I have no idea what the market will do on Monday or later in the week but this might be worth bringing up now in case I can't post in the morning.
If there were to be a actual crash like in 1987, what would you do within your portfolio? There is no right answer for everyone and for some people the right answer is to do nothing. Whatever is right for you you should know in advance what you would do or maybe have a couple of different plans in place.
If the market did crash, I know my double short would go up and I expect (but maybe not) gold would go up. Assuming no crash (which is the better bet) I have figured out how much double short to add for each account now that the market is below its 200 DMA and that is one option I might pursue but if the market fell 20% tomorrow I would be more inclined to sell what I have as opposed to buy more. Further I can see where some of the foreign stocks would not go down as much especially if the "crash" came later in our session. There might be a delayed reaction the following day in the ADRs and so I might sell an ADR into the crash too.
I might also sell my gold in that type of scenario. I don't have it exactly figured out to the minute each exact action I would take and when but generally speaking I have a plan in place if there is a crash.
This becomes even more important for people who are prone to emotion.
The idea of lifting hedges in the manner described may seem counter intuitive but there is no bigger panic than a one day 20% decline. After a crash fear will be off the chart and while I may not have the stones to buy stock for clients on the day of a crash, it doesn't change the history of crashes; they exhaust almost all of the sellers.
Someone will probably leave a question asking what if it keeps going and while it might, I am unlikely to think this is any different than other big panics. I would also add that even though I would expect a snapback after a crash, selling into that snap back might be the better trade but I'll weigh in on that if it happens, which again I am not expecting.
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19 comments:
I would do nothing. I have aa much at risk in stocks (about 32%) as seems appropriate now. The rest is bonds of various high quality types, cash, and an odd sort of bear fund - Hussman Strategic Growth.
Fred
Good post; flexibility is key. FWIW the bond markets seemed to recover at least a semblance of balance by the end of last week so I'm hopeful the equity markets will settle down a bit as well; repricing risk certainly can become contagious but earnings remain reasonably good as do global markets generally so (fingers crossed).
If the market is still reasonably healthy we should see a rally even if the day starts down but I'm tactically reorientated to increased volatility regardless; i.e., With the exception of a few, select homebuilders and mortgage lenders who I intend to hold short until they die I'm prepared to lighten up on some short positions but not vix ...yet.
OTOH my strategic portfolio has hardly changed in over a year -- net long but strongly hedged -- like watching bloody grass grow.
Good luck to all tomorrow.
"There is only one side to the stock market ...not the bull side or the bear side, but the right side." - Jesse Livermore
20% decline seriously? Buy as much as I can over the next few weeks.
The volume in short ETF's last week was ginormous, and should be big this week as well. They appear to be better hedges than gold or bonds, in my opinion.
The strategy I hear most is: move to cash, shorts, and
keep a prudent portion in stocks. Seeing the foreign markets march in lockstep with the fall on Friday makes them a poor hedge, although the currencies
FXE, FXF, FXB, were strong last week in spite of the general EEM's, ADRE, EFA, etc. tanking. Does anyone agree that now is a good time to stock up on the pound, swiss franc, and the euro?
Thanks, Scoot.
Sorry, I forgot to add this:
Greenspan (a bipartisan putz, Andy), with the aid and abetting of Congress and the Presidents got us into this mess by maintaining low rates. Doesn't the Fed therefore bear the responsibility for getting us out of the liquidity problem now? Once foreclosures start hitting the market like Krakatoa, that will be the mother of all tsunamis in my opinion, and unless that is dealt with in a hurry......
Scoot
Roger .. You are correct; each of us will have to decide. This is what I wrote on my blog:
I spent this weekend investigating the market panic sell-off late in the session Friday. Most of the S&P 500 loss for the week, about -2%, occurred in the last hour of trading! And the catalyst for the sell-off was the statements from the late day Bear Stearns conference call. "These times are pretty significant," Sam Molinaro, Bear Stearns chief financial officer said on the conference call Friday. "It's as bad as I've ever seen." (See “ Bear Stearns Bares Its Soul”)
Pretty scary for the credit markets, but when there is blood on the street isn't it time to start buying? I'm spending my time reviewing RSI's recent ETF picks and preparing my buy list. Hang on for a wild ride.
You can view my blog at http://rocketscienceinvesting.blogspot.com/
Why "experts" state that the Fed should lower rates befuddles me.
That approach dictates a "once shame on you, twice shame on me" reaction.
When stips on loans are raised to get cheap low rate financing the race card is played, and banks are beaten like a rented mule to give out money without even a pretense of qualification.The cycle then repeats with a vengence.
Raising rates would be a big mistake at this time, imo.
There’s a flip side to “buy when there’s blood in the streets” , I think it goes “ If you can keep a cool head while those around you are panicking, maybe you don’t understand the situation”.
Re the poster that said the Fed got us into this mess, there’s truth to that, but I think there’s more truth to the idea that Moodys/Fitch/S&P may have dropped the ball when they rated mortgage securities. I suspect a whole lot of people bought AAA, AA, or A CDOs that are not behaving like AAA, AA, or A debt instruments and that’s behind the sudden margin calls and institutional credit down grades we’ve been reading about. I could be wrong,
And from an investors perspective, if Moodys/Fitch/S&P dropped the ball rating CDOs, then why is there any reason for confidence regarding their ratings for junk and emerging market bonds? Whoops, there goes the bond market, and then the stock market.
My guess is that the market is worried about a systemic failure at Moodys/Fitch/S&P as highlighted by the mortgage debacle. It’s a huge issue for people that hold CDOs or bonds.
The market may or may not recover tomorrow, but I think the rating issue, and consequently market volatility, will be with us for a while. It could end badly if investors decide that Moodys/Fitch/S&P have sold out or are not competent. It's already ended badly for a number of investors.
I would be dumping my balanced funds and buying leveraged stock funds and stocks on margin across the board. After hopefully getting a bit of the down by day-trading options.
BusinessWeek Cover
'Bonfire of the Builders'
Is it time to cover housing stocks?
I've heard this myth before, but I may have to give Jamie and Adam of MythBusters a call.
It certainly seems that a bottom has to be near on the homestocks as chapter 11 is the next step.
Many, but not all Roger's readers have plenty of time every day to deal with these issues whenever they come. I don't so I am depending on stops, which I admit are more of a blunt weapon. Last week there was a family crisis which would have made it impossible for me to trade on several days.
Also does anyone remember from the last market crisis that some brokerage websites were not accessible. I think part of the kind o planning Roger is talking about has to be how to trade if you can't get through easily.
Linda
no broker access? while it is hard to believe this is still an issue, Linda makes a fantastic point.
every industry has its leaders and dogs
this is what u do people
obvious you bought the leaders in each industry
NOW is the time to sell covered calls on them leaders AND THEN PAIR TRADE each of those leaders with a dog in that industry sell the dog stock and sell its covered puts
first you are selling premium at juicy premiums when the VIX is peaking IDEAL TIME
second you have neutralized partial market risk by PAIR TRADING your portfolio
another way is to write covered calls on the stocks in your portfolio and write naked puts on the stocks you would like to add to your portfolio if price got cheaper and then use that premium to underwrite bear spreads and maybe a bull spread on CBOE index options and eCBOT and CME index futures
reality is price is always in flux and never fixed so you can never fix value either, either fundamentally or technically, value is always reassessed
HOWEVER
volatility is measurable and has very definable peaks and troughs
volatility is peaking around here but it will also measurably subside
THAT IS THE GRIP
this emotional peak displayed by the peaking VIX is not over yet as things are still swinging on the 200 ema
but it will subside once all the emotions get washed up and left to dry, only to rear its head again some other day
all you can do is bad emotional stuff, nothing, or profit from the rich premiums going forward
peace
I had a good laugh at this unintentionally pointed news ticker item:
Mannkind downgraded at Oppenheimer
8:57 AM EDT
MNKD was downgraded from Buy to Neutral, Oppenheimer said. Partnership
delays will affect Technosphere, and the company lacks potential
catalysts by the end of the year.
If it would've tanked today? I'd rotate into more aggressive holdings tomorrow.
And if that didn't work and the stock market went to $0, I'd sell whatever I could and buy ammunition. LOL.
...and whiskey.
Got a nice, strong clearing rally as expected w/ no improvement in internal divergences or liquidity so I rotated some longs into shorts.
Do believe I'll have a shot of the good stuff now; prosit!
Roger,
I recently read your TheStreet.com article on hedging with double short ETFs.
So yes, I would hedge using the SDS, double inverse $SPX, and if a crash occurred, my $SPX would have a profit.
I've also written an article on how I'm Staying Calm during these wild and volatile times:
How I'm Staying Calm during these wild and volatile times
I also explain a real hedging situation using SDS during the most recent correction.
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