The legendary investor Jesse Livermore said:
"The successful investor is not invested in the market all the time. There are many times when you should be completely in cash. If you are unsure of the direction of the market, wait."
In the aftermath of the extreme volatility of late, I am inclined to be a bit more patient and let the dust settle before rushing back into the market. I will look to add to positions incrementally as the market begins to stabilize. If we miss some bargains, so be it. I prefer to invest with the wind at my back. Right now, it’s swirling. To jump back in to make pennies when there are dollars to be made in better environments makes little sense to me. I prefer to follow trends and not chase returns.
Tuesday, May 11, 2010
Monday, May 10, 2010
Market Comment 05 10 10
The Market surged higher this morning on news of a bailout package for Greece and other European nations if needed. The recent stock market decline may be over, but we cannot draw any conclusions based on the surge in buying this morning alone. The market was extremely oversold and due for at least a short term bounce. This morning’s bounce may be primarily due to short covering. It will be a couple days before we can put the recent sharp decline and this morning’s sharp advance in proper perspective. Just as we did not get caught up in the emotion of the day during the decline, we will not get caught up in the emotion of the current rally.
Our investment style and investment game plan is clear. We check our egos and notions of what the market should do at the door and let the market itself be our guide. If the rally holds I will begin to add some new positions this week.
Our investment style and investment game plan is clear. We check our egos and notions of what the market should do at the door and let the market itself be our guide. If the rally holds I will begin to add some new positions this week.
Sunday, May 9, 2010
Trendline Analysis - The proof is in the pudding
Does past performance tell us anything about future performance? An astute investor pointed out the fact that every prospectus ever printed discloses that past performance is no guarantee of future performance.
Does what happened last month, last week, or yesterday in the market really have any bearing on what may happen in the near future? After all, what happened in the past is old news and the future cannot be known.
Trendline Analysis is based on the past and the present. Is it really of any value? If you are not familiar with Trendline Analysis read the May 2010 issue of The Gerritz Letter; a link is provided below.
When you were a child you might have placed your hand on a hot stove, ouch! If you did, it would be my guess that you never did again, at least not on purpose. Life teaches us a lot of lessons. We either learn from our experiences or we repeat mistakes.
Market movement is comprised of three important trends superimposed on each other.
Primary Trend
The main or primary trend, is often referred to as a bull or bear market. Bulls go up and bears go down. They typically last about nine months to two years with bear market troughs separated by just under four years. These trends revolve around the business cycle and tend to repeat whether the weak phase of the cycle is an actual recession, or if there is no recession and just slow growth.
Primary trends are not straight-line affairs, but are a series of rallies and reactions. These series of rallies and reactions are known as intermediate or medium term trends.
The intermediate or medium term trend can vary in length from as little as six weeks to as much as nine months, or the length of a very short primary trend.
Intermediate trends typically develop as a result of changing perceptions concerning economic, financial, or political events. It is important to have some understanding of the direction of the main or primary trend because rallies in bull markets are strong and reactions are weak. On the other hand, reactions in bear markets are strong and rallies are short, sharp, and generally, unpredictable.
If you have a fix on the underlying primary trend, you will be better prepared for the nature of the intermediate rallies and the reactions that will unfold.
In turn, intermediate trends can be broken down into short-term trends, which last from as little as two weeks to as much as five or six weeks.
The market after all does have a history of trending both up and down as well as going sideways from time to time. Past market price trends are therefore relevant to the present condition of the market.
Trend lines can help us determine current market direction. Additionally, trend lines can help us filter out normal short-term market fluctuations. If a trend line is broken it warrants our attention. If a new counter trend develops it needs to be confirmed and assessed.
If we use this information and decide to sell out of an equity position, we have protected our account from a potential drawdown. If we are wrong and the market resumes it's climb higher; we just buy in again. Most people cry harder over big losses than missing a couple points of gain.
As you may known our portfolio model went to zero equity exposure on the 4th of May, two days before the extreme volatility on the 6th. Without the benefit of Trendline Analysis we could not have made this, what now seems to be, critical decision. We protected client accounts from a large drawdown in what is now clearly an intermediate change of market direction.
The proof is in the pudding.
Does what happened last month, last week, or yesterday in the market really have any bearing on what may happen in the near future? After all, what happened in the past is old news and the future cannot be known.
Trendline Analysis is based on the past and the present. Is it really of any value? If you are not familiar with Trendline Analysis read the May 2010 issue of The Gerritz Letter; a link is provided below.
When you were a child you might have placed your hand on a hot stove, ouch! If you did, it would be my guess that you never did again, at least not on purpose. Life teaches us a lot of lessons. We either learn from our experiences or we repeat mistakes.
Market movement is comprised of three important trends superimposed on each other.
Primary Trend
The main or primary trend, is often referred to as a bull or bear market. Bulls go up and bears go down. They typically last about nine months to two years with bear market troughs separated by just under four years. These trends revolve around the business cycle and tend to repeat whether the weak phase of the cycle is an actual recession, or if there is no recession and just slow growth.
Primary trends are not straight-line affairs, but are a series of rallies and reactions. These series of rallies and reactions are known as intermediate or medium term trends.
The intermediate or medium term trend can vary in length from as little as six weeks to as much as nine months, or the length of a very short primary trend.
Intermediate trends typically develop as a result of changing perceptions concerning economic, financial, or political events. It is important to have some understanding of the direction of the main or primary trend because rallies in bull markets are strong and reactions are weak. On the other hand, reactions in bear markets are strong and rallies are short, sharp, and generally, unpredictable.
If you have a fix on the underlying primary trend, you will be better prepared for the nature of the intermediate rallies and the reactions that will unfold.
In turn, intermediate trends can be broken down into short-term trends, which last from as little as two weeks to as much as five or six weeks.
The market after all does have a history of trending both up and down as well as going sideways from time to time. Past market price trends are therefore relevant to the present condition of the market.
Trend lines can help us determine current market direction. Additionally, trend lines can help us filter out normal short-term market fluctuations. If a trend line is broken it warrants our attention. If a new counter trend develops it needs to be confirmed and assessed.
If we use this information and decide to sell out of an equity position, we have protected our account from a potential drawdown. If we are wrong and the market resumes it's climb higher; we just buy in again. Most people cry harder over big losses than missing a couple points of gain.
As you may known our portfolio model went to zero equity exposure on the 4th of May, two days before the extreme volatility on the 6th. Without the benefit of Trendline Analysis we could not have made this, what now seems to be, critical decision. We protected client accounts from a large drawdown in what is now clearly an intermediate change of market direction.
The proof is in the pudding.
Saturday, May 8, 2010
The Tail Wagging the Dog - Greece
In 2007 the sub-prime mortgage problem was generally thought to be contained; an inconsequential problem that would affect a relatively small part of the market. The events that followed soundly put that notion to rest. Now a potential default by little ole Greece is shaking markets worldwide. Mohamed El-Erian, CEO of PIMCO, offers some great insights as to why we should be concerned.
Click the link below to view a brief Morningstar video interview with Mohamed.
Click the link below to view a brief Morningstar video interview with Mohamed.
Friday, May 7, 2010
Putting Yesterday's Mid-day Plunge into Perspective
Yesterday’s sharp intraday plunge was apparently due to a trading error exacerbated by the high speed computerized trading systems used by the likes of Citigroup. The stock market was already in a short-term downtrend. I don’t consider that mid-day plunge to have much long-term significance. As to the decline that started almost two weeks ago, I think it is still too early to really know how significant it will be. All major market tops start out as a short-term downtrend, but not all short-term downtrends turn into major market tops. That is why we use stops to help manage volatility and risk.
Investing involves risk. It is generally counter-productive to attempt to avoid all risk. It is never a mistake to take a systematic approach aimed at managing risk.
Investing involves risk. It is generally counter-productive to attempt to avoid all risk. It is never a mistake to take a systematic approach aimed at managing risk.
Thursday, May 6, 2010
Market Comment 05 06 10
The volatility of the market today was off the charts. You will be happy to know that going into today most client portfolios had no exposure to stock funds or equity ETFs.
On Tuesday the 4th we sold all equity positions in our model portfolio. On April 30th we also tendered all shares of XOSAX. We continue to hold only two income/high yield bond fund positions. Our bond positions are much less volatile than the stock market. Given the reemergence of extreme market volatility we will be watching our remaining positions very closely.
The risk management systems we have in place definitely did a great job of protecting our client portfolios today. Our analytic tools and indicators gave us warning signs and we heeded those signs.
On Tuesday the 4th we sold all equity positions in our model portfolio. On April 30th we also tendered all shares of XOSAX. We continue to hold only two income/high yield bond fund positions. Our bond positions are much less volatile than the stock market. Given the reemergence of extreme market volatility we will be watching our remaining positions very closely.
The risk management systems we have in place definitely did a great job of protecting our client portfolios today. Our analytic tools and indicators gave us warning signs and we heeded those signs.
Wednesday, May 5, 2010
Market Comment 05 05 10
Tuesday’s sell-off suggests at least a short term top in the market. This does not mean that the bull market that began last year has come to an end, but rather odds have increased that the short term trend is now to the downside.
I would expect the usual bounce to the upside after such a decline is likely. If that bounce is not sufficient to take us back up to pre-decline territory and if it is followed by a down-leg that exceeds the preceding decline, a trend reversal will be confirmed. Remember, an uptrend is defined as a series of higher highs and higher lows. A downtrend is defined a series of lower highs and lower lows.
A potential correction of 8 to 10 percent would not be an unreasonable expectation. At this point however, we will have to wait and see what transpires next. Given the multiple negatives at the moment caution is called for.
I would expect the usual bounce to the upside after such a decline is likely. If that bounce is not sufficient to take us back up to pre-decline territory and if it is followed by a down-leg that exceeds the preceding decline, a trend reversal will be confirmed. Remember, an uptrend is defined as a series of higher highs and higher lows. A downtrend is defined a series of lower highs and lower lows.
A potential correction of 8 to 10 percent would not be an unreasonable expectation. At this point however, we will have to wait and see what transpires next. Given the multiple negatives at the moment caution is called for.
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