Looks like the 3 consecutive months of average 2% declines is upon us...yield curve looks OK, but 200 day MA in play...new bear market or not?
First things first, the 200 DMA is my preferred catalyst for defensive action. I don't really think it matters which trigger is used as no single trigger can be the best for all times but they can be effective which is the priority as I see it. Here effective is simply defined as avoiding the full brunt of a large decline. Aside from my belief in its effectiveness, the 200 DMA is simple to explain and understand.
As far as 2% declines for three months in a row (I know this as originating with Ken Fisher, feel free to comment if you know otherwise), this is reliable insomuch as true bear markets start slowly giving many months to get out as was the case in both 2000 and late 2007 into 2008. Fast declines, or panics typically retrace quickly and are better bought than sold for someone who is a trader.
On April 1st the SPX was at 1363, May 1st 1345, June 1st 1320, July 1st 1300 and now it is at 1292. By my math that does not literally invoke the 2% rule but it is clear sign of a slow rollover. Anything can happen of course but it looks like a rollover which I would use as more of a confirmation of the 200 DMA. In practice this could mean selling two stocks to get started with defensive action instead of one.
As far as the yield curve, I believe in heeding the inverted yield curve for initially reducing financial sector exposure even before a 200 DMA inversion. Currently the curve is very steep but I continue to believe US banks stink so we are still light there with no plans of loading anytime soon. One complicating factor with the yield curve now is that fed rates have been at zero for a couple of years which is IMO distorting the rest of the curve in some manner. My suspicion of the yield curve is not problematic because I am not ignoring an inversion, I simply feel the steepness is artificial which is supported by how poorly the financial sector has done.
As I mentioned in the comments of yesterday's post, I believe the GDP is warning of a recession sooner than most of the experts think. Two quarters below 2% is bad, period. It does not have to mean recession but I think it does even if I don't know how soon. This will influence the type of defensive action I might take in the face of a 200 DMA breach.
It does not make sense to try to sell now before any indicator is triggered because (repeated for emphasis) there may not be a recession. It makes more sense to heed a trigger in the market for defensive action because in addition to it being objective and simple, stocks will turn down before the next recession, whenever that is, as a function of normal market behavior; capital markets turn down before the economy. Also if somehow there was a recession but stocks did not go down there would be no reason to sell.
As far as a "new" bear market, I believe the 200 DMA will tell us the answer, what is more important than guessing correctly is (also repeated for emphasis) having some sort of objective strategy for defensive action that gives a reasonable chance to avoid the full brunt of a large decline. I put the word new in quotes in that previous sentence because it is quite obvious to me that we are still in the same macro economic event as 2008. The crisis from 80 years ago took more than a decade to sort out so the worst crisis since that one could take just as long.
On a more humorous note; although I'm sure it came out wrong, Harry Reid had the quote of the crisis yesterday: the only compromise is mine.
8 comments:
Hi Roger: I was the one who posed the question yesterday on the 2% rule. Ken Fisher originally wrote about it in a Forbes magazine column dated 9/21/98 (I still have the column). He subsequently wrote about it in one of his books. The number he used is actually 1.5-3% per month, with 2% being an "average". In the article he attributes the rule to a fellow named Joe Goodman, who apparently wrote for Forbes in the 1950's. I don't know if u remember, but I once met you (in 2008) and we had the conversation that I corresponded with Ken via e-mail in the autumn of 2007 (which was the last time the 2% rule was triggered) and asked him his thoughts. At the time his response was that the rule should be used as an alert (kind of like a fork in the road), and if one believed that the fundamentals are good, then one could choose to ignore it, which was his choice at the time (in retrospect a COLOSSAL mistake for this billionaire money manger who was at least kind enough to corespond with me.)Anyway I agree that having parameters and sticking to them is a good way to go, whatever they are (such as the 200 day). Other things I am looking at are Hussman's reccession rules (he wrote about it extensively in recent letters and I am guessing more is coming)...Specifically a PMI below 50 would be worrisome, plus he wrote about stock prices being lower than they were 6 months ago (in fact they are right where they were 6 months ago). Finally the one thing giving me pause is Lowry's work. Suffice it to say that none of their bear market parameters are close to being met. Perhaps I am overthinking all of this and should simplify it as you have; identifying a new bear market is such an important call, as you know. At any rate I appreciate the blog as a forum for discussion.
Best, Andew L.
Best, Andrew L.
Good discussion here...however, it seems prudent that with the public capital markets there is only one rule to follow: there are no rules!
As anon quoted from Fisher, there are only alerts or guidance from the pure technical analysis.
Roger,
I'm curious about something I hope you'll comment on.
You've stated in the past that, for your own personal portfolio, your equity percentage is quite low because there's no reason for you to take much risk - you already have what you need for retirement since you save a lot and have kept your costs low. What is your equity percentage again? I recall it being somewhere around 30%.
So my question is, do you take defensive action based on the 200-DMA (or any other triggers) for your own personal portfolio as well? The reason I ask is that it seems to me that defensive action makes the most sense for portfolios with a high equity percentage. For those with low equity exposure (such as your personal portfolio), doesn't it make more sense to ignore market fluctuations, or perhaps even to *increase* equity exposure during a market crash (i.e., maintaining equity percentage during a crash means buying on the way down)?
Thanks,
aagold (long-time reader)
200 dma whipsawed you last time
the 2% rule seems to be a false indicator if it really is occurring now IMO
no one rule is always correct. they all give false signals.
Personally I think we move higher after this political theater on the debt limit.
I agree the are cracks in bull market as well stated by roger and others. I just do not see this bull dying yet. I anticipate new highs for this bull. How high is the big question in my mind.
SEG
Hi Andrew, yes I remember you, I think we met at two conferences actually. Hope all is well out your way.
aagold, the short answer is yes. if it is something i am selling for clients that i own too (there is quite a bit of overlap) then I usually participate in the block sale. To correct one thing, I don't think we have enough, more like we live phat on a small amount of money due to no debt which allows us to save a very high portion of our after tax income. last year we saved more than we needed to live on. probably won't save quite that much this year because we had to replace a car. We'll probably save 75% of what we spend this year ex-new car which is a 2003 Forerunner limited that we bought with only 24,000 miles.
SEG the 200 DMA gave what turned out to be several "false alarms" last summer. In those instances the whipsaw involved trades equal to about 2% in and out of inverse index funds that were completed with small losses. While the trades were indeed whipsaws they were very small like maybe 20 basis points or less of a drag. Personally that does not deter me as whenever the next big one is, the 200 dma will have turned out to have been reliable.
Roger,
you do not over react to anything. So being whipsawed by the 200 dma did not disrupt your portfolios much.
But others will react differently to the 200 dma or 2% rule or whatever. My point was none of these guides is perfect and one must expect them to fail from time to time. You recognize this and do not over react. Who knows what some people will do.
hopefully that message makes it through; don't overreact
I assume that it's the Dow or S&P index falling below the 200DMA to lighten the equity portfolio.....what's the get back in rule, index going above 200DMA?
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