How Oversold Are We? 21 comments
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I would certainly not like to be known as the "SpongeBob" of bottom calling (how about now, what about now?) - it isn't a fun game in these markets.
I was oh-so-negative in the summer of 2007 and ecstatic with the declines in January and March, when I was still short. But, I changed teams early.
Quite frankly, I was able to navigate the long side well, as the types of stocks in which I was investing proved to perform quite well despite the pressures on the market, even into the end of Q3 (just 11 very long days ago). In late September, I shared my views regarding "the bottom" being near if not even behind us.
While I may have been right if one assumes I meant in time but not price (God help us if not!), I, like anyone else who was long any stock, have had my proverbial hat handed to me, stuffed down my throat and et cetera. It hasn't felt good - that hat was a hard one. A long-only portfolio that I manage was actually up 1% YTD through quarter-end, but now is down a whopping 17%. I guess that's not so bad relative to the market, but it's very bad.
What now? While most of the elements that were signaling a potential bottom are still present (to an even greater degree, obviously), I still can't be more confident than I was then (which was more hopeful than declaratory) despite the plunge in prices. As a reminder, here is what I was looking at:
- It's that time of the year
- We got the spike in VIX
- Credit spreads reflect dire pessimism
- Put/Call and sentiment ratios reflect dire pessimism
- We have a "confirmed rally" according to IBD
- Market strength in early recovery sectors
- Valuations are extremely low
- Rates are likely to stay low
- ***The right solutions are in the public domain now
We can certainly take off the "confirmed rally" - it quickly failed (as I pointed out might be the case). For the most part, though, all of these indicators have become more pessimistic (which is positive).
One aspect that I didn't include two weeks ago was the level of "oversold". There are many ways to measure it, and, no matter how one looks at it, suffice it to say that a record drop in a week from already oversold levels leaves the market extremely oversold. As we have seen, this is no guarantee that it can't fall further or become even more "oversold".
With that said, I wanted to share an indicator that I use: The number of stocks above their 50dma. The S&P 500 has just 3 (less than 1%): Chicago Mercantile Exchange Holdings (CME), J.P. Morgan Chase (JPM) and UST (UST).
I guess it could go to zero, but this level is unheard of. Perhaps the guys at Bespoke can look into the statistic as it pertains to post-9/11 or the lows in 2002. In the S&P 400 (Mid-Cap), there are 6 (1.5%), including a tech stock, a retailer and four financials. In the S&P 600 (Small-Cap), there are 12 (2%), including a home-builder, a drugstore being acquired for cash, a food distributor, 7 financials and 2 tech stocks.
Bear markets wipe out typically 1/2 of the previous bull market, but, as measured by the S&P 500 from its close this past Friday, we have retraced 84%. Of course, this isn't just in our country but in all of the major economies.
Anyone who can confidently say that things can't get a lot worse is most likely fooling himself or herself. Just as one can't tell how far the pendulum will swing to the upside, it is impossible to estimate the overshoot downward.
Traditionally, lower prices bring in buyers, but, in a deleveraging world, they bring in more sellers. It is this process that has caused the traditional measures of sentiment and volatility to improperly signal a potential bottom.
I certainly don't know how much worse it can get in the short-term. And isn't it funny how when the short-term is so disastrous that the focus shifts from the long-term? After all, if you can't survive the short-term, who cares about the long-term? I remain hopeful that stocks, which tend to be a forward-looking discounting mechanism, have over-reacted, but I sure have no real inside information there.
To me, this market feels a lot like the oil market a few months ago. You may recall that the day oil peaked, it gapped up in the morning, climbing inexplicably yet again. It was what is known as an "exhaustion gap", where it gapped up to an all-time high and then never saw that level again.
We are down almost 50% in a short period of time since then. What we didn't know that morning was that there was a collapse of a gigantic speculative trade, with a massive short-covering.
Well, I am not so sure that Friday was the final low for stocks (obviously), but it had many of the markings, as the lows on that gap down from the open served as the bottom for the day. We know that there are many, many investors being forced to sell. What will we learn in the days ahead? How many Aubrey McClendons are there (Chesapeake Energy (CHK) founder who lost almost his entire stake due to a margin call)?
We know that the market will eventually rebound. Anyone who has bet on it recently, though, is hesitant to make that bet again. So, only a few will be able to buy "the" bottom. But that isn't the goal.
Long-term investors know that this meltdown creates an opportunity whether they buy the S&P 500 at the intraday low of 840, the closing price of 899, tomorrow's price of 750 (I hope not), or even next week's price of 1000 (hypothetically). The important thing is to have confidence that the bottom is behind or at least be willing to suffer until then.
So, with great care and humility, I will continue to search for compelling signs that the market has bottomed, though I know that it could prove to be false yet again. Unfortunately, it's anyone's guess at this time.
Disclosure: No position in any stock mentioned
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This article has 21 comments:
I expect you to do so shortly. ;-)
I am in limbo as I will not know what my first move on Monday will be until I can see which way the market flows or plummets (before the bell). I have bought what I thought was dirt cheap until I saw my stable buried so they fell even farther. Most likely they can and possibly will drop deeper into that casm of partial return.
I am a long termer but also have a fun fund which I am not having fun in..hell nobody is. When I hear the likes of Icahn mentioning fear and a great concern going forward how can the little guy not feel the same?
I am doing homework, I am reading the fundies, I am charting my stock 50 dma's. I know some of my holdings are sound with a backload of work and a grip of cash working in their favor and they too are beaten down. Their only saving grace as we sbhould know is there divvy; the only free lunch! I do watch JPM and it still remains above 40 smackers. I bailed on financials. Too uncertain but I know they will eventually rip.
Timing on the rip, I cannot forsee..who can? I will concede that even if I miss the bottom and it starts to climb I am hoping I can get in in the lower end and ride the wave.
Alan, thanks for keeping it real.. it is affirmation that I am following the right path in my gut.
The past several weeks the situation much different and it has reach irrational. and maybe not, reasoning as wealth destruction accelerates around the world. There are investable and lendable funds available but no one wants to take the risk of investing when the leading candidate in the presidential elections wants to raise taxes on capital gains and dividends. When the leading candidate in the presidential election wants to institute socialized medicine and the leading pharmaceutical companies in the world, those that have nothing to do with real estate, are plunging to twenty year lows. Companies that have absolutely nothing to do with real estate and debt, in fact these companies are debt free themselves, are plunging because the leading candidate for the presidency of the Unitized States is a Socialist.
The magnitude of the market plunge the last several weeks has a direct correlation with Obama's strength in the polls. People want to hide their money from the government. I know I do. The Obama Administration will, admittedly, redistribute the wealth while McCain is silent. The media is silent. The Wall Street Journal is silent. Those who don't understand that the greatest destruction of wealth the world has ever seen is taking place in front of their eyes while a Socialist is seizing power, a power that will adversely affect the wealth and culture of this great nation.
A Socialist, well bred for this job by powerful forces in and outside of this country, will destroy the country that many of us have fought and worked so hard to protect. Do the left-wing journalist, academics and activists actually believe that they and the country will be better under Socialism? If they are that naive they should study what the demise of their fellow travelers was when Marx, Engels and Stalin ruled the Soviet Union. The wealth was distributed to the politically powerful statists and freedom of the press, education and national wealth was destroyed. Individual incentive and productivity plunged and, finally, the country became one large gulag. If you think it cannot happen here, you are in denial. This has been planned for decades and the powers to be, and Obama is just a pawn, will get what we let them take by, ironically, democracy.
Where is the anger?
This is the dumbest statement ever uttered by the "experts" when no time frame is given. So next time you fell like saying that why don't you add something like in a year, in two, in ??
We don't need to repeat the mistakes of the Soviets just in order to reign in the anything-for-a-buck animal spirits of the wild west.
Steady growth without boom and bust has always been a desirable goal. Otherwise we are simply rolling the dice with a financial China Syndrome.
wefwef, you made a great move. i moved in with my 80% two weeks too soon, thinking those a-holes in washington would vote yes. now, i have to hold on and wait for the spot to put in the other 20%. good luck to you.
Instant Karma's gonna get you... ;-)
Funny I watched the bailout vote on CNBC and could see the proportion of nea to yea votes winning 2 hours before the newscasters noticed. Don't know why they didn't catch this. I pulled about 75% out over 11,000. I continued to watch and felt best to stay out that week as financials fell dragging down everybody else. (Had nothing much else to do but watch tv being off last week.) I believe the correction overshot Wed as P/E's entered the single digits. Friday was true capitulation if I ever saw one. I bought everything from equities to FNM minus energy on the lows that day around 8000. Market correction will balance to Wednesday's levels next several days. Mainstream is just beginning to tap into their 401k's for fear. Debt transparency and the recession begins. After a slow rally, set your stops and reinvest. There won't be many winners. I'll have a new strategy then, probably overseas.
Funny I watched the bailout vote on CNBC and could see the proportion of nea to yea votes winning 2 hours before the newscasters noticed. Don't know why they didn't catch this. I pulled about 75% out over 11,000. I continued to watch and felt best to stay out that week as financials fell dragging down everybody else. (Had nothing much else to do but watch tv being off last week.) I believe the correction overshot Wed as P/E's entered the single digits. Friday was true capitulation if I ever saw one. I bought everything from equities to FNM minus energy on the lows that day around 8000. Market correction will balance to Wednesday's levels next several days. Mainstream is just beginning to tap into their 401k's for fear. Debt transparency and the recession begins. After a slow rally, set your stops and reinvest. There won't be many winners. I'll have a new strategy then, probably ETF's overseas.