Thursday, October 23, 2008

Back in the Bear Camp

Last Tuesday I wrote the following:

For the time being, I will wait and see. My gut tells me that the lows of this bear have not been made yet, but I are trying to remain open minded here. There is still a lot of near-term risk here and a retest of Friday's low is likely over the next few weeks or months. Any substantial take out of those lows would likely lead to a test of the 2002 lows. If those lows are taken out, another crash (THE crash?) would likely ensue...

After I wrote that (at S&P 998), we basically sold off like crazy (S&P 865) and then rallied (S&P 985) and now we are at S&P 897, below where we were at the close of that horrible Friday Oct 10th (intraday low was 840).

I have become bearish once again late last week and have acted accordingly over the past few days. Today's declaration of a currency crunch is only adding fuel to the fire. I have bought SPY puts and am putting a few shorts on again. I did not like most of the "bullish" action of late (with the exception of Thursday, Oct 16). Given the 45% drop in the S&P thus far, I would have expected more than the crummy volume on the rallies.

The strength in the US dollar and Japanese Yen (I hold both), the lack of consistent up days and other indicators that I look at (Lowry's technical service among others) are not yet showing a convincing bull case.

For some "voodoo", we are currently smack dab in the middle of WD Gann's 49 to 55 day death zone (look it up ; 1987 and 1929 saw 55 calendar day crashes) until Monday, October 27th. In addition, there are a variety of important dates after that that go well in to mid-November that give any of my bullish impulses pause here. (I give thanks to legendary trader Jeff Cooper at for educating me about the importance of time and price).

I am loath to give a downside targets here as the volatility and the crosscurrents are enormous. However, I will say that it appears that we are heading for a test of that 840 Oct 10th level and if that doesn't hold the 777 level from 2002 comes back in to focus.

As I stated in the post from Oct 14:
If those lows are taken out, another crash (THE crash?) would likely ensue...
THE crash may not have been the early October version. We may be in a series of crashes or heading for THE crash. The good news? The time for this to likely happen is between now and mid November. Therefore, a bottom (perhaps but not necessarily THE bottom) is near in time.
The bad news? We are dealing with systemic risk where sellers simply swamp buyers and stocks can fall to unfathomable levels. The bottom in terms of price may not be near.

The most likely scenario is a test/undercut of either 777 or 840, but even the late 1994 levels of 450 are a possibility if systemic risk rears its ugly head via a 1987 style 1 day crash.

We are trying to deleverage 18-25 years of credit excesses in 18-25 months. As I have been preaching, this is not a garden variety bear market, as we all now know. This has been the fastest -45% fall in the S&P in the post WWII era. While most severe bears end at around -49%, the speed of the -45% decline (1 year) is possible proof that this one will be even worse. In addition, the unprecedented credit boom/housing bubble/derivative bubble and now a global intervention bubble make this very difficult to forecast.

In summary, we are at a very, very difficult juncture in economic and political history that our children and grandchildren will read about. Risk remains very, very high here.


Rick said...

"Risk remains very, very high here."

Long term, barring human extinction, there is no risk. You know that markets will recover. You, and every other investor, are patiently waiting until October is over. At that point, investors will pile back in causing a chain reaction mirroring the October sell off.

Investors are just sophisticated gamblers playing the odds. What fool wouldn't cash out in October?

The poor economic fundamentals existed well before now. This is just the October effect.

When sidelined investors see their opportunity, they'll cash out of US dollars and that currency will tank.

Adil Burney said...

Thanks for the comment, and while you may be right, I respectfully disagree. Yes, October is often a bad month, but so far, the S&P is down 22% after being down 9% in September. That chain reaction would be a 28% increase (assuming we close Oct at these levels). Possible, definitely. Likely, Absolutely Not.

Yes, one day markets will recover. One day, the S&P will make a new high. But unless you have a very long time horizon, risk is very high. The S&P is now at levels that it first touched over 10 years ago. When you factor in inflation and risk, your return since 1997 is very negative. If you invested at the top in 2000 or 2007, you are very negative.

Look at the Nasdaq. It is still 70% off its 2000 high after 8 years! What do you say to investors in Lehman or AIG? What about GE (down to 20 from 60 a decade ago)? Intel (15 from 75), Cisco (20 from 82), Pfizer ( 17 from 60). You get the point.

If you are buying today and holding for 5 years or so, you'll probably make money. If you are down 40-50% YTD, it may take you 5 years to recover. If you are ok with this, then fine, risk is not that high. I am waiting for the near-term risk to dissipate before entering this market. If it involves paying up a bit over today's prices, so be it. I am up YTD so I can afford to be a little late. Normally, I would be buying like crazy in this type of panic. This is not a normal bear market. This is a once in a generation bear market thus far and systemic risk is the issue here.

jen said...

I'm with you, Adil.

I recently saw this chart I'd like to share chart that shows the facts about the performance of one cash equivalent vs. other investments during the past (almost) eight years:

I think the time for you to remove the infamous question mark in your title is drawing nigh.

Rick said...


So we agree that long term (~5 years) the markets will recover.

I also believe (almost know) that some segments of the market will recover much sooner. By soon, I mean less than one month. The stocks that won't recover quickly are, of course, those more influenced by a recession. But look at GE and Dow Chemical. 10 year lows and paying high dividends. These are companies that may actually benefit somewhat from a recession through lower commodity costs.

I do think that the market has bottomed. Asian and European markets were down close to 10% on Friday, but the Dow and TSX were nearly unchanged. Investors are tired of selling. I think Monday will be huge.

GE will be among the first stocks to increase. I'll report back shortly to gloat, lol.

Anonymous said...

Rick, Rick...

"Long term, barring human extinction, there is no risk. You know that markets will recover. You, and every other investor, are patiently waiting until October is over"

More like waiting until the real bottom comes about. Say when the Dow hits about 4,000 or so? IMF is about to loan billions to countries on the brink of collapse, and you think the stock market will recover anytime soon? LOL

Expect L-shaped recession that won't see Dow at 14,000 for 15 to 20 years!

Adil Burney said...

Jen: You are right: the time for the question has passed. I have held off because I need to think of a new title as the 2008 is also coming to a close.

Rick: Thanks for the opposing viewpoint as that is one of the reasons that I started this blog. I will be honest that being bearish with the market already down so much is difficult for me. With the exception of the 1930s, every 50%ish bear had at least a sharp cyclical bull within the context of a secular bear. It is very possible that we are very close (days or months away) from that.

However, because I have dodged the bear thus far, I can afford to be a little patient. If I see strong signs that a new bull or even a multi-month countertrend rally showing up, I will write a post as such, and I will say that risk is lower for at least the short term. I am not going to try and catch the exact bottom, just as I began selling well before the exact top.

I agree that the economy was bad before, and part of this is the October effect. However, as Soros would say, this is reflexive. The sinking markets hurt confidence and wealth, which causes the economy to sink further.

However, I am not waiting for October to be over. Too many investors are already doing that, which could make it self-defeating. I am waiting for mid/late November, ideally. There is real risk for at least a few more weeks. What we are experiencing is not normal. It is a meltdown involving possible systemic risk, with credit default swaps, currency crises, derivatives, bubbles, etc...Say for example, purely hypothetical, if a large country defaulted (as Brazil, Argentina and Russia have in relatively recent times), what would that do? What if a large institution such as a Morgan Stanley or even a state government went under? I am not predicting that, just saying that nothing would surprise me here. This is not just hedge funds blowing up. This is the absence of buyers and lots of forced selling by everyone (retail, institutional, hedge funds, insurance). When the buyers show up and the forced selling ends, then I will buy what is clearly a reasonably priced stock market.

I honestly don't know where the market will be in 5 years. It should be higher than S&P 876, but it may not be. We could get a multi year rally and then be in a bear market in 2013.

As for GE, I hope it goes up, but a move from say 18 to 28 would not be anything out of the ordinary given its fall. GE Capital is the black hole there, and anything is possible. You could have used the same argument for GE or C six months or 50% ago. Those dividends could be cut as well. Feel free to gloat but maybe state your ACB if you do.

rick said...

"Feel free to gloat but maybe state your ACB if you do."

I haven't held any stocks in about 4 years. But today I bought 100 shares of GE at $18 for fun. I'll report back in a month.

Adil Burney said...

Rick, thanks for sharing that. Since you haven’t bought stock for 4 years, you are probably in good position to buy some GE here. Were you in cash?

I suspect that a big move (could be up or down) is coming and you very well may be up nicely, despite my comment on risk. Some of that risk has materialized as we are now back near the October 10th low. I am following a set of rules to get back in. I just want to be a day late rather than a day early here...

rick said...

"Were you in cash?"

I'm relucant to invest until my line of credit is paid off. We're using a LOC instead of a mortgage.