“Take time to deliberate, but when the time for action has arrived, stop thinking and go in.”
– Napoleon Bonaparte
“The greatest mistake you can make in life is to be continually fearing you will make one.”
– Elbert Hubbard
Two quotes today both of which I thought summed up where investors need to be right now. If you are chasing this market day in and day out I am sad to say odds are you will lose lots of money, if you are lucky. If you are not so lucky you will lose your entire account. If you are not comfortable with the risk presented by this market then I suggest cash or hedged options.
I made a mistake last week by portraying my own fears on the market and selling many of my options too early. This market has shown its hand. It wants and needs to go lower. At these prices there are no buyers. The time for conviction is now. Trying to jump in and out correctly is a doomed strategy based purely on luck.
This is a different market than prior pullbacks. This is a confused market. This is a scared market. This is a market in disbelief. This is an emotionally charged highly leveraged market. Longs and shorts are getting beaten up while many others who saw this move are missing it as they wait for the market to give them a perfect opportunity to initiate positions.
There are different strategies to get into this market one of which I highlighted recently, the diagonal spread (found here). Such a trade takes advantage of the high volatility in front month contracts and uses that to actually lower the price of the option you ultimately want to own. I initiated this position the other day and I’m not trading it but holding it long term.
A few points to make to further highlight the weakness and issues facing this market
Bank Of America after today’s conference call with the CEO sold off over 10% again in heavy volume. There is more and more talk of using Dodd-Frank to restructure this bank. Imagine the scare this will put as chatter grows among investors in all financials.
SocGen was all over the rumor mill today with the stock down 20% at one point. This is Lehman 2.0 if it goes. Market pundits were talking today about the French put where they could nationalize the bank essentially putting a floor under the stock. What? Equity would take a beating if they survive at all. Such rumors of nationalization in 2008 caused all US financials to crater out of fear of being next.
Every day CNN.com and FoxNews.com report massive losses on Wall Street. The average American sees that and has to be very worried about their portfolio. The pressure on fund managers to meet redemption requests will only grow with days like today. With record low cash levels the only source of funds is to liquidate stocks.
Ask yourself this question. Do you think more investors are willing to go long with a buy and hold strategy now versus six months ago? That group is not only being beaten up emotionally and financially but is more scarred than ever.
The 10 year treasury yield is 2.14% only 10 basis points away from the yields seen during the 2008 recession. The same time the SPX was 900. Bonds are speaking and have been for months. Economic recession has arrived. Equities missed the last recession in a big way and are proving once again their forecasting ability is horrible.
For months correlations galore were broken as the SPX did its thing and diverged. Many, self included wondered who was right. Well the SPX has proven it was wrong as it comes in and correlations begin to work. One such correlation is that with the 30 year yield. This one simple chart tells me equities are still overpriced.
Later this evening I will update the skew charts. Thanks for reading.
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Market Recap Wednesday August 10, 2011- Macro Story.
Images: Flickr (licence)