Over the last couple of weeks I have made several references to feel-good rallies. If this is a bear market there will likely be several feel-good rallies along the way and we could be in the middle, or maybe the start, of a healthy feel-good rally.Some examples;
On April 14, 2000 the S&P 500 hit 1339 intra-day. A week and a half later on the 25th it closed at 1477. Thats 10.3% in no time, think people were feeling good that day?
The next low was on May 23, 2000 at 1373. Two months later on Jul 19 it closed at 1510, a less dramatic 9.9% over two months.
On April 3, 2001 SPX had a low of 1100. On May 21 it closed at 1312 a 19.2% rally that no doubt felt great.
I'll skip the rally after 9/11 as that was an external event.
July 23, 2002 SPX traded at 797. On August 22 it closed at 962, a 20.7% lift.
Some folks will try to trade these, and be successful, and some should leave them alone. As I still believe this is a bear market I want to be less volatile than the market, this has been my positioning for months. Given the bear market context, I would be thrilled to be up 5% versus a 10% feel good rally and only down 5% versus a 10% drop. This of course would be a smoother ride which, again, late in the cycle is exactly where I want to be.
For some context of where a feel-good rally might go; the 200 DMA is up near 1485 (that would surprise me), there are also several resistance points along the way up to 1485 including 1350 which is about where it closed yesterday.
You should decide for yourself if this is a bear market but if it is, we should expect several rallies as part of the bottoming process, it is very normal.
13 comments:
roger,
you always advocate planning ahead. put this question in that context and allow me to diverge from equities for a moment. what junk bond and distressed bond funds appeal to you for longer term (say 3 to 5 year holding periods) investment? i could probably go to morningstar and sift through some of their data, but my lethargy tells me to ask you as you will quickly narrow the list to a few worth studying. i don't plan on making any moves quite yet, but i see that the treasury to junk spread now exceeds 700 basis points according to merrill so if we get to 1000 bp i think i'll start to buy--at those rates even if the default rate goes up to 7% or 8% you will be receiving adequate compensation for the risk. by the way,, i asked about junk bonds and distressed bond funds separately--i'd like to eventually hold a position in both.
gjg49,
you are about to walk in the footsteps of most of my family as I am about to disappoint you...
two years ago i might have had a couple of CEFs to mention but CEFs are flawed by the nature if their structure and their flaws, IMO, are greater than ETF flaws.
if i go into high yield i am inclined to think it will be one of the ETFs.
However I am inclined to think that i would seek yield in converts (I have two CEFs that I use AVK and CHI, of which AVK has done much better) and foreign bonds. When buying the middle of the curve makes sense, to me, again I expect there will be decent yield available (there is now) and I may consider one of the ETFs too.
I think we may feel good all the way back to 1420 my friend. I'm only buying on dips in this bear, I will sell the recession next year if it finally comes. At this point and these prices, I may simply be able to lock in at a 10% yield, and ride out 2009 with a smile.
Roger how about a CEF like PTY. has a nice yield and possibly a decent opportunity for some Cap appr here? The portfolio doesn't seem crazy risky as it has quite a bit of higher rated securities and is managed by Pimco. Do you see an opportunity here? thanks
Roger, can I presume that the structural flaws that you refer to in CEFs relate to their trading above or below NAV? I own several and I'm alternately elated or disappointed with their market price swings. I've actually picked up a couple more with good yields that were beaten down in price at the end of 07. The Wall Street Journal published such a list not too long ago.
had to drive to Phx today (boo Phoenix! lol) and can now catch here.
10%? if it happens, sign me up (ex-junk).
PTY? ETFconnect doesn't have the composition of the fund, I don't know it.
as i look at a couple of similar funds i see them at a discount and PTY at premium. it just listed on Oct and hasn't worked off the initial premium, i guess?
the structural flaw I referred to is the nav premium/discount issue.
during times of panic, supposedly staid bond funds puke down. owning a couple ot add a little yield is not a bad thing but too many seems unnecessary to me.
It will definitely involve junk, sorry.
Roger,
Sorry if this is off topic, but how does sentiment play into your bear market thesis? Seems like sentiment is awfully negative these days, which of course is usually a contrarian indicator. You've obviously found a way to discount this or minimize its impact, and I'd be interested to hear your rationale. Thanks for the great blog--I read it often.
As I wrote a month ago - the end of January will meet something between 1550 and 1450 (standard error of 50 units of index).
This is not a bear or bull market. This is fully predicted market.
I really wanted to commnent not before 02/02/2008.
Too early now to say what is the truth.
into the bear market? sentiment doesn't play much of a role.
I find it more useful during fast declines regardless of what animal describes the current market.
Roger,
A question regarding position sizing of hedges like SDS. I'm guessing that some positions in one of your "typical" portfolios have a low correlation to the SP500, while other positions are much more highly correlated. Do you pick an arbitrary number (add all positions with a .80 correlation and higher, for example), and hedge that dollar value? I.e. portion of portfolio with > .80 is $100k, so take $50k position in SDS?
Thanks,
Jan
Roger,
Would you devote a post to the OTC derivatives market with some good simple explainations of notional value,otc credit derivatives and credit swaps? I am reading that there are OTC derivatives with a notional value of 516 Trillion dollars (with a T). I assume that only the Financial Industry would be using these "risk mediating" instruments. Is that a good assumption or are other industies, municipalites involved? Talk about the 800 pound Gorilla in the room! Tom in Indy
Jan,
tardy answer, sorry.
this is not very scientific. the science, i think, is when i take defensive action not how.
how is more art. in the interest of small bets and moving slowly my first move is likely to be a 2% weight in the double short, as was the case on this go around.
trying to manage beta or correlation to the tick is very difficult unless many trades are placed to make adjustments which I would rather not do.
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