Aug

8

I would posit that every time an equity market set a 10% correction, defined in some quantitative way, it was a good time to buy. Often the definition of a correction is very fuzzy depending on whether one uses intra day or closing prices, and much latitude is often taken to try to prove the point.

Anatoly Veltman writes: 

Yes: if you are a perpetual Bull, a 10% discount can't be worse than a lesser discount. But that was the question I posed yesterday: are there market junctions, where such discount may be justified, and more discount is likely coming?

My proposition: yes, such junctions are quite possible in the markets. Temporary factors (like sub-prime credit, or ZIRP, or QE) might have produced such overvaluation at market peaks that a one-third price correction (and not just a 10% correction) is required to bring prices more into line with economic realities. In the process of such "one-third correction", you may still get a quick bounce off of a 10% level or any level. Is such a bounce a "good play"? Your stats may well agree. Yet others will prefer to use your bounces as a shorting entry point to continue position themselves within a greater decline phase. Both may be profitable plays. During a decline phase, "Short and hold" will prove profitable. But quick bounce-ups will also prove profitable, because they will be sharp. You are already having an over-20 handle bounce on some Friday short-covering, an odd Putin tweet, all kinds of mumbo. Yes, there are ebbs and flows for both sides.

On the precise sampling of "10% declines": why buying into a twentieth "10% decline" is supposed to produce the same success as buying into a seventh "10% decline"? Given the progressively increased valuations (which might have not been supported by corresponding economic growth), such study makes no sense to me. I only hope someone proves me wrong, and I am anxious to find out exactly why my reasoning is worthless.

Jeff Watson writes: 

While the sky is falling among the retail class of trader, and they are getting quite bearish, the fact is that the S&P is only off 4.22% from it's all time close on 7/24. Hardly any reason to shout "Fire" in a movie theater. We're nowhere near correction time yet. And when it does come, there will be great opportunities for the nimble minded trader. I've been in a bear market in the grains for months and am quite enjoying it, but then again I'm one of those who learned the ropes in a decade long bear market.

Gary Phillips adds: 

It all depends on one's time-frame. As a leveraged trader, one makes short-term decisions/trades, manages the risk/ keeps draw-downs to manageable levels and occasionally turns short-term winning positions into longer ones. Since early 2013, the average spx one-year return has stayed above 5%. Today's low was at the ~4% level and at major technical support, i.e., the highs of the previous 3-month-long trading range, so a bounce back to 1950 should not be overruled. Nevertheless, p/c ratios, breadth, and volatility indices, remain on sell signals, leaving the market intermediate term bearish. Long term, everybody knows the " bubbly" situation, yet even the valuation bears see the market going to 2250, and as long as Japanese funds continue to diversify out of the yen, Chinese investors continue to park their money outside of China, Draghi's narrative is accepted, and interest rates don't rise dramatically. The final tipping point is probably years away.

Jeff Watson replies:

Everyone knows the "Bubbly Situation"? I guess I need to be more enlightened because I don't see that at all, or am unable to see the forest for the trees. Anyway, one has seen the effects of a market where "everybody knows." In those kind of cliche cases, everybody usually gets a hard kick to the gonads from the Mistress. Since the stocks as a whole haven't been going down as much as "everybody" thinks they should, I wonder who is on the other side of the trade, buying? After all, the Fed is working 24/7, 3 shifts a day creating money that the flexions get first crack at. That should be pretty bullish for stocks. But then again, I am the absolute worst stock picker on the planet and what do I know? 


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search