Fear of Missing A Rally
A friend who is a fund manager asked me the following question today: What's the greater fear, missing a rally, or owning equities that go down?
Today's rip-roarin expiration day market rally might help answer that question. The fear of missing the rally certainly appears to be the much greater sin -- at least to most professional managers today.
Now consider this interesting variation (This one should definitely get the attention of trend followers).
John Roque -- the very smart technical analyst for Natixis Bleichroeder -- John relates how he continues to hear on CNBC and from clients that “financials are cheap…we’re doing selective buying.” Or, “We’re buying financials down here. They’ve been destroyed.” Or, “The financials are raising capital and getting the deals done. The worst is over. We’re buying some good ones.”
Now, compare that attitude with typical investor interest/sentiment about oil, food commodities, or natural resource stocks. Extended! Overbought! Driven by speculation!
So if you are looking for a true contrary trade, which do you choose:
- The one in a long-term uptrend with no sign of any technical weakness, widely disbelieved the whole way up?
- Or, do you go for the relentlessly beat up, long term down trend -- the one if you are buying here, you are merely guessing the worst is over.
Thanks to John Roque of Natixis Bleichroeder, here's the relative Market Cap of S&P Energy versus S&P Financials:
courtesy of Natixis Bleichroeder
Friday, April 18, 2008 | 02:15 PM | Permalink
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Amen my brotha
Posted by: Jonathan Garber | Apr 18, 2008 2:35:33 PM
I'm a very bearish guy, but I keep suspecting that we will need some real Bear Capitulation to go down.
Then we can get back to bull capitulation.
I also suspect with all the inflation, and materials strength, continued global strength...... Long and shallow recession.
Stagflation is far worse than "Recession"
Posted by: Eric Davis | Apr 18, 2008 2:39:42 PM
How has the stock market done historically in periods of inflation?
Posted by: Jonathan Garber | Apr 18, 2008 2:42:59 PM
Days like today, I know money managers have lost their minds. I doubled my long on Swiss Francs, and doubled my short on Xinhua index. If I'm wrong by next month, come visit me in the crazy house! :)
Posted by: OldVet | Apr 18, 2008 2:45:03 PM
sounds like two guns on the table and you have to choose the one that has the least amount of bullets...
In order to buy either you have to ignore ALOT of reality and embrace fanaticism....
You're still dead in the end.
Ciao
MS
Posted by: michael schumacher | Apr 18, 2008 2:52:06 PM
"sounds like two guns on the table and you have to choose the one that has the least amount of bullets..."
The problem is that, at the moment, neither gun is a revolver...
Posted by: Jeff G. | Apr 18, 2008 3:00:51 PM
It's a great time to buy or sell stocks!
Posted by: John F. | Apr 18, 2008 3:07:46 PM
Someone mentioned a Dow Theory "Breakout" today.... Was it the Transports?
I'm not well versed on Dow Theory.
Posted by: Eric Davis | Apr 18, 2008 3:14:33 PM
- Or, do you go for the relentlessly beat up, long term down trend -- the one if you are buying here, you are merely guessing the worst is over.
it's interesting that this applies to both financial stocks and houses...
i guess another interesting question would be, why aren't money managers buying real estate?
Posted by: m3 | Apr 18, 2008 3:15:39 PM
My money is invested with these assumptions:
- gold/gold stocks haven't topped
- treasuries have topped
- financials have not bottomed - but 5 years from now - will likely think that WM @12 and C @23 were good buys.
Posted by: kurtmilne | Apr 18, 2008 3:16:02 PM
to paraphrase J. Rogers investors (amateur and professionals) don't find anything sexy in commodities/basic materials/industrials.
as a generational cohort, baby boomers taken for granted cheap commodities (1980-2000)...which is ironic as they grew up during the oil crisis (I'm only 31.)
we haven't seen any blow-off top.....you don't hear of your house-flipping neighbor now playing the futures market.
The genuine commodities blow-off top will come when you see people carpooling, investing in futures and even the most ardent right-wing enviro-skeptics talking about conservation. Plus the requisite "Death of the American Lifestyle" cover on Time magazine.
Posted by: i try to avoid reading comments but still can't help myself | Apr 18, 2008 3:17:08 PM
fear not cash.
Posted by: dukeb | Apr 18, 2008 3:24:10 PM
Bull markets are led by financials gaining strength first followed by a general bull market. That's in the standard playbook.
What I see here is traders buying financials to set up that bull market appearance anticipating that the rest of the bull market will appear out of thin air. This is cargo cult magical thinking that has cause and effect backwards.
I don't worry about missing rallies in this market; I worry about preserving capital. This markeet is like a bowling ball going down stairs. When it hits a step, it will bounce sharply but, that is just part of the ballistic trajectory that carries it downward again. Don't try to catch a falling bowling ball.
Posted by: Fredex | Apr 18, 2008 3:24:35 PM
How about something approaching day trading? Jumping on the surge but getting back to cash at the first sign of weakness?
Posted by: Mind | Apr 18, 2008 3:31:04 PM
Personally i will feel bad about missing a rally. I am a long term investor (buy & hold for decades), so missing a rally means i am purchasing at higher price. If the equities in my portfolio go down, then i assume this as short term trend and expect things to move up at a decent ror in near future.
Posted by: Bharat123 | Apr 18, 2008 3:42:45 PM
more guesses,
If we get a breakout just into 1400, My guess is we will shake things out and realize that, for Equities "Rising interest rates are bad" "Rising Dollar is Bad " An Inverted yield Curve will be bad"
that the light at the end of the tunnel is actually the Train.
Posted by: Eric Davis | Apr 18, 2008 3:43:35 PM
I am not a Dow Theorist, but Richard Russell is (Note today's action takes up above his 12,743 level):
"Hey, remember the Dow Theory? It tells us that a move by one Average, unconfirmed by the other, is meaningless for prediction purposes and may very well be deceptive. Well below we see the daily Dow. Yesterday it shot above its (blue) 50-day moving average, but as of yesterday's close, the Dow had still failed to better its February peak of 12743.19. That was a great move yesterday, but the Dow still must better its February 1 peak.
So why does the Dow have to better its February 1 peak? The reason can be seen on the daily chart of the Transports below. The Transports, which have led the market for months, have bettered not only their February peak but they have bettered all preceding peaks right up to their record high set last July. So if the Industrials are going to confirm, their first move must be to advance above their own February 1 peak of 12743.19. Bettering 12743.9 would be a huge and very bullish accomplishment.
As matters stand now, we have an upside non-confirmation with the Dow not confirming the latest move by the Transports."
April 17, 2008
Posted by: Barry Ritholtz | Apr 18, 2008 3:50:28 PM
Eric & co.
trying not to be wise-guy here, but I'll ask the same question I ask on here 2-3 weeks ago... (no response then)
Your work has shown you nothing...nothing at all to get long over the past month or so? No chemicals...no basic mats...no oilservices...no Brazil/latin...no steel...no ag...no nothing?
If your your answer is no, then you are probably too bearish, which like those who are too bullish, will result in poor performance. Again....the enemy of a trader is ego. The inability to come off an opinion that you are on record as having. Many talking heads are bitten' by this problem....."I'll be proved...the market is wrong". Always respect both sides of any and all trades.
Posted by: Matt M. | Apr 18, 2008 3:56:09 PM
yeah, i suspect most people fear missing a rally way more than seeing stocks go up and then down later. IMO far fewer people have the patience and confidence in their thesis to sit out a bear rally, and in fact prefer to ride it up only to ride it down a few days, weeks, or months later. You have to have a ton of confidence that the rally gains aren't permanent and we'll just round trip or that the valuation of the market is not worth the risk.
tough one, i struggle with it every day!
what do you guys/gals do in that struggle?
Posted by: craig | Apr 18, 2008 4:03:01 PM
Thank you Barry,
Your input is as always, Priceless.
My own Chart Astrology, says we break 1400..
Then I'm looking for Bear Capitulation.
If "The Fly" being bearish, didn't set every one's spidersense/contrarian off..... I swear he is a plant by money managers.
Posted by: Eric Davis | Apr 18, 2008 4:04:22 PM
But will the fundamentals (esp. consumer spending) support a change-about to bull for the mid-term? Can a change at this point be anything but a short-term bounce in a longer term down trend?
Posted by: Mind | Apr 18, 2008 4:04:23 PM
The period 1989-1991 might offer a useful historical parallel. By way of example, BAC (Bank of America) fell about 65% over a period of 15 months, from a peak in July of 1989. And during the period 1999-2001, financial stocks fell over an even longer period of time (18-20 months). As for the present situation, the XLF peaked in May of 2007. It’s only been 11 months. In addition, inflation is on the rise, which is not particularly good for financials.
The XLF probably has more work to do on the downside.
Posted by: DL | Apr 18, 2008 4:10:17 PM
'fear not cash.'
really? in an inflationary environment? i fear it greatly.
Posted by: yusef | Apr 18, 2008 4:14:36 PM
Matt M.
agreed, even if you think broad market indexes may be going down, you can still find individual stock or sectors that can outperform. I try to do that because it's my full time job. a potential problem is that a lot of non-investment profession people may not have time for the necessary due dilly to pick individual stocks or sectors, so they rely on broad market indexes.
Posted by: craig | Apr 18, 2008 4:18:25 PM
http://www.msnbc.msn.com/id/24196045/
"Citigroup share price jumped Friday, as many investors had been bracing for even more dismal results...Citigroup essentially lost in the first three months of the year, $1.02 per share...Analysts, on average, had expected the New York bank to lose 95 cents per share, according to a Thomson Financial survey."
Can anyone 'splain this apparent contradiction to me? This is why I'll never be smart enough to be a banker (or a financial reporter).
Posted by: Cubbie | Apr 18, 2008 4:19:04 PM
