The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

18 January 2010

The (coming) Decline of 2010

... is now upon us. All the periodicities (daily, weekly, monthly) have aligned in one clear trajectory: down. You can just feel this little rock-slide gather momentum, well on its way to avalanche.

The initial break occurs at S&P 1085. (Approximately 10,235 on the DJIA.) And if you were to ask me to be precise (always foolish; to name price and time), I would point to the July 2009 lows of S & P ~875 as support (an ~25% decline from recovery highs) within the next 6-9 months. If and when the market achieves (achieves?!) that objective, we then would seek new signals whether its decline would continue.

What does my market expectation mean for the casual investor? A 25% decline in an index is dissimilar from individual securities; they could decline either less... or more. And it is that last possibility that should concern you. I view a decline to 875 as likely, and a return to the March 2009 low as possible; the possibility for a deeper decline than 666 relies on the market's dynamics at 875.

No matter how inviolate you think your investment position, ask yourself this sequence of questions (now, while the comparative getting is good): "What would I do were xyz (insert here your favorite investment's ticker) to decline 15% over the course of the next 6-9 months? 25%? 35%? How about 50%?"

Your answers to that question-in-parts (now, before shares pick up steam) will tell you precisely how you will act when that terrifying moment occurs; you will be prepared for all eventualities -- and need not panic then. It also explains why, after 9 months (3 brief months shy of a long term holding) and constant bearish chatter all the way up, I finally sold Green Mountain Coffee Roasters/GMCR. Obviously, my sale presupposes that its decline should exceed the tax penalty of the short term gain. That the shares tagged crucial resistance at $86 helped make my decision. Multiply that decision by all other long term holdings.

But let's circle back to the beginning, before this post began.

You know by now my thesis: 

• The markets are in a high level consolidation that began ~12 years ago, and which could continue for another 5-10 years, in accordance with historical patterns;
• That group and sector analysis, and timing, trumps buy & hold-style investing during such periods. (See this recent article from McClellan for more info on the topic.) And 
• That the market's structure, its pattern, is not random; past patterns prove valid as to the reliability of future patterns following similar trajectories.

I quote Tim Villano often, but not recently; fact is, no other market analyst comes even close to Tim for his astute and savvy insights re the market's nuances and direction. Tim's comments from Friday morning, in part:

"It finally appears that the short-term technical picture, which is now topping, is coming in line with the larger-picture of weekly wave-4 retracements and counter-rallies. I would expect a rapid decline to the (ES 1115-1103) level to develop over the course of the next 2-5 sessions. Yes, it is possible this could be the start of a bigger decline or at least a process of topping and resistance, which evolves into an intermediate-term down-leg. Contributing to the negative short-term appearance of stocks is the positive short-term picture in the Dollar. The US Dollar Index (DX 7730) is expected to make new rally highs over the course of the next month in the (DX 7930-8350) range at some point in February. Accordingly, Gold and Crude are topping near current levels and are expected to decline, exerting further downside pressure on the S & P in coming weeks and months.
Inter-market analysis is crucial at all times, but especially at turns. Which is where the market appears to be here and now. And therein lies the opportunity, its creation. And why I grow increasingly excited about the opportunities to occur... after the decline is mostly complete, of course.

Let's get specific. This post, and its ensuing discussion, continues on Investment Poetry. See you there.

-- David M Gordon / The Deipnosophist


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