So, is everybody SHORT now ?

After this pretty heavy semi-crash in the stock market, how do you position yourself ?
Can we expect more selling and more carnage?
As for myself, I am in cash now but waited too long and have lost all my good profits for the year.

Have you been prudent/lucky and avoided the sell-off altogether or blessed with a good Timer/Sell signal going short? If yes, it’ll be interesting to hear more about that.

I have raised a lot of cash because I heard there was a survey of 500 CEOs and 82% said a recession before 2020. Not going to be a hero here. I don’t think it even makes sense to trade when volatility is high like today.

I’m definitely more long than i was 3 months ago. I’m seeing lots of great prices out there.

In all fairness, the S&P 500 was down what before today? Something like 1% this year with dividends. Nasdaq just turned negative.
Since the beginning of 2017 it is up 18% and since 2009 it is up over 200%. I think the magnitude of this selloff is not very big compared to past gains.

Unemployment rate is 3.7% . Look at what happened the last two times the rate hit this low over the next 2 years? Selloffs and recessions.

I think investors have to ask themselves:

  1. Do you think prices will be cheaper 3-6 month into a recession?
  2. Do you think a recession will arrive within the next two years?

Make your own judgement and good luck.

SPY has had a 13% drawdown. It also had a 13% drawdown in 2015/2016. It had a 19% drawdown in 2011. And a 15% drawdown in 2010. Of course the drawdowns were bigger in 2001-2003 and 2008-2009. But there were double-digit drawdowns in 1998, 1990, 1987, 1982, etc. The stock market always has periods of major drawdowns, and there’s no reason that this time should be any different. If you go to cash every time something like this happens, you won’t know when to get back in to reap the big gains that are down the road. I’m 100% in equities right now, and plan to stay 100% in equities no matter what happens.

I wish I had the knowledge and bandwidth to develop/evaluate/validate a market timing signal to incorporate into my portfolio because, to answer diconoclastx’ questions:

Yes.

Yes.

Assuming we’ve already established a 24 month time-frame for a 3-6 month drawdown to occur, by my rough calculations I’ve got a less than 50% chance at missing the downside and catching the upside if I were to naively try timing it.

Statistically, I am better off staying invested.

Unless, of course…

Is anyone willing to convince me there is a good and easy way to time this market?

This is from the Economist Dec-15th to 31st:

"Jesse livermore earned his reputation as a talented speculator by pocketing a tidy sum during the Panic of 1907. Mindful that a scarcity of credit and a giddy stockmarket were a dangerous mix, he began to sell stocks short that autumn. When share prices crashed on October 24th, Livermore was up by $1m ($27m in today’s money). He then changed course. He started to buy stocks, which were now a lot cheaper. The market rallied. By the end of the year Livermore had made $3m.

Anyone who has ever invested in stocks has at one time fancied that they can time the market as exquisitely as Livermore did. Very often, they hope that a benchmark of fair value, such as the cyclically-adjusted price-earnings ratio, or cape, will be their guide. History shows that when stock prices rise a lot faster than profits—as they did in the 1920s, 1960s and 1990s—they tend subsequently to fall back (see chart). So the market-timer will sell when the cape is high and buy them back when it is low.

It seems simple. In practice, it is surprisingly hard to use valuation gauges to time the market. Investors who try often sell far too early. As a consequence, they miss out on some of the richest returns. Selling stocks when everyone is still buying may actually be the easy bit. It is harder to find the nerve to buy stocks when others are selling them in a panic.

The purist view is that market timing is a mug’s game. It says stocks are a random walk: their past indicates nothing about their future path. In the 1980s academics questioned this creed. Since stock prices tend to revert to a mean value, they must be somewhat predictable. They deviate from this fair value only because investors over-react to news. When profits are strong and stocks are rising, there will be keen buyers almost regardless of value. The reverse is true in recessions. This herding—or, if you prefer, this rational pricing of risk—creates the opportunity for market timing.

There is a drawback. What is “cheap” or “dear” is defined by reference to the full history of prices. But an investor active in any period could not have known this in advance. Nor is it obvious at the time whether the cape is close to a peak or trough. Without the benefit of hindsight, timing produces disappointing results.

A study in 2017 by Cliff Asness, Antti Ilmanen and Thomas Maloney of aqr Capital Management tested a timing strategy. Their gauge was a rolling 60-year average of the cape. When the cape was below its historical median—that is, below fair value—the strategy would borrow to buy stocks. When it was above fair value, it would lighten up on stocks in favour of cash. Over the whole period (1900-2015), returns to the market-timing strategy were scarcely better than to a buy-and-hold portfolio with a constant 100% stockholding. And over the latter half (1958-2015), returns were no better at all.

A big failing was that the strategy was under-invested in stocks for too much of the time. The average cape has trended upwards since the 1950s. Too often stocks were deemed dear based on historical valuations. Timing works no better in countries other than America. A study in 2013 by three academics, Elroy Dimson, Paul Marsh and Mike Staunton, found no consistent link between valuation and subsequent returns in 23 stockmarkets.

Value is too weak a signal to be much use. But it can be improved upon. The aqr researchers found that combining the value benchmark with a “momentum” signal of the underlying trend in stock prices yields better results. This is intuitive. The problem with value benchmarks is that prices drift away from them for long periods. But a blend of value and momentum represents “value with a catalyst”, as the authors put it.

This strategy is too complex for ordinary investors to profit reliably from it. But there is a simpler form of market timing, which has some empirical support: rebalancing. It requires investors to decide first how they want to divide their investments. It could be, say, an equal split between American and non-American stocks. The precise weights matter less than that they are stuck to. That requires regular rebalancing to restore the original weights. It means shedding assets that have risen a lot in favour of those that have gone up by less.

The virtue of rebalancing is that it is simple. You are less likely to make a costly mistake than if you follow a more complex strategy. The drawback is that you must give up the delusion that you can time it like Livermore. To do what he did takes nerve and a rare feel for markets. You may think you have such talents. You almost certainly don’t."

Needles to say, I don’t agree with the Economist. There are numerous ways to time the market to improve on “buy-and-hold”. We have several models at iMarketSignals which work well. One of them is our Composite Market Timer which consist of six component models. This Timer is currently out of stocks.
https://imarketsignals.com/2016/composite-market-timing-increases-returns-and-reduces-drawdown/

Good points everyone.

But to be fair there is an alternative. Short term yields are now 2.5%.

If you look at performance of stock markets around the world:

VGK (Vanguard Europe ETF) flat since 2005
EEM (Emerging markets) flat since 2007
China’s Shanghai composite flat since 2007
Japan’s NIKKEI back to 1993 levels.

Evidence leads me to believe the superior performance of US markets is the exception - not the rule.
Real expected returns from stocks are not much higher than returns from treasury/interest rates.
I happen to believe the long term return in US stocks is around 6% , of which now is closer to 4% over the next 5-10 years. Does being in cash (2.5% yield ) make sense? 2.5% yield with 0 volatility might not be the right option for everyone but it is definitely something to consider. I would rather invest when I know I can obtain a 8-10% yield (I.E. after a big crash).

One other thing to consider is companies are having shorter life cycles.
https://www.innosight.com/wp-content/uploads/2017/11/chart-1-average-company-lifespan-on-sp500.jpg

Many new companies are emerging and older companies are being disrupted. An example is in retail, where MANY companies are in serious trouble. So if you use a DCF model you would use a lower terminal growth rate and get a lower value. This wasn’t always the case in the history of the markets.

There are still opportunities to be had in this market. For example trading the spreads between stocks via long/short. I have had success using this approach.

To add on to my last post, since many here are doing micros, IWC (Russell Micro-cap etf) has returned 3.6% a year plus dividends since it was created sometime in 2015. I used the starting date as the time it was created to show I’m not cherry picking dates. Is that so much better than the return from bonds?

I mean, bringing up IWCs return in the midst of a 20% drawdown is kinda cherrypicking the end date. I could simply say the US market is (relatively) expensive and EEM is cheap and both are due some mean reversion.

Im a p123 subscriber specifically because my intuition and timing instincts are lousy. Getting out of the market is always the easy part of the timing attempt. You get out when it feels good to get out. Its the getting back in part thats the hard part, because by the time it feels good to get back in youve already missed the crucial part of the rally. I will say every bear market Ive experienced since 1998 “felt” more scary than whatever is going on at the moment. Some cyclical global slowing and an overvalued US market getting corrected? This is some basic run of the mill stuff. Who couldnt foresee the overcrowded FANG trade getting its day in the mean reversion sun. Wake me up when we get the equivalent of a Lehman Bros. shuttering or an AIG going insolvent.

I might spend a little time looking at the history of the stock market around presidential elections. My impression now is that it can get turbulent. Perhaps that is just because I lived through the end of the Bush administration and the start to the Obama administration. Maybe I have a bit of confirmation bias from this experience.

Ken Fisher has written on this and I will certainly go back and review his writings. As far as any rational reasons, the leaving administration (or the one up for re-election) tries to maintain a good economy. But they are (or can be) what are essentially lame ducks and sometimes they fail at maintaining the economy. Going further would start to be just a story. But can the time around elections be turbulent? I think so for now—before more research.

If elections can be turbulent can this next one be crazy? Going by just gut feel I think maybe so. What do you think?

I was planning on taking money off the table before the next election. Probably still will.

Still time for a little rally before the real drawdown. Just for fun that is going to be my prediction.

-Jim

Not really. Sticking to usual long models, selling some hedge, and transferring fresh cash to start increasing long position sizes at 2300 (or 2100 if we fall through without stopping). If you feel some stress in a 15% DD, it’s not about the market, it’s about you and your exposure.

Some commentators have been talking about a “buyers strike”. I think I fall into that category except I that do buy, but very infrequently. I currently have open limit order against my crash list stocks and everytime one is bought, I reset the remaining open orders lower. I’m not sure how that strategy will eventually work out, but it keeps my enthusiasm in check. I do think the sell-off is just about over. Of the three things bothering the market - over-valuation, rising interest rates, and possibly decreasing earnings - only the later is unknown. The first two were widely recognized for a while and shouldn’t surprise investors any longer. Valuations are coming into line and while interest rating may be raising but are still low on a historical basis.

As for data, the S&P1500 aggregate operating income growth is about 16% Q over PYQ. And there are only two sectors with negative OpInc growth; utilities and staples. In both cases, increasing COGS seems to be the problem.

I’m also watching the analyst revision count. I expect it to go positive after the broader market does and to confirm the change in investor outlook.



Walter,

I like your charts and analysis!

Thank Chaim!

Here’s another Custom Series to consider. It plots the S&P1500 median PEG ratio (this is P123’s PEG). The market seems too pessimistic to me, but it is what it is. On the other hand, on Dec 19th, my market timer did trigger a signal to hedge. That itself isn’t a big deal since it can thrash a bit.

Walter


Russell small caps are proving to be garbage once again. Like every day it’s down .5% vs SPY.

Crash-like downturn continues, unabated.
Trump shutting down the government is crazy. This could get really ugly down the road.

I am Long! 90% up since 2016, 25% p.a. since 2011, happy to wait for sell Signal… I was early in April 2016 to be back in the market, now I might be a Little late, but giving my market Timing a log of slack, I think is the best way to capture the most of the trend…
-5% YTD, 18% DD, but after 87% (in Dollar Terms) in 2017 and round 34% in 2017 (in Dollar Terms), fine by me!

I’m still long as well, but had rotated into quality-defensive (q-d) stocks and sectors either automatically (with an etf rotation port) or manually (by choosing to invest in q-d stock ports) as the total market got toppy, and as a result my draw-down is less than 1/2 that of the total market index (VTI). However, I am starting to worry about q-d getting hit harder, so am considering putting in tighter stops (by running sims) on some of those positions…

How is everybody’s market timers doing?