Wed 10/8/2008 (SPY @ 97.51). During my last post, I lamented the lack of adult leadership in Washington and advocated selling the SPY, buying DOG (the inverse of the Dow) and GLD (gold ishares). Since then, the SPY has plunged 22.5 points (18.7%). Total open profit since the short sell signal at 125 in early September is DOG has surged and Gold has held its own in a down market.
So many pundits are trying to call the bottom of this market. It's a fool's game and you don't have to play it to make plenty of money. You don't get extra credit for guessing the exact bottom (and only liars do). Your objective should be to follow the trend as it unfolds, and I continue to pound the table that the most robust way to do this is with the 20 day high as a buy signal and low as a sell signal.
In a normal market, you will get plenty of whip saw trades for small losses, but will make most of your money in 1 or 2 monster breakout trades (up or down). All you need is a trend.
Well, a trend we have, and it's a mother, a financial tsunami. It's very ominous that writing $700 billion checks and slashing interest rates in a global coordinated fashion has done nothing to stop the bleeding, but it also shows the futility of trying to manage markets and defer the popping of the bubble. This pain should have been experienced in the late 90s or at least 2000. Now it has built with interest and the pain should cascade through the financial system.
If you are uncomfortable selling short, or wish to try this strategy in a tax-deferred account, check out the DOG ETF (DOG) that moves inversely to the Dow.
Currently, I would not buy until the SPY breaks above 128. Yes, that is far away, but obviously will come down with time.
I would not be surprised if there were a monster rally day or two, maybe to 110 or 115, the pundits declare the end of the rally, then the selling resumes. Markets rarely form V bottoms. They almost always form a bottom, rally off the lows, then sell off again to test the lows, usually exceeding them slightly. Just as everyone gives up, sick and tired of the roller coaster, the market surges, forming an enormous W. (Ironic, since his leadership got us in this mess.)
I believe all of the following are true:
1.) The market remains extremely dangerous in the short term and a true market crash is a possibility (no, what we have experienced is not a market crash, but perhaps a grinding bear market). In 1987, the market was about as much off its peak BEFORE it lost a third of its value in a day. In today's terms, that would be a 3,000 point drop in the Dow. Circuit breakers and other silly government gimmicks might delay the inevitable, spreading the pain out over several days, and perhaps that is what we are seeing now.
2.) The stock market is the single best place for your money over the very long term, and no matter what happens over the next few months, 10-15 years from now, we will all be kicking ourselves for not putting more money to work in stocks now, so long-term investors should do nothing.
3.) The world will not end, we will muddle through this, and the more the Feds try to muck around with the situation, the worse it will get.
The consolation prize for all this is that the plunge in the Dow virtually guarantees that a Republican defeat in November (incumbent parties almost always lose when the market plunges), and the sell-off in crude has knee-capped the Russian juggernaut. An ascendant Russia is less likely given the financial crisis Putin is now facing. Check out RSX for a sense of the incredible meltdown in the crude oil dependent Russian market.
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