How I'm Identifying the Fear/Bear Boundary

I had an epiphany yesterday, a moment of clarity if you will. I figured out how to articulate my view on the current market.

First, this came about from a small trade I did early in the day Thursday. With SPX near 882, I started to buy back the Statoil (STO) I sold in May. Specifically I sold about 25% of the position back in May around $43. I bought those shares back times two around $16.10.

If that is not clear, if someone sold 100 in May they bought 200 yesterday.

Somewhere between SPX 900 and SPX 1000 there is an important Mendoza line that marks the difference between normal bear market and oversold freak out.

I don't know exactly where that line is but at SPX 900 or lower I tend to think more about re-equitizing and up over SPX 1000 I start to think about defense (either selling or buying the double short ETF (SDS) back). A bigger idea is that a portfolio will probably look a little different at the end of a bear then at the start of a bull. The dance between 900 and 1000 is perhaps where the transition needs to occur.

This is not about bottom calling but more about the understanding that the world is not ending, most companies will survive, and a new cycle will start even if it takes an uncomfortably long time to happen.

I talked about not having a great feel for the short term (sometimes I get hunches) and I think contributing to that has been the inability to articulate this 900-1000 theme. While I still don't have a feel for the bottom in terms price or time, this notion of scared prices at SPX 900 and normal bear market prices at 1000 (just round numbers so don't obsess on them) does make things a little clearer.

Buying stock below 900 was not comfortable. I have no worry about the world ending (metaphorically) but I'd obviously prefer to minimize whatever emotion any of our clients might feel. The bottoming process, a process that can go on for a long time, should be uncomfortable. If we go down I may buy something else and if we have a meaningful rally, as mentioned before I may sell something (or buy double short).

Comments

[Paulo:]

Yeah, if you don't think the next Great Depression is upon us or lurking around the next corner, re-equitizing by quickly using some astounding intraday lows to average down the cost of solid stuff you already have is one strategy.
But do you really want to get back into SDS again right now? Have a look at the chart.
And stop losses in this kind of volatility can lead to some unwanted results!
One way of hedging any re-equitization is simply not buying anything you are not prepared to keep for the long term, because you might have to.

2008 Oct 17 04:52 PM