Wednesday, October 29, 2008

Is risk lower now?

I have been warning for some time that winter was coming in the stock market and warning that that risk is high even as recently as this week.

Now that we got a big rally on Tuesday and the Canadian dollar soared today, has risk been lowered?

I am not sure yet. The ability of the S&P and Dow in recent days to stay above the October 10th lows (S&P 839) must be respected. Normally, if the market is truly going lower, it will fall right through the key level. The bears tried for about 2 1/2 weeks and it did not. I was actually quite short at the start of the day Tuesday, but I covered almost all of those positions around 2pm when I saw the S&P rally through a key level 882. I was fortunate as once the market got through that level, it was one of the biggest up days ever as the S&P finished at 940 (up 11%). I also switched a lot of US cash to Canadian cash late Tuesday and a little this morning as the dollar rallied about 5 cents from 77 to 82.

Now what happens? It could go either way, in my opinion.

Longer term, I remain confident that we are still in a bear market. That does not preclude a multi-week or multi-month 15-20% rally (half in one day?) especially since we were at record oversold levels prior to yesterday's rally.

Shorter term, I still believe that there is risk. As mentioned, there is risk here until well in to November. Also, to make me bullish, the market first needs to close above today's high (970), then above a bunch of levels in the upper 900s/low 1000s. If we get to those levels, and the internals look good, I will be on board for at least a bear market rally. I acknowledge that I will have forfeited some nice gains from yesterday's low, but that will be a small price to pay for preserving capital in one of the worst bear markets of all-time (thus far).

I also suspect that if the market can hold these gains for two more days, then it will be November. Then the bulls will be able to claim that a classic October bottom was made and the central bankers were able to preserve the system. And that bullish may lead to a risk of at least another retest of 840. If said retest fails, look out below (S&P 777 or 738 or gasp 662?).

I will keep you posted on my thinking. For now, I am mostly in Canadian dollar cash and I did a little nibbling on some gold stocks today. I could change my mind at any time and if I feel that this rally will peter out like the ones from mid October, then I may go heavily short again.

3 comments:

rick said...

"Now what happens? It could go either way, in my opinion."

Isn't that always the case, in any market?

I have some opinions, but I'm completely unqualified. Here goes anyway:

Short-term decisions are very risky - we might as well flip a coin.

That's why I think it's better to make investment decisions with a 5 year plan. Make picks based on value and growth potential. Growth potential is determined by trends and economic conditions.

For instance, we're in for a recession, but that has already been priced into the stocks. The time to make decisions based on a coming recession was 2007. Will we be in recession in 5 years? Probably not. If you think so, then lets look at safe havens - large cap, low dept stocks providing essential goods. Take boeing which has a backlog of sales for fuel efficient planes. If you think the recession will end soon, then buy Corning which happens to make flat panels and fibre-optics. The stock continues to be hit hard, but it has cash to weather the storm and its products will again be in tremendous demand.

FWIW

Adil Burney said...

Rick
I really enjoy your comments."It could go either way, in my opinion." Isn't that always the case, in any market?
Not in my case, I was correctly bearish from late July/early August 2007 and I am up in the bear market (I invite you to go back to my bearish postings dating to early 2008). I did not say at that time, it could go either way. I am saying that now that we are down 40%. I agree that a garden variety recession is priced in. The worry is that a severe recession (perhaps the worst since WWII) has not been priced in.
Using a 5 year outlook, how would you have seen the recession coming in mid 2007? After inflation, I doubt that the S&P will be higher in July 2012 than it was in July 2007. If you are fine investing in a secular bear market (where your money has done nothing since 1997, not even including inflation!) for 5 years, then I think your approach is fine.
I am trying to preserve capital in a bear market (so far, so good) and participate fully over the life of the bull market. Despite what Wall Street and Bay Street tells you, it can be done. I will put together a post eventually on some basic steps that an investor can use to avoid the worst of a bear market.
Adil

rick said...

"I agree that a garden variety recession is priced in. The worry is that a severe recession (perhaps the worst since WWII) has not been priced in."

You are not playing the odds if you're banking on a 100 year depression event. In addition, even in the depression, there were significant rallies. Worst case scenario, there is money to be made in some stocks some of the time by staying ahead of the speculators.

"Using a 5 year outlook, how would you have seen the recession coming in mid 2007?"

Good question. The recession was caused by the real estate and oil bubbles. Using the 5 year plan, you would have invested in 2002 and sold in 2007. You have to be ahead of the speculators. I haven't owned stocks in 4 years, but I guess I got lucky (at least temporarily) by buying real estate in 2003.

What is the next boom? The electrical revolution. Advancements in solar technology in combination with the next increase in oil prices will make solar electrical production viable. Then there is the inevitable switch to electric cars. Commodities like silicon, copper, aluminum, and lithium will skyrocket.

"After inflation, I doubt that the S&P will be higher in July 2012 than it was in July 2007. If you are fine investing in a secular bear market (where your money has done nothing since 1997, not even including inflation!) for 5 years, then I think your approach is fine."

Na, I'm not fine with that. I wasn't investing during the last 4 years partly because I thought stocks were overvalued. I was wrong with respect to oil. That run the best example of speculators gone wild since the dot com boom.

Now I see good companies at 10 year lows. Maybe their stocks will spiral down, but not likely. Again, if you are betting on another 100 depression event, the odds aren't with you.

I believe that you can't win by diversifying in the stock market. Investment advisors preach diversification and they are wrong. There is a finite amount of liquidity out there and it just switches from one bubble to another. Again, you have to be ahead of the speculators to make money. Mutual funds don't make sense in a world of speculators. You have to invest in trends, if you can identify them.

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