Planned, Cautious Buying Amidst This Panicked Selling

by: Roger Nusbaum October 24, 2008 | about stocks: DIA / QQQQ / SPY / STO    

Roger Nusbaum

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This is a rough market by anyone's measure. It would be reasonable to be a bit grumpy or concerned.

Wednesday was yet another day of crash-related selling. Fear is ratcheting back up, and VIX is now higher than the price of oil (as they mentioned on CNBC). I'm not sure that matters, but it is a little interesting factoid.

Given what seemed like an emotional reaction in the market as manifested in the run down to SPX 900, I bought one of the publicly traded exchanges almost across the board with about 60-90 minutes to go in Wednesday's session.

I've been very underweight financials and an exchange is at least a couple of degrees removed from the meat of the financial crisis. I'm going to hold off on naming names on this one, but what matters is the increased, albeit slight, exposure. Additionally, like most publicly traded exchanges the name is very volatile and if we ever have a rally again (feel-good or otherwise), I would expect it to outperform meaningfully on the way up.

I titled my Greenfaucet post about buying a little Statoil (STO) as Bear Markets Should Make You Feel Uneasy. I talked about buying stock in a panic as being difficult in case it turned out very wrong, thus causing anguish for clients (I'm not trying to freak anyone out after all). There was no such thought Wednesday (not sure what to think about that). I think SPX was at 908 when I decided to do it.  I mentioned the other day that down near 900, I'm probably a small buyer - we got there and I was a small buyer.

I would revisit a point I've made many times before. I am a big believer in trying to make a plan of action and then trying to stick to it. It should have been clear from recent blog posts that I fully expected to see another run down, so I was ready for it emotionally and strategically. The notion of thinking of a decline ahead of time does a lot to insulate from panic.

None of the above means we can count on a bottom, or ensures that the purchase will be "right" in the near term. My focus is (repeat coming) realizing the market is panicked and knowing that buying during a selling frenzy usually works out well.

I stumbled across something useful the other day when making the video for last weekend. I said I could buy a fair bit of stock and still be very defensive when I was done buying. I feel fortunate to be in that position. I know from reader comments that there are plenty of folks that were more aggressive raising more cash than me and lately have been more aggressive moving back in.

There is no guarantee that they will be correct, but we do know they are not panicked, again a good place to be.

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This article has 6 comments:

  •  
    Oct 24 08:00 AM
    People have forgotten that you buy low, sell high?
    Reply | Link to Comment
  •  
    Oct 24 09:03 AM
    Next stop for the SPX: 650

    Good probability of getting there in the next dew days.

    Next stop below that: 450

    Cash is king for now, unless you have a trading strategy suited to this new, 'limit-down' market.
    Reply | Link to Comment
  •  
    Oct 24 09:17 AM
    That was a thoughtful post. The element that was missing however is the plan under worst case scenarios, or what I would call "survive to fight another day" scenario. Although I have suggested all cash positions since February, I recognize that "traders" are looking for "deals".

    Look, it might be unbelievable, but the market reaction to the current crisis is painfully obvious. First it will discount all growth since the housing bubble, basically assigning 5-10 cents on the dollar to mortgage backed securities of that vintage and bringing the Dow and S&P down to 2002 levels. From that point it could get even worse, much worse, so in making choices in this market, realize that the risks are enormous. The VIX alone documents an extraordinary risk level.

    That brings me back to your point about "a plan". That plan should also account for the risk and costs of being wrong, meaning that if you are just hoping for a stabilization, or hoping for a bounce, then the plan should be to avoid risk.

    Regarding the comment about "buy low and sell high", that works great in retrospect, but today's price might seem low now, but in fact turn out to be very high in a month from now. Don't invest using aphorisms, as you know "a fool and his money are quickly parted".
    Reply | Link to Comment
  •  
    Oct 24 09:20 AM
    To "a believer": If you feel so strongly on your projection then why not invest in it? Buy the Proshares' UltraShort S&P 500 (SDS).

    Reply | Link to Comment
  •  
    Oct 24 04:44 PM
    I think what they mean by buy low and sell high is, after a ridiculous fall, it is bound to rise back some, even if it falls lower within the next few days, and after rise without reason, well it is going to fall, the problem is forcing yourself to lock in a gain, any gain before the market falls again, either way you can do better than break even by buying in ultra short as long as you hold more than half your diversified portfolio in cash for when market freaks out for clearly no reason, and it will, so if you go long, the easy choice right now is shorts for winter.
    Reply | Link to Comment
  •  
    Oct 24 10:31 PM
    The bet on the end of the world has been a loser for many years now

    S&P is down 45% and I'm buying quality and selling calls - as much as I can get my hands on
    Reply | Link to Comment
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