Saturday, January 05, 2008

01.05.08

John Murphy warns that the S&P closed below its 20 month moving average. It increases the probabilities of a bear market. Gary K (which I'm listening to last night's broadcast now), is sounding pretty ominous: "We are in a bear market for stocks, and there will be more to go."

Something that I've come to appreciate and understand better is the concept of "probability." I listen to people who state expectations in terms of 'probabilities' rather than emphatically stating that 'this' will happen or 'that' will NOT happen. No one knows what will or will not happen in the future with certainty. One has to find empirical signposts--and the more empirical signposts one gathers it increases (or decreases) the probabilities of a particular outcome.

Early last year there was much anticipatory chatter about the coming bear market. Three tops and dome and other such stuff. John Murphy, Martin Pring, the Hirsch brothers among others were talking about it and pointing it out in all of the charts. They were wrong, and the market went on to make new highs. Largely without me! The technical conditions producing current bear market chatter are not anticipatory, but rather a reporting of realized breakdowns in the indices.

It is certainly a time to look at one's exposure and protect capital accordingly. I find it an interesting paradox that the counsel of many advisors is to stay long in such markets. They would be the first to counsel not to short in an up market, but the obverse, staying long in a down market seemingly poses no dilemma.

I had some NTRS puts that I sold on Friday for a 36% gain. It is breaking down, and I'm suffering from seller's remorse! It wasn't very many, but I feel a rate cut coming in my bones, and I think that the financials will take off--albeit initially. I would surmise that a cut will be more than 25 basis points. That's just opinion, not grounded in any fact other than the political theater is rather dependent on the economy NOT tanking for the Republicans.

I have some THI puts and 2 DE puts. I bought some DUG in my speculative account. I don't see oil staying at this level--particularly with most of the developed nations going into recessionary mode.

--------------------------------------------} On a another note......
A reader writes:

If you go to Big Charts and use PE and Yield as your indicators then companies like WFC and DRE are looking historically attractive. This is an idea for LT investors like Gemma. Definitely can overshoot though if things start to accelerate. Some of these names are 50% from their recent highs. I'd stay away from retail REITs though. DDR for example can sport a yeld north of 10 when the crap hits the fan. I'd back up the truck then as that's the expected LT hold return for stocks even w/o appreciation! A very simple way of winning this game



8 comments:

Anonymous said...

The crazy thing is Leisa that the Adv?Dec line refuses to break down. Until it does, we can't completely roll over.

The "new information" we got last week is that tech is not a safe haven as Cramer and CNBC had been shouting. It never was if you had looked at the internals. It's adv/dec line was HORRID, and had been for awhile. The whole thing was being held up by RIMM, GOOG and AAPL. And those got taken out back and shot last week.

There has never been a recession without a bear market in stocks. We are in a recession right now. "The great probability" is that we see a lot more come off this market, with tech, energy and the other commodities finally taking some heat.

Cat

Anonymous said...

One other thing, if you use the function the reader mentions on Big Charts, use the complete data history to see what yields spiked to in the last consumer-led recession (90-91). You won't believe your eyes. It is these kind of fat pitches that made Buffet famous (73-74). Since then it's the magic of compounding.

Cheers.

Cat

Anonymous said...

Leisa,
This is just an idea for you to look at, MHS. I have some that was spun off from MRK a few years ago
at about 30.00 per share approx.
Sometime last year I added to my position at 70.00 , it now is around 105.00 per share & scheduled to split 2 for 1 fairly soon. I think it will still be a great stock to own in this market.
No dividend but in a good sector with all of the drug users growing in numbers. Its like death & taxes, you cannot avoid it.
Just my opinion! I still own the stock.

Vavoline6

russell1200 said...

"There has never been a recession without a bear market in stocks".

Maybe, but your sample size is small, and stocks in general do not track the economy well. Primarily because stocks often track inflation as closely as they do economic inputs. It they economy grows nominally because of inflation, stocks will often contract because the p/e multiplier will drop.

Having said all that, if a full blown ugly recession pops up, I agree that stocks are drop like a rock in real money terms.

Anonymous said...

r120-

Not "maybe". The sample size *is* small, but EVERY one had a Bear associated with it. Can you name one that didn't? I even pre-conceded your possible point by saying "the great probability". Are you saying anything different?

You are correct that stocks don't track the economy very well. Or earnings for that matter! There have been plenty of piss poor earning years where the market has done well, so I know a little market history too.

So could this be the first recession that doesn't welcome The Bear? Sure. It *could* be. Think that a shallow recession saves the speculators? It sure didn't in 2000-01. That recession wasn't even a blip. And don't tell me it was because the market was in a bubble. TMT was in a bubble. Growth stocks were doubly bubbly. The rest were at valuations whereby you couldn't help but make money so long as you stayed away from the others. Do we have any bubbles popping today?

Cat

Leisa♠ said...

Cat--I'm not sure that I understand the a/d line NOT breaking down. The ones that I've seen look not so good.


Valvoline: Jim Cramer has been touting Medco. It has been a very strong stock--you've done very well with it-congrats. To me, it looks a little extended here, but it appears to be the 'go to' defensive name. Thank you for mentioning it. Mark and Reade have gone to a place on the York river (friend's FIL's place)for the final day of hunting season. They are having fun even though no 'kills'.

Russell & Cat: In today's post, Martin Pring gives a chart of the relationship between the s&P and 20 yr bonds. Ultimately, the stock market is some combination of liquidity and fundamentals--the balance of which varies from time to time. Despite all the printing of money, I do not believe that it is increasing liquidity but rather filling a deeply dug hole. That hole being the one left from the nuclear blow up of structured finance investments and specious loans. Loss of liquidity also removes economic lubricant. As is mostly the case...follow the money (or watch the money swirl down the drain)--that will be the biggest clue on what the stock market and the economy is to do. No lubricant--rough ride that slowly grinds to a halt.

Anonymous said...

I do not believe balance sheets are in good shape at all. Too many financial assets polluting the numbers from the non-financial companies. You see this in the National Income accounts, which have had to throw in "dark matter" to reconcile with what the corporations are showing. When the tide is out, I think this gets revealed. This has been Andrew Smithers' point for some time. I believe him.

Cat

Anonymous said...

L-

Regarding A/D line, it is true that they are deteriorating but not to the degree normally seen preceding a fall. My supposition is that the energy trade and basic materials sectors have been quite sticky and that is the reason. Whether ythis is a distinction without a difference I do not know. No one can dent the bear market we have in banks and brokers, home builders, REITs and, to a lesser degree consumer discretionary.

Cat