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I inherited a modest sum when I was in my early twenties, bought an apartment, invested what was left over, and then proceeded to work for 20 years as an attorney at law firms in New York City and Washington, DC. I saved aggressively because I thought I could get fired at any time, and invested... More
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  • Performance and Happiness
    There is an excellent article in the New York Times entitled "But Will It Make You Happy", which examines the causes of happiness, and questions the extent to which buying more and better stuff can contribute to your happiness. The article is relevant for investors because at the end of the hunt, investing is all about making money, and your success as an investor is typically viewed as a simple function of how much money you have made. But if you are an investor who is asking larger questions about his or her personal happiness, don't you need to step back and ask what you hope to accomplish with the money you will hopefully make as a result of your investment activity? After all, if the Times article is correct that buying more stuff will not make you happier, why bother spending time perusing stock prices and trying to figure out the next big thing and how to buy in at attractive levels?

    What drives a number of investors, myself included, is the pleasure of getting it right. It feels successful to make an investment that, in retrospect, turns out to have been a good one. And when I feel successful, it makes me happy. But I am also cognizant of the fact that much of any investor's performance has to do with luck, as much as anything else. I realize that if you measure your own sense of personal success by what the Dow Jones did today, you're setting yourself up for a potential disappointment. You are, in fact, ascribing performance and self worth to something that is entirely unrelated to you, your intellect, and your very being. Delusions seldom produce lasting happiness. I don't think it is healthy to feel great when your stock portfolio is soaring higher, or want to jump out a window whenever the Dow Jones crashes.

    So getting back to the recent Times article, it struck me that a healthier approach towards being a successful and happy investor is to look at two metrics:  (1) returns on your portfolio and (2) your personal expenses. To the extent that you can maximize the delta between these two factors, I'd say you are more successful than any investor who earns 10% but spends 11%. And you can certainly control your personal expenses better than you can control the Dow Jones, so this dual metric does indeed pertain to you and to your personal abilities.

    If you derive happiness from feeling like you're succeeding at what you do, try this. Next time the markets tumble and your net worth takes a hit, ask yourself whether you'd rather own a $200 pair of sunglasses, or $200 worth of corporate stock in a company you believe in. If you'd prefer stock to sunglasses, you can hopefully derive some satisfaction in the knowledge that as an investor, you must be doing something you enjoy. That's success in itself.    

    Disclosure: None
    Aug 10 4:17 PM | Link | Comment!
  • Market Park Ranger
    Do you know what I find annoying? Market prognosticators who declare, seemingly with 100% confidence, that we are either in a bull market or a bear market. The annoying aspect of this sort of commentary is that it ignores the plain (and to my mind, obvious) fact that nothing in life is certain. The very best that an asset manager can try to do is to gauge the probability of whether we are in a market destined to decline or to fall, and then, to allocate capital based on those probabilities. And, most importantly of all, the asset manager must factor in the probability that he is wrong, and hedge against himself or herself.

    With that background, where are the markets headed over the next few months? Are we in a bear market that is destined to go lower, or a bull market destined to climb new highs? Based on the information I see TODAY, my best guess is that we are heading lower. Why? Mainly for technical reasons. But first, the practicalities. We have seen positive earnings news, but the market has reacted without much enthusiasm - particularly last Friday and, if futures markets are any indication, today as well. This signals to my mind that investors have priced high expectations into share prices, and with high expectation comes the increased likelihood for disappointment. Disappointed investors, and opportunistic bearish traders, tend to dump stock and take down prices. So practically speaking, this is something you often see in a bear market. If you are seeing it now, you can deduce that you are probably in a bear market and not in a bull market, all things being equal. That's part of the story. The other part is that we haven't really gone down too far yet from the market peak back in April, and the period of declines only started back in May, which is not so long ago.  Bear markets typically last a while, and typically go down more than 10%. What that means is that if we are in a bear market, more pain probably lies ahead of us than behind us.

    Now, technically speaking, what we are seeing are chart developments that are very typical of a bear market, and not very typical of a bull market. Because we see technical developments that are characteristic of a bear market and not a bull market, it's safe to assume we are in a bear market. It's basically what you would do if you saw a pattern of stripes in front of you and I asked "do you see a zebra or an elephant?" Obviously, you don't see either animal - all you see are stripes - but you could get comfortable that grazing under those stripes is more probably a zebra than an elephant.

    In bear markets, the 50 day simple moving average (the "SMA") is below the 200 day SMA, and the 50 day exponential moving average (the "EMA") is below the 200 day EMA - at least until the market hits a bottom that nobody can identify in advance. Today, we see one of these characteristics in the S&P 500 - the 50 day SMA is below the 200 day SMA, and the 50 day EMA looks like it will cross the 200 day EMA today or later this week. We see both of these bearish technical characteristics prevailing in the Dow Jones World Stock Index and the Dow Jones Global Stock Index. We see the same thing across multiple broad based national and international exchange traded funds as well - Vanguard Total World Stock ETF (ticker VT), for example. So, from a technical perspective, we know that the S&P 500 is not some kind of outlier. Investors are dumping risk worldwide, and it appears that an ebbing tide is sinking all ships. Not normal to see this in bull markets.

    Another hallmark of a bear market is that moving averages tend to act as trading resistance and not as support. Since May, each time the S&P 500 has bounced up to the 50 day SMA or 50 day EMA, it has gotten stuck for a couple of days, and then sold off violently. Most recently, that's what we saw back on July 12th, and in the ensuing trading days, the markets have sold off violently, knifing through the 200 day SMA and 200 day EMA like a freight train through wet tissue paper. Again, typical bear market behavior, and not typical bull market behavior.  

    Another favorite technical measure I like to use are the weekly SMA and EMA. These are less volatile, and screen out more of the market noise. Another characteristic of a bear market is that the 20 week SMA is below the 40 week SMA. That is not yet the case in the S&P 500, but looks like it will happen this week unless we see a stunning recovery in stock prices. But a stunning recovery seems unlikely for another technical reason. The weekly moving average convergence/ divergence oscillator (the "MACD") show that the difference between short term selling and long term investment momentum is picking up steam, and both have just now broken into negative, net-selling momentum. One thing that is very typical of a bear market is that the MACD remains in negative territory, and short term selling momentum is lower than long term buying momentum. That is something we see now in the S&P 500. And what's worse - the exact same technical posture is prevalent across the global stock markets, except that the 20 week SMA has already dropped below the 40 week SMA on many international stock indexes already.

    Last but not least, you have the Chicago Volatility Index (the "VIX"). Bear markets drop faster than bull markets climb, which is to say, volatility (which is what the VIX measures)  is another characteristic of a bear market. And volatility trades like any other asset, following trends and observing support and resistance levels similar to stocks, commodities or currencies. The 20 week SMA on the VIX broke through the 40 week SMA in June, and since then, the 20 week and 40 week SMA have behaved consistently as trading support. That suggests that at the moment, the path of least resistance for the VIX is higher, saying nothing good about the prospects for owning equities just now.

    Taken together, I see more sharp teeth and claws than I see horns, and so I assume I am still looking at a bear market. But nothing is certain, and I am often wrong. But the characteristics I see are clear enough that I have reduced equities exposure sharply and have preserved an overweight cash exposure.

    Disclosure: Author owns SPY, but no other positions mentioned in this article
    Tags: VXX, VT, SPY
    Jul 20 9:04 AM | Link | Comment!
  • Maybe I Jumped the Gun
    Those who read my posts know that I have been extremely bearish on global equities for the past few months. It is now time to re-assess that posture.

    To review, the simple moving averages have spelled doom for global and US equities for some time now, culminating in a "death cross" formation across multiple indexes over the past month. The final cherry on the sundae fell last week, with the S&P 500 confirming a very bearish "head and shoulders" formation, and joining the Earth's other equities indexes in the dubious camp where the 50 day simple moving average has fallen below the 200 day simple moving average.

    Bears took their best shot and won.

    Or did they? Almost right on cue, markets staged and explosive rally, launching prices for the S&P 500 over 5% higher. Pity the fool who bet with the trend last week. That in itself should raise a red flag for a bearish trader. When bears take their best shot, score a massive technical win and then take a massive financial bath, you got to think that something went wrong with the theory.

    There is more to it. I have been looking now at the EXPONENTIAL moving averages, which place a bit more weight on recent market happenings then the somewhat more wooden simple moving averages do. And here is what the exponential moving averages say. The S&P 500 has not formed any death cross pattern. In fact, the 50 day EMA got close to the 200 day EMA, wit hthe S&P 500 observing both averages as trading resistance over the past month. But this week, the S&P 500 has  rallied above both such moving averages, and yesterday, confirmed them as trading support. When resistance turns into support, you can start to give the bull market case some more serious thought. And when an index is above the 200 day and 50 day exponential moving average, that's a technical way of saying it is in a long term and short term bullish trend.

    Let's look at this theme a bit further. The MACD on the S&P 500 is now breaking higher, with short term buying  trading momentum above long term selling momentum, and heading straight into positive territory overall. The broadest global index etf - Vanguard Total World (ticker VT) is similarly positioned, only MACD is already in positive territory. This suggests the potential for further gains ahead.

    Fundamentally, the economy of the Earth is falling apart, and this has kept borrowing costs and discount rates wonderfully low. And all the while, corporate earnings remain robust. When you combine low discount rates with high earnings growth, that pretty much is the stuff that triggers or sustains bull markets.

    There is a fundamental case and a technical case for further gains ahead in the equities markets. The bearish case is, at this point, in question. And as we see, clear technical signs are failing to accurately predict coming market events. At the moment, the prudent course of action seems to be about the same: a very conservative allocation to equities (I am keeping equity exposure at 15% in my model), and overweight allocations into low risk bonds and cash. 

    Jul 15 9:40 AM | Link | Comment!
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