Markets rallied strongly yesterday over the news of more horrible job losses. This was a positive sign. Politicians everywhere are depressed, talking about “depressions”. I am reminded of the old adage from Fred Schewd Jr. that when the politicians are all wringing their hands in depression over the recession it is time to start taking your money out of Tbills and start buying equities. “But Danielle the sky is falling. The world is bankrupt. The free world is over.” Maybe. But more likely, not. How long will this “bounce” last? No way to know. Given the price thumping of the past 14 months, a retracement rally of 25-30% from here would just get us back to the 200 day moving average on major indices. 25-30% would be good. On top of the now reasonable probabilities for a retracement bounce, yields here are worth holding. A little reward for our risk is always appreciated.
Are the troubles over? Is the coast clear? No. Realists know that the coast is never clear. All we have are relative probabilities. Relative probabilities are starting to favour some risk taking again. Could markets break down again in 2009? Absolutely, the November 2008 lows are the low water mark we will be watching.
From a reader: “I wonder if you would mind posting your thoughts on how the race by governments to deficit spending might impact yields on interest bearing investments over the next 5 years.”
5 years from now, I think there will be inflation. In the meantime, there is no demand. There are falling prices and falling wage pressures. There is no inflation. The problem with people is they try and dress today for how they guess the weather will be five years from now. Truthfully, it is pretty much impossible to guess that far in advance. That is why we must always focus on what is now and what we can reasonably guess about the near future.
This means autopilot passive, asset allocations are generally a disaster. Even though that is the commonly recommended approach. The conventional wisdom is lazy. We have to think and assess every day. We can't fall asleep at the wheel. Ever.
Its rather like when people start on a new diet or exercise plan, and they ask, “How long do I have to keep this up?” The truth if you want a lifelong benefit? “For the rest of your life!”
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Hi Danielle,
Caught your interview on BNN.
Are you suggesting that sectors ie financials,tech for example are the the best at the moment or could one take advantage of the opportunity by simply buying the TSX or S&P 500 now?
Billb
Hi Bill,
if the market is going to rally significantly then it will lift most boats, so broad markets and lead sectors would work to participate. I prefer exposure with growth assets that also pay us while we wait.
Hi Danielle,
With the market down 5% today, it looks like you jumped the gun on your long position.
When does your sell discipline dictate that you need to cut your losses short?
B, One day is no trend, so nothing is proven yet. D
I realize one day doesn't make a trend, but it appears to me that a breakdown below spx 800 is imminent. I base this on massive treasury supply hitting this week (and thus sucking private capital out of the market) and the very bearish wave 4 structure traced out since the lows back in November.
At one point does your sell discipline dictate that you take a loss and wait for another appropriate entry?
Hi Danielle,
I saw your interview on BNN last week and you mentioned a final sort of flush out. Was today's action the start of this flush out and do you see this as the time to possibly get back into the markets?
Thanks,
Parm
of course. If we get a sell we will sell.
if present levels do not breach the November lows this is an accumulation phase, if they do break below November the risks to the downside remain significant.
Sideways churn usually breaks in the direction of the previous prevailing trend (down in the current case). That's what textbook technical analysis says.
Bernie, besides technical reading, you also have to look at history, and you seem to be splitting hairs over a few percentage points for entry or betting on the 1932 scenario, while people like Warren Buffet and Bill Miller say that case is only a 20 per cent probability, that's why they've established big positions at current levels, betting there is an 80 per cent chance that we have roughly seen the worst.
I would put my money with Buffet and Miller and Ms. Park rather than a rigid textbook analysis.
Put your money with Miller. He only lost about 70% last year.
I like to think for myself. Right now, I see everyone bullish including the bears. Note that famed bears Fleckentstein and Doug Kass are bullish.
Absolutely nobody is bearish.
I see a break of the lows and a big capitulation sell-off. That will be the buying opportunity.
This market screws most of the people most of the time.
Too many technicians. That's why we got a lot of false breakouts and breakdowns. You have to short the breakouts and buy the breakdowns.
Hi Danielle,
I am no technical analyst by any stretch but I am learning more about the charts. Yesterday's dramatic reversal has to be viewed as a positive I would think. I just wanted to get you opinion this movement. I am referring to the S&P.
Thank you,
Parm
Your right in that now is the time when you can claw back last years losses within this narrow ping pong trading range, if you have the stamina to trade like that. I'm saying legendary value traders lost last year and the odds suggest they won't lose again this year.
Playing ping pong you can risk losing the big picture, in my opinion, and get to confident shorting breakouts, maybe lose like people did with the bottom falling out last year.
Hi Danielle,
Heard you on BNN and then read the more detailed version in Investor's Digest. ( You got the front page, and Embry is actually agreeing with you – albeit he still brackets everything in the longterm. Any chance you can post the article and talk a little about it In particular, I'd like to know if you feel that the stocks and/or the bullion will go down with the same velocity?
I am still waiting for notice of your next speaking engagement in Barrie : )
Thanks as always for the clear thinking.