When the Going Gets Tough, the Tough Play Defense

This is a bear market. Bear markets eventually become very difficult for the masses and then at some point after that, they end.

All of those articles you've read telling you how 1974 ended up being a great time to buy stocks; late 1987, late 1990, fall 1997, summer 1998, late September 2001, late 2002 -- well, what do you think was going on then? I was around for most of those and fear within the investing public was off the chart and in several instances the declines were smaller than the current bear.

In the future, late 2008 / early 2009 will be looked at as having been one of those times. Late 2008 / early 2009 will be looked at as one of those times even if the bottom is SPX 600.

For the entire life of my website I've addressed this sort of thing. In early days I wrote about when I would take defensive action, then wrote about actually taking that action when the time came, and in the last couple of months I've been talking about the slow process of redeploying the cash raised in my effort to be defensive.

In yesterday's ugly selloff I bought a small position in the Consumer Discretionary Sector SPDR (XLY). I've been very underweight the sector because discretionary always does poorly during slowdowns. When the market turns, discretionary usually is one of the leaders, but even after the purchase I am still underweight discretionary.

If / when we follow through with another step down (here I am thinking more than 1-2% for the broad market) I have an order for something else to buy ready to go.

This has been the plan all along, as written about, and I am sticking to it. I would still have enough cash even if I buy something today to meet any reasonable definition of defensive, which will allow for wading in slowly as I have been doing.

At the point I hit the button on XLY, the SPX was at 867, which is down 44% from the peak and 40% YTD. I believe that is buying low; it may not be buying at the bottom, but if you believe no one can pick the bottom then all you can do is buy low. If down 44% isn't low, what is?

A real big risk floating out there that I don't think I've read elsewhere is that we get a huge rally that draws people in at, I dunno, SPX 1300 and then it whooshes right back down to 850. In that sort of scenario there will have been people who previously panicked out between SPX 1000 and 900 who get back in at 1300, or whatever, only to panic out again after another 30% loss. This sort of tail chasing is not uncommon and is the sort of thing that wipes people out.

Comments

[Topcat:]

Hello, set STOPs,.

2008 Nov 13 04:28 PM

[fjpenney:]

It's not only knowing when to buy, you have to know when to sell. On my blog, I advised getting out of the US market on June 11. I don't profess to have known how deep the sell-off would be. My timer indicated that a downward trend had started but, like all timers, it doesn't forecast the degree of a move in either direction. Until an upward trend develops, my timer won't go long.

This is an extremely difficult market and I suspect the elevated level of volatility will be with us for longer than we prefer.

FJP

2008 Nov 13 04:49 PM

[Alex Filonov:]

I thought that defense is cash and high-yield stocks...

2008 Nov 13 05:02 PM

[mn33:]

blah blah blah , babble babble babble

2008 Nov 13 05:17 PM

[bricki:]

It's easy if you remember the following two rules:

1. Buy low.
2. Sell high.

Right now it's low.

2008 Nov 13 05:27 PM

[Kunst:]

After the tech bubble, Cisco stock went down 90%. If you bought it when it was down 80% -- a screaming bargain, right? -- you would have lost half your money by the bottom.

2008 Nov 13 06:08 PM

[retard:]

You would not have lost half your money as long as you didn't sell. If you held, you'd see gains. That's the whole point. No one knows if the bottom will be down 80% or 90% from the peak, but you buy when it's a "screaming bargain" and then you hold until the stock's price better represents its true value.


On Nov 13 06:08 PM Kunst wrote:

> After the tech bubble, Cisco stock went down 90%. If you bought
> it when it was down 80% -- a screaming bargain, right? -- you would
> have lost half your money by the bottom.

2008 Nov 13 06:55 PM

[john the ba...:]

Huge market rally to S&P 1300 ...wow .... I want some of what he is smokin! More like continued volitility, then another 40% leg down in Jan/feb '09 and then just go sideways for a few years through a long worldwide econimic depression. Till eithor there is a world war or a green energy revolution around 2012.

2008 Nov 13 08:25 PM

[Smarty_Pants:]

"More like continued volitility, then another 40% leg down in Jan/feb '09 and then just go sideways for a few years through a long worldwide econimic depression. Till eithor there is a world war or a green energy revolution around 2012" - mark twains hairdresser


Keep in mind that the Aztec calendar ends on December 21, 2012. The person with the largest +/- differential on Seeking Alpha will win the Grand Prize, then the world will end, so don't sweat the small details too much.

However, if the Aztecs prove to be in error, you are probably correct in your analysis, or really close anyway.

2008 Nov 13 08:54 PM

[David Lentz:]

Say, Roger -- any thoughts on the apparent lack of letting the air out of the credit bubble? If this bear market is due to the "collapse" of a ginormous credit bubble, then we ought to be seeing some shrinkage in the total debt outstanding, should we not?

I've seen some disturbing stuff that indicates the debt-to-GDP ratio was still rising as late as August. Now possibly, this is due to the GDP imploding faster than the debt, but the numbers seem to indicate that the Fed+Treasury are pumping out new credit at a sufficient rate so as to keep the totals rising in absolute terms.

I'm wondering if you have seen anything similar (or anything that contradicts this, which just seems insane to me), and if so, what you make of it?

2008 Nov 14 09:42 AM