Click chart to enlargeSome time ago, we predicted that the market would trade in a wide range for the next several years (something like 7,000 - 10,000). We still believe this, and given recent events, we believe that the market just put in the top of this range. Now to find out where the bottom will be!
We ran into two of our well-respected Wall Street hedgies this weekend and asked them both where they thought the market was headed. One is a long term thinker and his reply was, "over the next 4 to 5 years... much higher". He did not seem in the least bit concerned with what happens over the next few months. The other told us that he sees the market going much lower. He admitted, though, that he was on the wrong side of the trade during the market's recent upside. He said he's been a bear on the market for a long time, and continues to be. He suggested not choosing sides and instead trading the VIX.
Given that our chats were inconclusive (one bull and one bear), we have to rely on our own spidey sense. Our guess is that given everything the market is facing right now, it'll drop to about 8,000 or so (lows of last summer), to mark the low for its new trading range. But that's just another two days of trading, so why fret?
We probably should not be 33% invested at the moment, and we may trim that percentage a bit if the market rallies. Otherwise, we're just going to remain focused on the intermediate term (end of year), and use this time to increase our exposure in companies with great promise. We still stand firm on our belief that the LED stocks will double by year end from whatever lows they make during this correction. Perhaps CREE from 55 to 110, or VECO from 35 to 70, whichever it may be, that's too large a gain to miss out on. We still strongly believe that these stocks have not put in their tops just yet, and that belief is rooted in our theory that they will not top out until a few quarters (or a year) before their earnings growth tops out. Given the size of their market, we don't think they've reached that point yet.
That said, we're still not willing to pay up for these names. We want them cheap. If the market drops 800 points one of these days, we'll be buying, not selling.
Along with our focus on buying low, we're also going to take hedgie #2's advice and play with the VIX. For those unfamiliar with trading the VIX, you should know that you cannot but the VIX directly. Instead, there is an ETF called VXX which tracks it. The chart above is a chart of VXX.
After the market calms down for a few sessions, this index will drop. During market corrections, the VXX goes sideways in a broad range, making very rapid swings from its lows to its highs. This makes it a great trading vehicle. Buying VXX anywhere in the low 20's looks to us to be a sure winner over the next couple months, as we agree that market volatility is here to stay until at least the next quarter. Buying VXX in the low 20's (if possible), is perhaps the best insurance policy against a market crash. There is little downside, because for it to drop significantly, traders would have to reach a point of complacency. Given the events overseas, our own struggling economy, and the market's recent large gains, we just don't think traders are going on vacation anytime soon.
For better or worse, here's our prescription...
-Cash is King. (have at least 2/3rds of your portfolio in cash).
-Use this correction to get bargains on strong growth stocks that you plan to hold until year end.
-Hedge your portfolio with a bet on continued volatility by buying VXX on dips.
15 comments:
The euro zone is putting together a bailout fund. When that is in place, I think there would be much less volatility and dow10000 would hold.
Too little too late.
VXX and the other VIX ETF both look like inverse ETFs that degrade over time. They are great if you can buy them within two weeks of a week like last week, but otherwise, they seem like expensive insurance.
VXX and others
Always be aware of inverse ETFs, they are bound to go down, unlike stocks at these prices, they are bound to go up. Last week was the best time for inverse, this coming week may not be.
Even if you had bought VXX in mid January, you'd be able to break even now. We would only buy it if it drops back to the low 20's, at which point the upside is greater than the downside short term.
We agree, though, that it should definitely not be bought at its current level (high 20's low 30's).
We still believe that we're in a correction and despite perhaps a few good up days this week, we're not going to rally until the correction runs its course time-wise. It takes at least a month, but usually longer before sentiment is able to reverse course.
This morning I sure wish my cash was long or double long. Shorts will be fried crispy golden brown.
Or perhaps just brown shorts?
sbbuilder, that is too funny! My two silly bids (low ball bids) didn't work. My two silly asks did. All my LTL sold at the open for $39.77. LTL quickly dropped to the mid-$37s. My cash is making zero :( How is everyone else doing? Well, I hope.
Joe are you holding your VECO shares? Snot are you using this time to ease out of your position banking on a further pull back? I've missed out on selling on great gains numerous times since mid April. I'm in at $44.97 and would hate to miss out on selling for a gain once again...
I used to be more of a trader type, but i'm really trying this long term garbage :)
Anon, we haven't done anything yet. We try not to trade on emotion. RBCN is the clear relative strength winner so far. We are leaning towards buying some of it rather than selling any VECO. Holding "long term" (12 months or so), is not as easy as it sounds. But look at it this way... we bought some AIXG back in late 07/ early 08 at around $14 a share, before these names were that well known. There couldn't have been a worse time to buy stock. Shortly after, Bear Stearns failed, then Lehman and Merrill, etc etc. We sold because there was no end in sight to the carnage. AIXG fell to below $4 a share. So we felt pretty smart about getting out. Needless to say, had we just stayed put, we would have had a tremendous gain.
So if you can buy a stock just before the second worst bear market in history, and come out way ahead less than 2 years later, why bother worrying about all these little dips at all? Or even the big dips for that matter? Just buy a few good companies and keep averaging down. It's nearly impossible to buy it when it turns around and starts going up, because it goes against human nature to buy something for substantially more than it cost the day before. So you're either in or you're out... for all of it. Don't expect the upside without having to ride out some of the downside.
anyone gonna short the Euro - EUO?
Anon, I sold the snot, pardon the expression Snot, out of almost everything yesterday (sold VECO, LTL, WATG, T) while holding my corporate USA bonds and adding to them (HYT, MSY). Today I plan to try to buy on the weakness (VECO, LTL, VOD, VPU). What are you holding and trading?
I sold about 1/4 of my Veco holding near the close yesterday. It seemed prudent to lighten up, and take the gift of a nice gain. The rest I plan on holding through thick and thin. I will probably keep adding to and subtracting from this core position until things eventually break down, or reach unsustainable levels.
I have long positions in other stocks that go back a number of years. Probably one of the best is Oxy. Thats the kind of stock I'll continue to hold for many years. Fiddling around with Veco and such is interesting and fun, but not necessarily what I'm banking on long term.
Of the S&P, Dow, Nasdaq, CREE, VECO, MRVL & RBCN, only one reached its highs from the beginning of last week (Monday, May 3rd)... VECO.
It takes a few weeks of data before relative strength can be determined, but so far it's looking like VECO is doing exceptionally well.
Does anyone know of any sectors making new highs (or correcting very little) during this selloff?
This gold company is making new highs Eldorado Gold Corp (EGO). Very funny, most gold stocks didn't move much during the strong surge of last year, this EGO did and it's making new highs during this correction. It seems like the stock will do well if the market does, and it will do better if the market crashes. How interesting. Do you think this is a good buy now?
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