The Deipnosophist

Where the science of investing becomes an art of living

My Photo
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!

05 July 2010

A rocket-ride to Hell

To begin, a snippet from David Rosenberg (Gluskin Sheff)...
Is it the correction that is unusual, or is it the fact that in a matter of 12 months, the S&P 500 managed to shoot up 80% — and amidst the weakest recovery in real final sales in recorded history? The few times that the market had ever rallied so sharply off such a deep interim bottom were both in the 1930s, and we saw a pullback of around 40%. So, the reversal of the past three months very likely has further to go, and, sadly, many market participants are still not braced for it. The old buy-the-dip habits die hard.

The 12% slide in the market in Q2 wiped out $1.6 trillion of paper wealth off the books. In a particularly ominous sign, the 3.7% decline in the S&P 500 this past week stood in stark contrast to what we usually see this time of year because seasonally, the equity market rallies three-quarters of the time heading into the fourth of July festivities — the 4.6% decline so far this week stands in stark contrast too.

Taking the year as whole, with the S&P 500 off nearly 8%, this goes down as the worst first half to any year since 2002. That year, if you recall, was an aborted recovery as opposed to a classic double-dip; however, it didn’t really matter because a market priced for over 3% and got basically near zero growth in the second half of that year, did not bottom until October...
You cannot complain that I did not warn you, though; in fact, I bored you to tears with my frequent warnings throughout December 2009 and Q1 2010. Bottom line: The market built a top during Q1 2010, and broke down during Q2. I stated almost as often that the oil sector would be especially weak due to technical factors inherent in its own group and sector chart, and would lead the market lower because of its 15% weighting in the S&P. It has done just that, and then some -- but, even so, who could have known about the downside outlier that BP represents, which exacerbated the sector's and, by extension, the market's decline?

For equities, this moment, here now, is difficult, troublesome, perilous... and exhausting. I quote market analyst par excellence, Tim Villano:
The high-probability trade to new lows has occurred; ES 1020 hit easily, and the 1005 mark tested. These lows have the appearance of a daily, wave-5 movement.
As an investor who watches each tick, it is difficult not to apply some greater meaning from the market's one-way trajectories, especially now with the predominantly negative ticks. How could the market's rocket-ride to Hell not mean the economy sucks and that people will lose their jobs and thus be unable to pay their bills, which will cause a feedback loop that only worsens the downward death spiral in the markets and the economy, and back to the markets, feeding ever-deeper declines?

See what I mean? But often, market action has no greater meaning; its import is for the market and not the economy, although 2008 is an obvious and notable exception. The responsibility lies heavy on the investor, as always: Is a given moment one of (heightened) risk or (increased) opportunity? Is this moment one of (heightened) risk or (increased) opportunity?

Yes, good questions. And what about this one: What transpires next for the markets? Find out on Investment Poetry where this post continues and concludes.
-- David M Gordon / The Deipnosophist


who's online