Recession Exposure

[james_gsx 16]

Disclaimer: No, I don't think we'll crash. No, I don't expect or want a crash. Yes, I am a bear. Now onto the thread. But the facts are in our face, this is a shaky market and things are a lot worse than we see in the daily news. As day traders, we are probably the best prepared considering we rarely hold anything over night and we can quickly adapt to new markets. But what if we have $500,000 just sitting there, how can we protect it?

 

Let's say our worst nightmare came true and the markets did in fact crash. Whether that be in one day or over the course of say a week. How would you best prepare yourself? Not just for the day, but for the longer haul. Maybe even a deep recession, obviously you don't want to be long your typical stock.

 

A few ideas I have are, long gold, long government bonds, and basically puts on the markets.

[OAC 10]

Well, we better not crash. I took a long at the close yesterday in my long-term portfolio based a potential completion of an ABC correction on the daily chart. I have a tight stop, and risk vs. reward looks great at this point.

[brownsfan019 17]

James,

The ideas for protecting a long only portfolio can be very basic to exotic.

 

Some basic ideas:

But puts

Covered calls

Buy a short ETF

Some exotic ideas:

Use futures to hedge (what many big money managers use them for)

Can do some neat stuff with options (options on stocks and/or futures)

Stock futures

 

Just a few ideas that come to mind. I know 'exotic' may not seem like much here, but to the average investor, those are some exotic ideas. I remember as a broker when going through a time like this, the long only portfolios were just in the shitter and people were panicking. Many would be in 100% cash by now or close to it. Many would sell out near the bottom, that's for sure. So some protection would be nice, but again, the average investor does not / will not think about ways to make money or at least protect what they have in a downfall market. Many just simply cash out somewhere near the bottom.

[darthtrader 10]

My Roth has been sitting in cash since early 07 when I sold all my gold and silver stocks. To me once we take the pain of the downturn/next recession, with all the ETFs and global growth there probly won't ever be a better entry point as far as money that I'll need 30 years from now.

To my mind any drawdown right now is extremely expensive if you calculate what that drawdown will cost as far as 30 years of less capital compounding. With my current understanding I'm only interested in taking the easy money. The only real place I would suspect there is easy money right now is in corporate bonds but I don't know near enough about the bond space to gamble my long term money there.

Thats basically why I think sitting in cash and learning proper portfolio theory/valuation is the best long term investment for myself right now.

I'm all over this text when it comes out next month

http://www.amazon.com/Optimal-Portfolio-Modeling-Maximize-Control/dp/0470117664/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1200464407&sr=1-1

[james_gsx 16]

Well I've been 100% cash since before that big move down in August. Back then it was an IRA so I couldn't really do anything but go long. I think this weekend I'm going to look into some bonds that we can hold for a few years and then some gold ETFs. I would feel more comfortable with an ETF rather than the actual futures contract since it seems to be pretty volatile.

[OAC 10]

I thought some of you may find the two attached daily charts of Dow and S&P 500 interesting. They are two almost perfectly formed Butterfly Patterns with the right proportions textbook style. It is a very powerful pattern and it should hold. if it fails, then the market can get very ugly.

So Mr. Market, the ball is in your court.:o

[PYenner 10]

the average investor does not / will not think about ways to make money or at least protect what they have in a downfall market.

Sad but true. My older brother worked hard so he could retire early.

Sold his house and bought a boat.

House prices doubled over 2-3 years.

Diesel prices went up and boat prices went down.

Now he can't afford to buy back into a house.

It was all covered in the news, all you had to do was be aware of what it meant for you, but he chose to live in comfortably numb land and ignore simple obvious realities.

So he made a huge effort over many years to make money, then lost maybe three quarters of it over a few years from not caring to do some basic thinking that would have required no effort at all.

The contradiction staggers me.

 

Many just simply cash out somewhere near the bottom.

Which is probably when they should be buying in.

I am waiting to see if my brother does this too, his overseas share portfolio is the only other asset he has left and it will have taken a hammering.

 

Apparently Chinas stability is now a significant part of the equation and it is still not a free economy, it depends on the political regime jumping in the right direction. A person has to have mixed feelings on that one.

 

If I had significant money in the markets I think I would want to keep it liquid and able to move on short notice. One person's risk is another person's opportunity, perhaps.

 

I have difficulty picturing a full blown meltdown.

Money is no longer real, it is essentially valueless and governments seem able to invent as much capital as they please.

 

Individuals do not want to be holding big debts at this time, yet counties are universally heavily in debt and have been for decades without consequences, yet.

 

What markets and governments seem to fear is a drying up of confidence that leads to a drying up of liquidity, people hold onto cash to avoid risk.

Markets and governments are essentially parasites that take the profit from other peoples turnover. If the turnover stops, their profit stops, jobs go.

 

Given the size of modern government, the fear might not be job losses in the markets, but governments halving their employees. I have difficulty picturing how a modern economy would go into meltdown. Money does not have a rigid meaning anymore, at least for governments, it seems to be just numbers without any consequences. Yet clearly they have fear, I'm not sure how much though.

[james_gsx 16]

OAC, I have seen those butterfly charts a few times but I don't really understand what they mean. For example, what would a potential target be if it held or if it broke?

 

When I look at the YM, I see a double top.

 

When I look at the weekly, I see a double top with several key support levels failed.

 

 

And on the monthly I see the long term trend line holding, but I don't know how long it will hold for. It still looks like we might see lower 11,000s. But of course, I'm biased.

 

 

 

So some explanation on that chart would be much appreciated!

[The Bear 10]

hi Brownfan - have you used any of the ETF's before to hedge? I'm not at the point right now where I would put on a hedge, since i'm still bullish, but a 2nd leg down from here on the dow, and I would seriously begin to consider this.

 

I've haven't had the need to hedge in the past few years, but I was thinking maybe shorting the SPY or DIA. I know there are a number of those short ETF's you are talking about, either 1X or 2X, but do you think the SPY or DIA would be a tighter correlation to set up a 'true hedge' to the market?

 

Is there a short ETF out there that is 2X the DOW or S&P?

 

 

James,

The ideas for protecting a long only portfolio can be very basic to exotic.

 

Some basic ideas:

But puts

Covered calls

Buy a short ETF

Some exotic ideas:

Use futures to hedge (what many big money managers use them for)

Can do some neat stuff with options (options on stocks and/or futures)

Stock futures

 

Just a few ideas that come to mind. I know 'exotic' may not seem like much here, but to the average investor, those are some exotic ideas. I remember as a broker when going through a time like this, the long only portfolios were just in the shitter and people were panicking. Many would be in 100% cash by now or close to it. Many would sell out near the bottom, that's for sure. So some protection would be nice, but again, the average investor does not / will not think about ways to make money or at least protect what they have in a downfall market. Many just simply cash out somewhere near the bottom.

[The Bear 10]

True that James, it's difficult to say, this move down has been pretty hard so I'm expecting a snap back rally from here, but to put a hedge on at that point? It's iffy, We may have already hit the bottom or are close to the bottom.

 

The market always surprises, and with sentiment so bearish right now, I would be surprised if the market blasts in our face.

[james_gsx 16]

Even if we have hit bottom, I still wouldn't feel comfortable investing in any normal stocks. I still think we'll be in a typical bear market scenario for a while. But that's just my opinion that I got from my own research. And that's why I'm looking for a longer term hedge like gold and bonds. When I think we'll go back into a bull market then I'll start pouring my money into stocks. If I thought we'd see a crash or something like that I'd load up on ES shorts.

[nycdweller 10]

Does anyone in here invest in LEAP's?

[james_gsx 16]

ES down 6% from last night. This could be interesting tomorrow morning...

[OAC 10]

ES down 6% from last night. This could be interesting tomorrow morning...

 

Wow, that is exciting. Most people pay attention to price, but I did a little timing work this past weekend (Nowadays I don't take any significant position unless, Price, Time and Pattern all come together). Just like price, where you may find confluence of support and resistance from several major levels like weekly pivots, 200 day ma...etc. There is a confluence of several time cycles due this week. Also if you notice, the first leg of the drop from 10/11/07 to 11/26/07 took 30 trading days, and the second leg of the drop from 12/11/07 to last Friday is 26 trading, so a few more days of the drop will still produce time symmetry. The Butterfly Pattern I mentioned last week can still be valid according to Pesavento(the originator of the pattern) but get extended from 127% to 162% of the distance of the rally from 8/16/07 to 10/11/07.

Since it is a Big Butterfly, the next extention would take the Dow down to 11,000. Because of several time cycle due this week, I didn't think Dow can still drop another 1000 points in a couple days. Now with the Globex down 6%, we are already halfway there. Wow !!

If Dow goes down to 11,000 this week, loading up on OEX call options would be the way to go anticipating a huge bounce . The way I look at it, the only way that we don't get a bounce at the 11,000 level is a complete meltdown of the Derivative Market . Trillion dollars worth of highly leveraged derivative products had been built up in the last few years, it is like an accident waiting to happen. If that happens, I will lose all my option premium, but then a Derivative Meltdown will throw the world's financial system into the stone ages. we would then have very little worry about a recession, because depression will be the word of the day.