Updating the Market Perspective

The markets have declined by about 10%, and many specific stocks have been harder hit.  How should we view this?

The decline, sparked by concerns about subprime mortgages, has been breathtakingly swift.  For traders accustomed to a trading range and gentle pullbacks, it evokes comments like "crash" and "bubble."  Those saying this should go back and look at charts from the 1987 crash and the 2000 bubble.

Who is Dumb?

In the current market, anyone who bought anything on the way down is dumb.  Fading the market declines has worked for years, but not this month!  Count us among them, since we have done some gentle buying on a wide  scale.  So far, any buy has been wrong, without regard to the normal fundamental valuation of the stock.

It happens.  We do not think such moves are predictable.  There is always someone who called the top and we call that Fooled by Randomness.  Many more pundits have been predicting the current decline for several years from much lower market levels).  They are now accepting congratulations.  Wow!

Reviewing Our Perspective

As a reminder to readers, we are not offering trading advice;  our purpose is an educational look at what we are actually doing.

In recent articles we have tried to illustrate several points:

1. Current trading is dominated by hedge fund liquidation.  The right posture varies by time frame.  Most individual investors cannot guess or time the kind of action we are seeing now.
2. Our intermediate trading model turned neutral as we reported on August 1st, and  negative  a couple of days later.

Not everyone can trade so aggressively, nor should they.  Each person must decide on a time frame and a strategy, and then stick to it.

Conclusion

Calling the bottom of a sell off is dangerous.  We have tried to highlight the difficulty in predicting any unlikely event.  Bottom calling certainly qualifies.

With this qualification in mind, we see plenty of stocks trading at prices that do not reflect the fundamentals.  These include companies that we have written about before like the following:

Apple Computer, Inc. (AAPL) where liquidating hedge funds have sold the stock without regard to strong fundamentals.

Global SantaFe Corp. (GSF) where the pending merger with Transocean, Inc. (RIG) and locked-in dayrates provides a great return.

No one can know where the bottom is in a decline featuring forced unwinding of positions.  The financial stocks have been the hardest hit, and may offer the greatest return -- the subject for a future article.

Comments

[RB]

It does look like Thursday's low was the bottom.

[Bill aka NO DooDahs!]

The "who is dumb" section almost, almost!, strikes me as very timely bullish capitulation.

"Dumb" is following emotion or not having a method. Even "smart" methods have lots of losing periods, drawdowns, et. It takes more than a month to call a method "dumb."

I think four consecutive years of calling for a crash that doesn't happen (you know who), or four consecutive years of underperforming the SPX (you know who), is enough evidence to call a method "dumb."

Let's compare our early buys in this correction to the others' late buys, and see if either is closer to the bottom ...

[John Forman]

If you really want to get picky, the home building and related stocks have taken more of a beating than the financials, though it's been over a longer period of time. However, your point is taken. The fundamentals for the banks and brokerages will not have been harmed much by recent events. One could even say that for some of them they have been improved going through this whole washout.