Sunday Musings: The Shortest Bear Market

Ulli Uncategorized Contact

Whenever stock prices correct, or the major indexes slide into bear market territory, a number of predictions are bound to follow as to its duration. Random Roger wrote a tongue in cheek piece on that subject titled “The shortest bear market in history:”

Wall Street traders and strategists alike are breathing a huge sigh of relief now that the bear market of 2008 is now over.

Investors may recall that the market officially closed in bear market territory on July 2.

The turn around in Thursday’s holiday shortened trade signals that the bear is now officially over.

Said one trader reached on Thursday “I’ve never seen so much excitement at any point in my 13 months in the business.”

A spokesman for another firm said his company plans to reinstate their original year end S&P; 500 target of 1660, a 30% gain from here. The spokesman noted that 30% is a normal bounce off of a bear market bottom.

Ahem. AHEM.

Any trend, whether bullish or bearish, has to run it course before a turnaround can occur. Most investors, however, don’t have the patience to wait but instead follow the urge to take a stab at buying on dips, which may work in bull markets but has proven disastrous during bear scenarios. Of course, this course of action of buying early is supported by the brokerage industry for nothing but selfish reasons.

If you are following trends, you will know when the bears have run out gas and the time arrives to be bullish again. You will not buy at the exact bottom, since we need to see its formation before we can measure and identify it, but somewhere within 10% of it. While that will lessen your potential profits on the upside, it will at the same time avoid a bunch of whip-saws or portfolio losses caused by jumping in too early.

Hedging

Ulli Uncategorized Contact

Prior to the last buy cycle coming to an end, I have addressed the fact that we have held on to two of our domestic mutual fund positions and hedged them against further downturns rather than selling them. Reader Tom had this comment:

Thanks to you, I have been sitting comfortably on the sidelines after I lost my initial 7% when the downslide first started. I also decided to sit out your most recent buy signal based upon the dire predictions of some of the references you had been quoting.

Lately your newsletter/blog has several references on hedge and short positions. Can you recommend a particular website or publication where those of us with limited knowledge of these strategies can come up to speed?

I certainly respect your advice as my portfolio took a drubbing in the 2001-2003 declines, but I managed a wry smile today when the market dipped 20% below the October 07 high.

If you search Google on the topic of hedging, you’ll find millions of answers. Most of them may not be worthwhile for you and some involve incredibly complicated computations. I think that the majority of these offerings are not for the every day investor.

I have not found a site which addresses simple hedging strategies that any investor can use along with his mutual funds and ETFs. So I designed my own. I have done some extensive research and testing with impressive results. My plan is to put these findings in an e-booklet of maybe some 20 pages and distribute it for free.

Before you ask when that will be available, I am not sure yet. Time always gets the better of me, but I hope to get something done within the next 60 days. Once I have something definitive, I’ll make the announcement on this blog and in the weekly update.

No Load Fund/ETF Tracker updated through 7/3/2008

Ulli Uncategorized Contact

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

More downside action had the major indexes close lower for the third week in a row.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains decisively below its trend line (red) by -2.84% thereby confirming the current bear market trend.



The international index dropped as well and now remains -11.29% below its own trend line, keeping us on the sidelines.



For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Where We Are And Where We’re Going

Ulli Uncategorized Contact

If you look at the table on the left, you’ll see that this year has been anything but kind to investors. From my viewpoint, we’ve been in a bear market and May’s rally attempt, which caused us a domestic whip-saw signal, looks more and more like a dead cat bounce.

Even by Wall Street’s definition, we have moved one step closer towards official bear territory when the Dow’s drop yesterday pulled it down by 20.8% from its all-time high last October. While the other major indexes have not passed the 20% threshold yet, they are getting close. The widely followed S&P; 500 has come 19.4% off its high.

If you look through my StatSheet, you’ll notice that this year’s sharp downturn has taken no prisoners. You see more red than green numbers, which supports my view that once a bear market strikes, being in money market on the sidelines is the safest course of action.

For a synopsis of where we are and where we might be going, I suggest your read Todd Harrison’s piece on that subject.

New Quarter—Same Old Problems

Ulli Uncategorized Contact

The bullish crowd got a scare Tuesday morning as this quarter started out with the Dow sinking by as much as 167 points with the other major averages in close pursuit. GM proved to be the savior of the day with better-than-expected sales reports for June, and the markets ended up closing in plus territory.

As much as the bulls are hoping this to be rally with legs, most likely it was just simply short-covering off a much oversold market. The problems of the year (low dollar, high oil prices and weak financial stocks) have not gone away and will most likely haunt the averages for some time to come.

Yesterday’s rebound had only a slight effect on our Trend Tracking Indexes (TTIs), which are now positioned as follows:

Domestic TTI: -1.47%
International TTI: -10.63%

As you know, we hedged our mutual fund positions (rather than selling them) on June 12 and as of yesterday that hedge has gained +1.21%. As time goes on, I’ll be reporting more from our continued hedging efforts using mutual funds and ETFs.

A New Beginning

Ulli Uncategorized Contact

By now you must have heard that the just ended month of June will go on record as the worst June since 1930. The major indexes declined sharply with the broad S&P; 500 surrendering some 8.6%.

Half way trough the month, our domestic sell signal kicked in and pulled us to the sidelines before the markets fell off a cliff during the last couple of weeks. Our newly established hedged positions worked out well by gaining while the major averages were losing.

As of yesterday, and closing out the month, our Trend Tracking Indexes (TTIs) have remained below their long-term trend lines as follows:

Domestic TTI: -1.54%
International TTI: -10.15%

With a questionable earnings season upon us, along with constant disaster for financial stocks and ever climbing oil prices, what’s next? For a different viewpoint, Bill Fleckenstein wrote an interesting article called “The End of the Super Bubble.” Here are some highlights:

There is a budding realization that the housing bubble’s collapse will be more difficult than the masses and Wall Street had believed. You could see this last week as the market moved back toward the lowest levels since the collapse began last fall.

It’s now obvious that this is a problem not only for the consumer but for the financial system itself, which is in dire straits as it tries to deleverage, thereby compounding the problem.

For quite a while, many believed that because sovereign wealth funds were deemed to be flush with money, the banks and brokers could just grab some capital from overseas investors and cash-rich nations and go back to doing what they had done before. That has clearly turned out not to be the case.

However, leverage is quite capable of creating the illusion of liquidity. Thus what many had seen as excess liquidity was simply massive leverage, which is now being unwound. (The surfeit of savings, which is what “liquidity” alludes to, never existed.)

All of these problems trace their roots to Alan Greenspan’s years at the head of the Federal Reserve.

What began as small bailouts along the way ended with the blowoff of the stock bubble in March 2000. In an attempt to ease the effects of the bubble’s collapse, interest rates were taken to the absurdly low level of 1% and held there far too long. That engendered a housing bubble, which was nourished by the abdication of lending standards in the banking system — as securitization, spearheaded and championed by Greenspan himself, and deregulation of the banking system were thought to be the solutions to any imbalances.

Meanwhile, the aftermath of this housing/credit bubble is far different from that of the stock bubble. Now the lending institutions are swimming in bad debts. Homeowners have mortgages they can’t pay, just as the assets (houses) behind those debts are dropping in price.

As if that weren’t enough, consumers’ paychecks are eroding, thanks to galloping inflation created by the money printing that fomented the housing bubble (and by the credit that Greenspan’s replacement, Ben Bernanke, has subsequently thrown in to ameliorate the aftermath).

The truly sad part is that this outcome was foreseeable.It was possible to anticipate a catastrophe of such dimensions even when the housing boom was still in full swing. Unfortunately, the very institution that had the regulatory authority to supervise the banking system was the one leading the cheering — namely the Fed, in the form of Greenspan. (That was sort of like putting a bartender in charge of adjudicating disputes over breathalyzer readings.)

The collapse of the housing bubble is taking the economy with it and pressuring the stock market as well. Thus we will have all three markets feeding on each other as each deteriorates.

Unfortunately, the Fed is going to be faced with a Hobson’s choice: trying to respond to that triple threat while its hands are tied, to some degree, by inflation. When push comes to shove, the Fed will choose lowering interest rates over fighting inflation, but it won’t matter.

In his latest book, “The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means,” George Soros makes the case that we are witnessing the end of a 25-year superbubble.

I certainly agree with his observation and would note that the time frame of this superbubble roughly approximates the career of Alan Greenspan, who in my opinion was responsible for its creation — and the enormous pain caused by its collapse.

I have to agree with Bill’s assessment, which pretty much throws a cloud on the future especially if you are looking for a place to put your money. I think that we’re still at a point where taking an outright short position could be hazardous to your financial health. Even though we’re below the long-term trend lines, violent blow off rallies ala 2000 could happen at anytime.

This is why I have done a lot of work designing simple hedge positions, which work well with mutual funds and ETFs (IRA and brokerage accounts) along with our Trend Tracking approach. It allows you to make money whether the markets rally or sink to lower levels. This type of a hedge smoothes out portfolio fluctuations and offers you continued market exposure, although much more conservatively.

Unfortunately, most 401k plans do not have the necessary fund choices available for hedging, so being on the sidelines in money market is your safest bet during these times of great uncertainty.