Thursday, January 17, 2008

Just in Total Freefall

Posted by TraderMark at 10:36 AM TweetThis
Not much to say here - August and February 2007 lows are now broken on the S&P and much just seems in total free fall. Now all of Wall Street's quant computers are set to sell at the same time, and in the past week we've turned to selling "winners" - meaning stocks with good fundamentals.

Everything appears to be oversold, but that does not mean it cannot get more oversold as people flee the burning building...

As I wrote yesterday, the technical damage now is just enormous [S&P 500 in Worst Condition in Half a Decade] and under these conditions the leadership stocks get sold just like the crummy stocks without any good prospects. It's all one and the same.

Ironically, I like the holdings and weightings in the top of the fund more than any time since starting the fund/blog. I have a lot of leadership type stocks scattered throughout the top 15; some of the strongest and best within their sectors. Not that it matters at this point; and the past week the fund has lost a lot of gains. But selling into this sort of nonsensical indiscriminate panic is to lock in some losses in some of the best stocks out there, so at this point, attach crash helmet and just hold on and eventually sense will return and "winners" will be separated from "losers". When the market does turn (some day), those companies who actually have great prospects should lead us higher. Today and yesterday the agricultural names - who have the best fundamentals of any group out there for the next few years - are being destroyed. Make sense? No. Reality? Yes.

As I've said lately, a market led by gold, healthcare, airlines (once again, airlines??), and cigarettes is not something we want to be too happy about.

Position: strapped in with seat belt

Posted by TraderMark at 10:36 AM Comments (6) | Edit This Post | Create A New Post

6 comments:

T-Rader said...

Mark,

This is the first bear market I have experienced. I wasn't in the markets yet back in early 2000. Is this the way it works? I was expecting small rallies here in there with a series of lower highs and lower lows. Not a cliff diving extravaganza. AAPL got slaughtered during mac world. AG space got murdered this week. Even consumer staples aren't even safe anymore. It feels like you can buy out of the money puts on anything with a ticker symbol and wait for the prices to come down. Although we are due for a rally, it feels like everybody would just sell into it.

How do you handle an environment like this?

January 19, 2008 2:46 PM  
TraderMark said...

It's not generally this bad week to week. What is happening now is we appear to be in a conversion point. Meaning realization might be washing over the masses. Those points are ugly. Once you get past that point it is more of a malaise. Just turn the SP 500 chart upside down and think like you would from the "other side". We will probe lower and make new lows over and over. But just like in uptrends we have falls, within downtrends we will have increases. But down is generally far quicker than up in a general sense. And with the advent of computer driven trading with so many computers keying off the same things it seems to exagerrate it. Last, while patterns repeat nothing is identical, so no playbook is perfect or will tell you absolutely how things play out.

And yes the rallies will be sold. Until we see a change in character in the overall charts the play is to sell rallies and try to catch turns off very oversold conditions - which is hard to do. As we've seen the past week. But again this is more of a transitional period as people who were denying extended weakness through fall and early winter are now resolved we are powerless to stop it. :)

January 19, 2008 3:22 PM  
T-Rader said...

Alright this might be just rhetoric but humor me. So in this scenario companies that look cheap, good fundamentals and earnings will be sold as the general trend is down (like AG). Although their prices won't come down as much as say other companies in bad sectors. So the game is trying to find the stock that will go down the least Therefore averaging down and putting more money into a losing position. How would anybody ever make money in this market if they aren't allowed to short (like your fund)? So the question becomes not how much the fund makes, but how much the fund doesn't lose? That last statement applies to all funds and not just yours :)

January 19, 2008 3:57 PM  
T-Rader said...

I wanted to add something on that last statement.

So the strategy becomes to average down on the best losing position with the goal that it will significantly outperform the market in the future? Doesn't this theory only hold if you have an endless amount of capital or that the market will turn around soon?

And then for the few sectors that go up, wouldn't the trade become crowded which would lead to its eventual downfall?

January 19, 2008 4:28 PM  
TraderMark said...

yes it is all relative
there will be absolute winners but far less in a bear market. If you look at mutual fund returns in 2001 and 2002 many lost huge amounts of money. Others lost a bit. And a few actually made money.

But again if you are going to be long you have to use the right yardstick. For example I dont measure myself against a Chinese focused international fund. The dumbest fund manager in the world made 100% last year in China.

I use the Russell 1000 and S&P 500 since I am focused on large to mid caps. If the S&P 500 drops 40% and I drop 20% I'd consider that a victory. That's 20% out performance vs 'the market'. But that doesn't mean one makes money as an investor. So the bigger question is do people anticipate a 40% drop in the S&P500?

Overall in down or up markets I want to beat the indexes I measure against. If market is up 8% I want to do better, if the market is up 25% I want to do better, if the market is down 25% I want to do better. I can't predict what the market will do. Anyone who can has yet to be found :)

January 19, 2008 4:30 PM  
TraderMark said...

For your 2nd question not necessary. If the market looks weak you sit in a larger cash position with a larger exposure to some short indexes. And rarely do 50 stocks go down week after week, month after month. Thats why you have a portfolio instead of 5 stocks. If you have 5 stocks, I suppose if you pick poorly all 5 can keep going down every week. But even in this market, heck Crocs was flat for the week. So was US Steel. So you can sell from the (relative) winners and average down into the (relative) losers - realizing that 2 weeks later they will probably sell off the winners and bid up the losers. THis is why retail stocks and homebuilders caught a bid a bit this week.

Again the past 3 weeks are not typical even in a bear. This is a serious compressed no holds bar sell off. In a larger bear market, stocks do go up. In the correct sectors. But the gains are smaller, and shorter in duration. But things do go up. There are 7-8K stocks out there. Rarely do they all go down all together, week after week. The last few weeks again, are different.

January 19, 2008 4:35 PM  

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