Moment of Truth for Stock Investors

[Do Or Die 10]

1. A similar drop like past 10 days (more than 10% decline in a healthy bull market) is a very unusual event. This has occurred so seldom since great depression that you can count the instances on fingers. Technically this indicates a very high probability for negative returns for next few years.

Date/Time	10 day change
8/4/2011	-10.54
3/21/2001	-11.58
10/27/1997	-11.29
10/15/1987	-10.76
10/27/1978	-10.15
9/3/1946	-10.74
5/14/1940	-13.58
9/8/1937	-10.43
5/11/1934	-10.1
7/21/1933	-15.79

 

2. Relative Strength of financials has peaked out considerably. Note that financials are usually the leading sector to turn down at a peak.

 

3. Fundamentally stocks are NOT undervalued- there is sufficient room for price stagnation for few years or a further decline of around 20%.

4. The NY Fed's Treasury model suggests a recession probability less than 1% (0.97%); and for July of next year the recession probability is even lower, at 0.80%. This data will soon be significantly updated with the recent fall in treasury yields. I have a hunch that this model in hyped being in public domain and has lost its edge. In any case, we may not see a typical recession but the chances of slow downtrend on weekly charts cannot be ruled out. (The model uses the spread between the yields on 10-year Treasury notes and 3-month Treasury bills to calculate the probability of a U.S. recession up to twelve months ahead)

 

5. This crash is unlike any similar past instances in the sense that it is triggered by global events and not just the US economy. The recent fall is most likely triggered by Europe’s dire crisis, with Italy and Spain joining to the list of troubled economies. ECB rate hikes expectations (until very recently anticipated for autumn 2011) have suddenly vanished, and the September 2012 Euribor contract prices them at slightly below those for 2011. The biggest consumer’s market, China, is slowing down. Japan currently is a distinct case study

 

6. The US Economy has just grown by 0.4% in the first half of 2011 and all major economic indicators continue to point slow economic activity. According to the National Association of Realtors home prices will likely drop another 10 % nationwide, and according to the Mortgage Bankers Association, 70% of all loan applications are refinancings. Rapidly rising prices have (and will) hit the confidence of consumers. ISM data suggests that new orders will be dropped off and firms appeared to have tightened down on inventories. Recent PMI number indicates that manufacturing is barely above the zero line.

 

7. Institutional Funds are flowing from relatively riskier assets to relatively safer assets (from stocks to treasuries and gold).

 

 

The market has made a strong opening today reacting to yesterday’s price action which looks like a climactic bar. I have marked yesterday’s lows and currently working to liquidate my investment portfolio (wrote most of this stuff yesterday evening).

[Tams 20]

the event that led to this "unusual" event is also very unusual...

I doubt the past historical market behavior is a good guide for this unusual current event.

[Do Or Die 10]

..

ie. the past historical market behavior is not likely to be a guide for this unusual current event.

 

wow... thanks for the pointer... so when are you going to sell me that magic forecasting mirror

 

PS: think calmly sometimes later can you make a more useless statement ever :rofl:

[Do Or Die 10]

I think I read somewhere on this page...

You can edit your post, but you can't hide your (posting) personality. LOL

:rofl:

[Tams 20]

wow... thanks for the pointer... so when are you going to sell me that magic forecasting mirror

 

PS: think calmly sometimes later can you make a more useless statement ever :rofl:

 

you are reacting to this at an emotional level... you are displaying your maturity level in dealing with a discussion topic.

[Tams 20]

I think I read somewhere on this page...

You can edit your post, but you can't hide your (posting) personality. LOL

:rofl:

 

You are reacting to this at a personal level... you are displaying your maturity level in dealing with emotional matters.

[Do Or Die 10]

Well, didn't mean to sound insolent or anything. I'll come back to discussion after market close.

[SIUYA 11]

funny discussion guys - good little piece of analysis doordie.....

going with Tams on this I guess this has been brewing for a bit and has just taken the market some time to wake up. Every crisis is different, yet every crisis has similarities.

The Asian financial crisis in 1997 was much the same - 6 months of fundamentally bad news and then one day the equity market craps its self - and that was a far bigger move. Looking back it now a blip.

 

Point is for every fundamental bit of info out there that is bullish, there are plenty of bearish ones too, but its what the market does that is important (unless you have billions to slowly move in and out). You can always point out both sides and make a case - thats what brokers do all day. (a few weeks ago on the same day we saw two reports - one commodities to crash 50-70%, the other was about the super cycle in commodities - all looking at the same info)

Whats is interesting for us in Australia is that our market has been one of the worst performing this year - we are already down from the highs around 20% after yesterday and yet we supposedly have one of the best performing economies around - go figure

Is this a bargain hunting opportunity, or a sign to exit? who knows.

[Do Or Die 10]

Hi Tams,

 

I almost fell from chair at your first post (before edit). Let me clarify.

 

I'm done way past the stage of generalizations. Generalized one-liners can be expected from beginners but it was a surprise from you. I'm referring to type of statements like "MA crossovers do not work", "tap reading does not works", "Elliott waves can forecast magnitude of imminent moves", "past historical market behavior is not likely to be a guide for this unusual current event".....

 

To say not to refer historical market behavior puts everything in question- TA, FA, QA or whatever.

 

I think you did not read further to the first point. I mentioned several reasons why "this crash is unlike any similar past instances"...

[Do Or Die 10]

Point is for every fundamental bit of info out there that is bullish, there are plenty of bearish ones too, but its what the market does that is important (unless you have billions to slowly move in and out)...

 

"I like uncertain environments because that's where the opportunities are. That's where I can out-analyze other people."

 

For every fundamental but of info that is bullish, one can find plenty of bearish info. Similarly show a chart to 10 technical analysts- half of them go bearish while half of them are bullish. The funny thing is, if a majority of people using either FA or TA have a common opinion the market defies them by moving in opposite direction.

[Tradewinds 12]

currently working to liquidate my investment portfolio

 

Aren't there instruments that you can trade in an investment portfolio that effectively act like a short? I thought there were things that technically you "Buy Long", but they make money if the market goes down? That way you can use them in a retirement account. If anyone has any info on this I'd be interested to know about it.

[Do Or Die 10]

Traderwinds, there are essentially ETFs to short for anything major you want to short from around the globe. I have few in my portfolio and will be adding some. There are many sites dedicated to them and just a google will help, I will be happy to discuss.

 

I'm not sure how to use them in a retirement account though because hardly any of my short trades last for more than 9 months.

[SIUYA 11]

For every fundamental but of info that is bullish, one can find plenty of bearish info. Similarly show a chart to 10 technical analysts- half of them go bearish while half of them are bullish. The funny thing is, if a majority of people using either FA or TA have a common opinion the market defies them by moving in opposite direction.

 

yes - thats why predictions regardless of their basis are so tough/pointless/meaningless

I though the last comment was interesting...sounds like you are a contrarian, I prefer to be part of the crowd, and look for reasons in the price action giving me indications to exit the crowd for a short while, as often market opinions and market actions become divergent. (much like a trader not sticking to his plan)

have a good weekend

[Tams 20]

Hi Tams,

... I mentioned several reasons why "this crash is unlike any similar past instances"...

 

you mean you agreed with my view?

[Do Or Die 10]

you mean you agreed with my view?

 

I would like to agree with your view if I knew what exactly it is

 

I would love to disagree with any generalized statement regarding trading

[Do Or Die 10]

yes - thats why predictions regardless of their basis are so tough/pointless/meaningless

Thanks for mentioning that... my previous article on volatility and The Sin of Predicting and Anticipatory Trading are inspired by you.

 

have a good weekend you too

[phantom 16]

you are reacting to this at an emotional level... You are displaying your maturity level in dealing with a discussion topic.

 

look who's talking!!!

[calsprdr 10]

1. A similar drop like past 10 days (more than 10% decline in a healthy bull market) is a very unusual event. This has occurred so seldom since great depression that you can count the instances on fingers.

 

2. Relative Strength of financials has peaked out considerably. Note that financials are usually the leading sector to turn down at a peak.

 

3. Fundamentally stocks are NOT undervalued- there is sufficient room for price stagnation for few years or a further decline of around 20%.

 

5. This crash is unlike any similar past instances in the sense that it is triggered by global events and not just the US economy...Japan currently is a distinct case study

 

7. Institutional Funds are flowing from relatively riskier assets to relatively safer assets (from stocks to treasuries and gold).

 

Some notes:

1) In spite of the "black swan" nature of the *cascade* of global events that are causing the volatility in world markets, our own stock market's woes do not seem to mirror the magnitude of what's happening. Shouldn't the market be down a lot more??

 

2) Financial companies started our government intervention problems. Do you think investors are "punishing" them?

 

3) "Fundamentally stocks are NOT undervalued..." did you mean technically? All the fund managers I have heard say companies are the strongest they have been in years (cash on books, M&A positioning). Yes, technically everything is very weak.

 

5) Japan is indeed an interesting outlier. Its economy is weak but the repatriation of funds inside the country after all the disasters seems to have at least temporarily shored things up. The Yen has been beating up on the Dollar for four months.

 

7) The price action in gold has me baffled... shoots straight up then crashes. Wat up wi dat??

[Do Or Die 10]

1) In spite of the "black swan" nature of the *cascade* of global events that are causing the volatility in world markets, our own stock market's woes do not seem to mirror the magnitude of what's happening. Shouldn't the market be down a lot more??

Maybe it will 'correct' and the time for correction has just started.

2) Financial companies started our government intervention problems. Do you think investors are "punishing" them?

Refer to sector rotation model (I included a link to Relative Strength in first post).

 

3) "Fundamentally stocks are NOT undervalued..." did you mean technically? All the fund managers I have heard say companies are the strongest they have been in years (cash on books, M&A positioning). Yes, technically everything is very weak.

Yes technically they are weak, and fundamentally there is room for correction. This implies stop adding your investments (title of thread).

5) Japan is indeed an interesting outlier. Its economy is weak but the repatriation of funds inside the country after all the disasters seems to have at least temporarily shored things up. The Yen has been beating up on the Dollar for four months.

Global economy is a mess now, we both are on the same page.

7) The price action in gold has me baffled... shoots straight up then crashes. Wat up wi dat??

Refer to intermarket analysis & sector rotation again. At the start of recession money flows from stocks to gold and t-bills- and the prices of both advance. (T-bills may be a different story now because US rating downgrade by SnP, and the flow of money in this global mess.

[jackb 10]

 

3) "Fundamentally stocks are NOT undervalued..." did you mean technically? All the fund managers I have heard say companies are the strongest they have been in years (cash on books, M&A positioning). Yes, technically everything is very weak.

 

Take a look at historical PE ratios. All that the 2008 drop could muster was to get us back to historical mean territory of around 15-16. A real selloff should have overshot the mean as the taste for equities became too much to stomach. Of course, such an outcome was subverted (perverted) through political machinations. And that supported another quick (psychotic) move back above 20 as if all systemic risk had been resolved. Moving down to a single digit PE will bring about the kind of disgust for equities as seen in the 1930s. And that's a long ways down from here.

Edited August 7, 2011 by jackb
wording

[Do Or Die 10]

The Asian markets are sinking right now. An insider was smart enough to short $1 billion at precisely the market top. Note that this news is dated 25th July: Investors: The $1 Billion Armageddon Trade Placed Against The United States

[jackb 10]

The Asian markets are sinking right now. An insider was smart enough to short $1 billion at precisely the market top. Note that this news is dated 25th July: Investors: The $1 Billion Armageddon Trade Placed Against The United States

 

Short bonds at the top? No.The bond market has exploded to the upside since July 25th. This trader is getting killed!

[Do Or Die 10]

Short bonds at the top? No.The bond market has exploded to the upside since July 25th. This trader is getting killed!

 

Yes the bond market went up since stocks going down, but he was betting on Treasury futures and supposedly made 1000% return on that trade:

Did George Soros win 10/1 return on S&P's US credit rating downgrade? | Mail Online

 

10 year T-notes

[SIUYA 11]

maybe they were exiting a trade

[MightyMouse 12]

If he exited, he certainly picked a really poor exit. If it was a bet, he should have bet the other way. Black and Red