As discussed in the comments earlier in the week and in yesterday's post I was prepared to do a small trade in reaction to the S&P 500 taking back its 200 DMA.
It is difficult to describe the trade as buying X because I had to go account by account to calculate what to do for each account. With that in mind I meaningfully increased clients' tech exposure from a severe underweight using ETFs.
There was a tremendous amount of work, relative to most across the board trades which, combined with a couple of other things, contributed to a logistics issue for getting the trade done Tuesday but it turned out OK in that I bought a little cheaper than I would have on Tuesday. I waited until about 12-10 minutes before the close to execute the trade.
Increasing tech does a few of the things I mentioned yesterday in terms of trying to add a little beta and a sector that might do well early cycle. Toward the end of the day the SPX seemed to be flirting with the 200 DMA and then it appeared to kick up at the end of the day to close several points above.
The trade was about sticking with the game plan set out months ago. My thoughts about another run down that scares the hell out of people have not changed but opinions can be wrong and staying faithful to something that tends to work (as opposed to second guessing) is probably a good idea. It is easier, both for professionals and do-it-yourselfers, to explain being wrong (either to clients or yourself) by saying this was the plan ahead of time and I stuck to it.
It is just one trade, there is still plenty of cash still on the sideline and I have started the process to build the next trade and have it ready to go. From here there is more art than science, especially if the market holds its 200 DMA. I'll update the blog accordingly as we go.
One other dynamic that made the trade a little easier (in terms of strict adherence) is that the 200 DMA is dropping quickly making it easier to stay above it, in a manner of speaking. I've brought that up before a couple of times. The flip side of that coin is that many believe that it will still be a bear market until the 200 DMA starts to turn up.
Tweaking the idea to account for slope is something to consider for the next go around but I don't want to change mid stream. While I have been generally pleased with how this has gone it has not been perfect (said up front it wouldn't be). The SPX went further below its 200 DMA that it ever had before so it rallied a lot before taking it back but again it warned early and would have you get back in at a much lower figure.
18 comments:
Way to follow your plan, Roger.
The flip side of that coin is that many believe that it will still be a bear market until the 200 DMA starts to turn up.
To agree further, this is a slippery slope. Some will argue the turn up indeed and still others will argue the steepness of the slope when the simple turn up doesn't pan out :) At some point someone will be right (and a host of others, wrong, but we'll forget about them and they won't be asked to come back to CNBC until they're right again) [grin]
Hi Roger:
I know some traders who use a 5% envelope to avoid whipsaws with the 200 day MA, so if the index closes back below it, they don't sell until the index closes a full 5% below whatever it was on the day of purchase. Should the index ever move 5% of the moving average on a closing basis, then the moving average itself becomes the "stop out" point. I am thinking htis might help some readers concerned with whipsaws...Best, Andrew L.
the second senetence shoudl say if the index ever moves 5% above the moving average....
sorry for all the typos...
Good morning Roger, and Bill.
The guy on CNBC is pretty good, fun to watch for sure. He says he wouldn't touch a lot of the stuff in my portfolio for a variety of reasons. Which is ok.
Bill, did you read the Bloomberg article carefully, which you referred to on Tuesday? I offer a couple of lines I cut and pasted out of it:
"Coldwell Banker is lobbying Congress for a $15,000 tax credit for all homebuyers, not just first-time purchasers.
........
Rising defaults and foreclosures are likely to also keep property values under pressure for months, making buying a home a risky proposition."
So, I don't think the bottom of the home market is a done deal at all.
There was a money manager on CNBC this morning that had the answer to being right or wrong. The CNBC guy wearing the pink tie asked her if it was a bear market or a bull market. Her answer was "Yes".
Thanks BillB, it is nice to not be very wrong ten minutes after you do something. I may be wrong by lunch of course but to not be immediately wrong:-)
WRT to some sort of envelope those work except when they don't. What if the market went down 5% below the 200 DMA, then you sold but it then went whizzing higher? Point being that an envelope strategy would be better sometimes and worse other times.
"It is easier, both for professionals and do-it-yourselfers, to explain being wrong (either to clients or yourself) by saying this was the plan ahead of time and I stuck to it."
What famous economist disparaged investors for a willingness to knowingly fail conventionally? I have no idea if you are right or wrong - I am just concerned that you appear to have closed your mind to what is currently happening (whatever that may be).
Someone else had a quote saying: "When the facts change, I change my mind. What do you do?"
anon 8:18, I can alwys buy more SDS. Your question is exactly why I move slowly, in case there is a whipsaw. as i said in the post it was one trade.
roger,
recognizing that the authorities prevent you from disclosing much, you sound like the trade you put in didn't amount to a significant change in your clients' portfolios. just curious, but in rough terms, how much did you actually increase the equity exposure?
btw, personally, over the last two weeks or so i doubled my exposure but still remain well under half of what i regard as my "normal" equity weighting.
--gjg49
anon 7:37, yup, did read the article. I apparently interpret the data a little differently than you do. So what if they're foreclosures, people are buying them. Supply is drying up, so prices will follow. This is evidence. Maybe more foreclosure supply will flood the market next month, quarter, year ... who knows, but at the present time, the data is ticking up, no matter the source.
Thanks for explaining the process. It requires time, and effort, to run this blog. So thanks.
Getting above the 200 DMA is easier now, and hence might merit an ounce or two of caution.
OT and a vent: For the life of me, I'm at a loss why people pay attention to the numb-nuts on CNBC and etc. I think that's a time-waster for the most part and potentially harmful to successful portfolio management. Spend the same amount of time on your own homework or visiting quality sites such as this.
Which brings up a suggestion. Perhaps Random Roger can write a blog entry some day on the internet-based people he reads and respects. (apologies if you already have done so.) And perhaps he could encourage his readers to contribute their favorites.
Meanwhile, page 3 of this morning's Financial Times has some economists declaring victory in the war against the recession. So rest easy, troops. Light 'em if you've got 'em. ... Seems like an awful easy victory, all things considered.
BillM
so, roger
are you going to unwind these trades if the index falls below the 200 DMA in the next couple of days?
i said above I can buy more SDS if need be but I don't view reversing one trade if it turns out to be wrong as being the end of the world
Kass says bank stocks will double or triple from here.
For those interested here is the link to Kass on financials and his view of the market...
http://www.fundmymutualfund.com/2009/06/doug-kass-on-yahoos-tech-ticker-bullish.html
Bill B- since you asked for a comparison of the 200 DMA simple versus exponential, the attached link to Condor explains why the exponential is preferred.
http://www.condoroptions.com/index.php/market-commentary/exponentially-curb-your-enthusiasm/
roger, you bought SDS when s&p crossed below 200 DMA, why haven't you sold it now that the market has moved over 200 DMA?
the position size has shrunk some and I added more long exposure. right here on the way up it is very little drag and progressively less drag if we go higher, on the way down it would grow to hedge progressively more of the portfolio.
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