen. And you were correct that the market could fall prior to the start of the bear. But...as they say, a broken clock is correct twice a day.
I'm not trying to pick on you, I'm just pointing out how the tone of your writing has been evolving as this bear unfolds. Everyone has been surprised by the scope of this downturn. I think we will all be surprised by the next turn of events too, that is just the nature of the market.
It must be tough to keep coming up with fresh ideas for your blog in a market like this. Hopefully you can start elaborating a little more on how you are positioning your portfolios, something more besides the 200 DMA, as we all get that. Maybe that is your whole plan?
The stock market works well when it works well.
No one can predict the future, only guestimates.
The only thing we can believe in is HOPE.We are HOPING for the long term success of this country and it's associated business model.
interesting tone to the comments. this same article posted at Seeking Alpha and the comments there are generally friendlier so far. Sometimes the comments there are nastier but not today.
6:26 I've covered that many times over. I can't include every bit of context to every new article from a thread that is more than four years in the making.
6:33 my point about a good defensive strategy is that being right about the bottom is not very important.
Felix, I'm not going to frontrun my clients.
I think a couple of the above comments are out of order pertaining to this blog. I believe the purpose is "to share process" which has been consistent. We are fortunate Roger is willing to share his thoughts; he is not our paid advisor.
Roger -
Understanding you can't "front run" your clients, would you consider a very basic post that would help the independent investor learn to hedge a $500,000 equity portfolio? Personally, I feel like my asset allocation is good but I can't figure out what to use for a hedge except shorting the S&P. And if that is the ticket - what percentage of the portfolio does one use to do this?
Specific percentages are no-no. I have written about this countless times and I'm not sure there is much value in starting to hedge a portfolio after a 55% decline.
I raised a lot of cash in 2007, I hold a little gold. I have had a little RYMFX for a long time and then added a little DLSAX recently. I was very underweight discretionary (still am) and financials.
I have no idea what to tell someone who took no defensive/hedging action. A reader pointed out I have been wrong about where the bear would bottom--being proactive with this stuff means not having to be right about the bottom. If the person asking the question has done no hedging up to this point I'm not sure how you start now. Maybe you should, maybe not. I have no idea.
Re: hedging a 500K portfolio.
I guess I should have been more clear. Starting December of 2007 I did raise some cash (to 15%), bought a gold/silver trust, agricultural commodities ETN, sold GE at 31, sold GLW at 27,sold BOA at 50 (!). Kept US Bank only - was ok till it fell off a cliff in January 2009. Increased MO/PM position. Bought Canadian Royalty Trust and got toasted by late 2008. Same with a royalty trust in an iron ore mine I bought - got toasted. Bought a Natural Gas MLP - off around 25%.
Kept Google and averaged down. Got rid of RIMM in the nick of time.
My point is that to "hedge" I jettisoned stocks that seemed to be behaving badly, raised cash, bought commodities (which tanked), and increased dividends with Trusts/MLP's/MO. My 500K portfolio is off 35% but kicks off $1400month in dividends.
Looking for additional hedging opportunities for the future. How crazy is it to buy FXA,FXF,FXC? Too early? I've never shorted. Is it prudent if one isn't glued to the market 24/7?
Anyway, not asking for "what to do now", just some creative and relevant ways to diversity and protect.
Roger,
Without getting into the merits of the prior commenters arguments, it's obvious that people are feeling a lot of frustration over the markets and especially financial advisors. From reading your blog, you seem to be a very thoughtful, honest, and transparent advisor, which goes a long way. That said, you have made statements over the past year and a half alluding to the fact that this is just your average, vanilla, run of the mill bear market. As I recall, you've stated this many times in the past, and have called bottoms accordingly. These predictions have clearly turned out to be plainly wrong. Now, you suggest that the S&P 500 won't fall below 600. But what's to say that this prediction is different from the others you've made in the past that were wrong.
I don't think anyone expects financial advisors to be fortune tellers. But you do charge a premium for your services and therefore there must be value you add that goes above and beyond investing in low cost index funds. For you to constantly make these predictions about what kind of bear market this is and what the bottom is does not, I don't think, help your cause.
As I recall, you've stated this many times in the past, and have called bottoms accordingly.
Roger doesn't need me to defend him, but I can't recall a single instance of him "calling a bottom". I recall him stating an opinion. I was expecting a bear for awhile as well when many people were arguing stocks were reasonably or even undervalued in 2006/2007.
I remember all the clowns going after Hussman for his cautious stance. Incidentally, I wonder whatever happened to Bill "nodoodahs" blog which seemed to disapper off the face of the blogosphere once the bear hit.
Still, I'm shocked by the magnitude of this bear and few if any correctly anticipated the magnitude. This is a once in generation type bear market where everything is getting killed (who would have thought Berkshire Hathaway would be down 50%+). I'm not sure the few who did are so smart rather then just lucky. Will they get the turn right or stay forever bearish.
I read Richard Russell regularly, and in a recent daily note, he basically said the public shouldn't invest in stocks period because they get in at the tail end of a bull. Public participation in the stock market was off the chart in the 98-00 time frame.
I'm sensitive to this because I am an investment advisor as well, and I sense the heat about why we couldn't avoid ALL of this decline. That is just an impossible standard to be held to. You are not going to buy the exact bottom, sell the exact top, and miss 100% of the decline. But hopefully a good advisor can prevent people from doing the absolutely stupid things that wipe them out like buying CROX near its top, relentless averaging down into bargains like Citigroup, and chasing overvalued overbought markets like 99-00 and selling everything in irrational panicky markets like the present. That is all one can really expect.
Roger,
I would appreciate your thoughts on this option strategy described by Kirk Kinder in an article with Index Universe. thanks
http://www.indexuniverse.com/sections/features/5501-to-option-or-not-to-option-with-etfs.html?Itemid=5
Dave, i will always have opinions and draw conclusions, much like anyone else. Like anyone else some will be right and some wrong. The big picture I think is recognizing the bear early on which i did. i absolutely did not expect this kind of magnitude so the conclusion I drew (call it prediction of you care to) turned out to be incorrect. nowhere in process of being wrong about the magnitude did i talk about loading up on stocks. I bought a couple, literally, of things along the way, that's it.
Interesting article on the use of currency ETF's with Anthony Welch by IU.
http://www.indexuniverse.com/sections/features/5506-us-china-not-only-currency-etfs-showing-promise.html
Kirk is a personal friend so I can say his ideas are sheer balderdash.
JOKE JOKE JOKE
Any time I look at premiums 10% OTM on ETFs they look very thin. Adam Warner, another friend, has written numerous times about periods of increased volatility, like now, being a bad time to be a net seller of option.
I don't see it the same way as KK but it is not balderdash.
anon. @9.59,
As Roger said, I think its kinda late to put hedges in, but in the future, maybe if you figured out what your sector allocation is, and buy inverse etfs for those sectors?
That way, you'll still generate the yield from your selections (assuming that you're trying to build an income generating portfolio for retirement), and the short etfs will mitigate/offset your capital losses.
Jan
PS: Roger, I also appreciate the time and effort you put into this blog, and find your insight, as well as many of the comments that appear, to be very helpful.
thank you Jan
From today's WSJ, "From punishing business to squandering scarce national public resources, Team Obama is creating more uncertainty and less condfidence-and thus a longer period of recession or subpar growth."
"The market has plunged notably since Mr. Obama introduced his budget last week, and that should be no surprise. The document was a declaration of hostility toward capitalists across the economy."
I believe this is what's happening. I honestly believe we're experiencing an attempt at a philosophical shift in the roles of government and the people which is markedly different from the vision of our founding fathers. The market is reacting, and I believe ultimately the pain will be so great that the populace will reject the Obama administration and its attempts at redistribution of wealth.
Likewise, I really appreciate Roger's efforts in maintaining this blog. I've learned much that will apply next time around! Too late now for me to put on hedges. I certainly don't expect Roger or anyone else to call a bottom with any accuracy, though I have no doubt many will, after the fact that is. :)
Interesting post here on impetus for the latest plunge:
http://www.ftportfolios.com/Commentary/EconomicResearch/2009/3/2/is_it_the_economy_or_the_policies?
Let's try that again:
http://www.ftportfolios.com/Commentary/EconomicResearch/2009/3/2/is_it_the_economy_or_the_policies?
Not too sure it is too late to hedge. First bear market was credit related. If that isn't fixed, at least we know it WILL be. But now, to be politically INcorrect, you are seeing true fundamental realistic fear. To me, this is not unfettered fear, it is warranted.
With Obama changing our country ( and he said it---" I will fundamentally change America" ...) there is real fear. When the White House press secretary says, "In the real world, Wall Street does not matter." ---we have a problem.
"....the psychological damage will be worse than the financial damage."
I totally disagree with this comment.
These indices are made up of companies stock prices. If they keep falling, down to 600 or even below there will be consequences for these companies--which will impact other companies (supply chain companies). If any pensions that must be paid, don't, then major cash will be diverted or pension laws could force bankruptcy. I would say the financial damage is already huge and getting worse....otherwise the AIG, BoA, Citi ++++ bailout money would not still be flowing. What about state pension funds....
YOU SHOULD GO LOOK AT THE NIKKEI DOW MONTHLY CHART.... NO NEW HIGH SINCE 1990 AND STILL GOING DOWN. 38,000+ THEN, NOW BELOW 8,000. Now that’s financial damage.
Roger: The Vix is telling us that the psychological damage from here from a further decline will not be as bad as you imply. There has been a steady decline in the fear factor even as we sank below 700 on the S&P. This is the market coming to grips with revaluation. Maybe you can explain what you mean.
Jan: disagree re Short ETFs, at least the double short etfs that reset daily. They only work as daily hedging devices. Compare SDS with November lows and SDS today. Look at SRS. Better to short the straight index.
Roger, I think I am tilting towards those that have picked a bone with your opinions/calls/expressions. You've long been in the "don't agree with Roubini" camp, justifying it with "don't need to pick a bottom, just don't want to miss the meat of the move up". But here we are 20% below what was to be a trading range that made you indifferent to any further calls for defensive protection. This WASN'T a "usual bear market", and Im not sure if you were early on calling it a bear market (wasn't there some dithering on whether it was a correction?), and the general advice to find some safe haven in other countries and nontraditional markets hasn't exactly brought home the bacon.
Yes, we all want to point out the clay feet, but in part it is because you have, by virtue of a blog and being a financial adviser, climbed up on that pedestal all by your own self. Dem's the breaks, buddy.
There might be less to say, and nothing to write, if in fact the best analysis/advice is "go to cash or stay short until we re-take 1000 or the 200 dma, whichever comes first."
I think the key flaw in your and other financial advisers approach has been to maintain the "all american?" perspective that up is good and bad (short) is evil. Had you been searching out and identifying underperformers and underperforming sectors suitable for shorting, aka, trading as opposed to "selling", which is what I think the financial advice industry really is doing, maybe the comments would not have the same disgruntled/critical/suspicious tone.
But then again, I can speculate without cost, since I am...
anonymous, and not on a pedestal.
(R in NY)
Yes Roger will "call bottoms" just about everyone does. It doesn't really matter how right or wrong someone is at calling tops and bottoms unless that is their goal in the market but more important is the gains or losses in a portfolio. I have yet to see him call a bottom and then make or advise changes. Presumably if someone where to use a 200DMA as an indicator for when to get defensive one would not switch to riskier and shorter term indicators for when to reverse direction. I certainly could be wrong on that call myself heh.
The one overall message I have learned from this site is that quantifying and guessing out how bad or good a market is doing is not as important as identifying the move and then reacting to it.
R in NY,
The tone of the comments, including yours, does belie a deteriorating psychology regardless of what VIX "says."
I stand by all of the opinions put forth and the action taken in client accounts. In navigating the market you will be very right, right, wrong and very wrong about things. The mix of those results determines the portfolio result. You can look at the quarterly videos for more specific info on performance but the goal set forth from day one was go down less in a bear market--anything else is far less important.
If a hypothetical investor was down half as much as the market when the SPX was at 900 then you might conclude that this hypothetical investor would drop half as much in any subsequent decline. In that context how much more defense should have been taken if the goal was go down less and realizing no plan would be perfect?
To Dave 2:58,
Financial planners get paid to help clients build portfolios that match their goals with their risk tolerance...at least the good ones do. The salesmen get paid to sell crappy products.
We don't get paid to know where the markets are headed because we don't have any idea. I have read Roger's blog for a while, and I have had a chance to hear him speak a few times. He is not going to know when the market is at its absolute bottom as no one will, but he is offering his clients and readers ideas to mitigate the downside risk.
To Roger: Balderdash...that is what my wife says about my ideas...that and gobbedlygook.
Post a Comment