Over the past few weeks, I have become increasingly cautious on the markets. I mentioned on Bloomberg I suspected this cyclical rally might be ending, and that we were moving from over-weight to equal-weight to eventually underweight equities. My concerns were about an Earnings slow down as well.

On October 26, I got even more explicit: Time to Reduce Equity Exposure. (see this and this and this and this).

As is so often the case, there was some pushback: Some folks said you can’t fight the Fed, others said any dip was a buying opportunity.

Lots of traders and investors and fund managers read this blog — do tell us what your perspectives are.
~~~

What Say ye ?

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

37 Responses to “Open Thread: Look Out Below!”

  1. edgjii says:

    Always appreciate your insights. As an investment advisor, we are fully hedged but was thinking the risk was missing a large upside move due to a congressional breakthrough. Then our government leaders spoke. So much for the upside risk for now. @edgjiertsenii

  2. dustbowl daze says:

    My least favorite graph on this site was the one that said analyst Bearishness was actually Bullish, because it turns out not to be true. It was very, very Bearish.

    ~~~

    BR: Extreme bearishness IS bullish. (We are not there yet…)

  3. woolybear1 says:

    I am being extremely cautious. I believe Europe will basically implode, I spend a lot of time in Spain. There is way too much complacency in this country. I would rather lose out on a rally than lose capital. On the other hand, what do I know?

  4. Lee Adler says:

    The technicals say we’re going down a bit more, and yesterday the Treasury announced $25 billion in cash management bills auctioned today that absorbed most of the Fed’s first QE3 forward purchase settlement of $36.9 billion today. So there went most of that prop. QE3, tilted Twist and MBS reinvestment cash will begin to roll in to Primary Dealer accounts now at the rate of $85 billion a month. The next slug of it will be next Monday and Tuesday totaling $22.6 billion, but the next installment won’t be until December 12, and the Treasury has an intervening settlement of around $60 billion in net new longer term paper settling on November 30. So there won’t be enough QE3 cash to help the market for the next 4 weeks. The momentum is down for now, and the next round number beckons on the SPX.

  5. larrr1 says:

    I knew it was coming all along, also. (Except for this, this, this and this)

  6. SWMOD52 says:

    I’m 50 … went to 25% equities in all investment accounts about 2 months ago…equities I do have are big pharma, GDX, DUK and CSCO

  7. PeterR says:

    SPY break below MA(200) on moderate volume was Options-related IMO.

    Fractal support at SPY 135 may hold with VIX still below 18.

    MA(200) just above 137 is now resistance.

    TBD for sure — but don’t rule out a Santa Rally to catch everyone by surprise.

  8. JerryC says:

    Late day mass dumping if we open down tomorrow I’ll be a buyer eying at least 1375 and possibly the 50 MA. JMO :)

  9. My WAG is that the Republicans will not do a deal on the Fiscal Cliff until the last hour approaches on the Debt Ceiling (assuming that the ceiling figure of $16.394T is reached before the end of this year)…they will hold that as leverage to get Obama to back down on his resolve to let the tax cuts expire on the 2%’ers. If that’s the case, I don’t see Sanata coming to the markets this year.

    The /ES Monthly chart still has a recent bearish “Death Cross” formation…plus negative divergence on Stochastics which has crossed down…the selling this month could just be the start of more to come: http://screencast.com/t/sWHq3RIWgsnD

    Economic weakness is accelerating in Europe (plus fiscal fiasco) and China, as well…these cannot be solved by U.S. Congress or the Fed.

    The current momentum (and sentiment) is DOWN until it changes to UP…plain and simple.

  10. Rightline says:

    I didn’t get to see the videos. I did see the main page post. I am on the site every day. Both the video and think tank last post is 10/12/12 for me. I have ie8 with fanboy tracking protection which I turned off to try to get updated page view. I clear cookies daily. Nothing I do updates the page. Can anyone help?

    No bid in sight for the market yet. I’ll guess we get a violent short lived bounce on low volume. Then grind sideways/lower into year end. Something positive out of Obama/Boehner meet or Greece getting relief money Tuesday?

  11. Futuredome says:

    The banking crisis is the United States is over, even with a Euro implosion, the law is in place to nationalize defunct banks and liquidate them with no systematic chain reaction. We will see “finally” what is solvent and what is not solvent I suspect in 2013. The truth will finally be told.

    The 2 things I hear on the street that bother the market:
    1.FMOC policy ending bank subsidies and QE targetting toward Muni/State investment ala a backdoor fiscal stimulus not requiring Congressional approval. The fact Bernanke is leaving tells me some things are going to change at the FOMC.
    2.Obama’s tax hikes to end financialization of commodity markets

    That is the price for not voting for Romney. Under Romney, the FED would have contiued the same ole policy. Don’t buy for a sec the “anti-fed” talk out of the Republicans. They need it to bail out the system again and undermine Dodd/Frank so the Executive doesn’t nationalize Wall Street’s cabal which Dodd/Frank does gives provision. It was the “real” reason a mild piece of legislation was hated by Wall Street.

    This means lower commodity prices, higher long term rates(which Bernanke failed to deliver) with steepening yield curve via stronger economic growth in urban areas while the rural areas deflate aka Republican strongholds. Not good for current market portfolio’s. Some adjustment is required.

    I wouldn’t be surprised Dimon and his ilk don’t return to the Republican party by 2016. Clinton has positioned the Democrats as friends of domestic manufacturing and urban areas, away from financial markets the last 3 years. Doesn’t help that Obama stuck out a hand in friendship and they took advantage of it. Tim Geithner will not be on any Obama mailing list.

  12. Rightline says:

    Figured out my issue. If I am not signed in, the newest post on video and think tank is 10/12/12. After signing in all pages are up to date. Then I signed out and the 10/12/12 pages were again the newest posts on the pages. Hope this helps someonene.

  13. JerryC says:

    –> Rightline

    Making folks sign in to see recent blog posts is pretty lame. I expect better.

  14. ConscienceofaConservative says:

    Seems the market goes up in response to a each new Fed Q.E. and then gives it back with each successive move having less effect. That said stocks go up in response to lower interest rates or increased earnings. Well rates are at zero, profit margins are at peak levels, and we have Europe being a drag on earnings. All in an environment where p.e. levels aren’t cheap.

    Doesn’t sound like a good risk reward scenario. And while the same was true six months ago, the market hasn’t one up all that much either. Best to stay cautious.

  15. There was a rather large trade that got the derivatives trading desks talking last Thursday. 104,000 contracts of the November $40.50 put traded as a buy to open for $0.38 in the EEM. trading desks confirmed to me this was not tied to stock (married put), part of a roll, nor part of a spread. Another 36,000 traded on Friday, making this contract the most traded for the week. There are now 167,830 contracts open going into Friday expiration. Just the math for the 104k – Yes, that’s a $3.9 million outlay when the EEM closed on Friday at $41 that we see below $40.12 or worse by the end of the week. If the trader has shares, that’s a significant premium to pay for (now two) days of protection. However, we are right at the breakeven point with two days to go…

    By Friday close, we shall see if $3.9MM can be spent wisely.

  16. meditative says:

    after going to cash just before the market tanked in 2008 I’ve had a hard time getting back in the market. Still have 20% cash, thank god.

  17. A says:

    Well, regardless of the accuracy of the prognostications or even their magnitudes, it looks like we’re nearing the point that Mr. Buffett has often talked about: being greedy.

  18. Bridget says:

    Ever since the call I will always remember with gratitude:
    http://www.ritholtz.com/blog/2010/05/cash-100/

    I pay very close attention to B R.

  19. mitchn says:

    Not rocket science. Global economy slowing, profits falling, CAPITAL GAINS RATES going up. No agreement in Congress in site. Time to take profits off the table. This could get much uglier between now and the end of the year.

  20. Sunny129 says:

    I saw the video and very excellent stats on slides!

    The overall negative sentiment confirmed my views which was already in execution a couple of months before.
    I feel like I am back to 2007-2008 when the reality was denied and the mkt kept going up! I used inverse ETFs a lot at that time and my portfolio withstood the ’08 crisis.

    But after wards since March ’09 when the rigging began withQEs+ZRP+ the worst was funny accounting (FASB-57!) I lost nearly 40% but I am recovering slowly. I lost when the mkt went up on perception but reality is bursting through and I am quite happy.

    Fresh air of reality was badly needed! I am experienced investor + trader since ’80s. Now I am using options short/long 3x inverse ETFs profusely and I hit the jackpot for several days. I always have a hedge since I got burned several times b/c of ‘kAKAMANIA’ solutions of Ben & Co.

    The powerful force of DEBT-Deleveraging ( of wealth built on debt-Consumption Economy- since 80s) is going on both sides of Atlantic. CBers are out of bullets and worse, clueless.Re-inflation by Ben & Co has failed after Trillions over the FIRE industry! They bailed the criminal Banksters on the back of taxpayers, Now who is going to bail them out? They are trying austerity on the Society. They should have let Banksters bite the dust in 2008.

    Karma is back after got kicked down again and again for 4 years. Consumer credit was mere 1 Trillion in late 70s, grew to 50 Trillions by 2000 and again uo during housing bubble primarily (70% of credit created) due to securitizations!

    Currently it is 53 Trillions. The household wealth is NEGATIVE.

    We deserve the 2008 again b/c no one learned anything! I welcome REALITY any day!

  21. Joe says:

    Ya gotta massage in where and when. My 401 where I got trading restrictions and very few and very macro choices? 18% mostly big cap stock funds/82% corporate bonds/stable value fund….

    In my “Hold my beer…. watch this…. ” account, margined to the max in 3 biotechs, one energy, one tech. I was 90% stocks a month or so ago in the 401….it didn’t feel right.

    It does NOT feel like end of the year good times and I only got one customer (and his family) to answer to…

  22. slowkarma says:

    Two thirds of my money is managed by other people, and I handle one-third. Over the past fifteen years or so I have done as well as the other two thirds, with a basic buy-and-hold strategy; I’m more of a long-term investor, the other two thirds are more active traders (with my encouragement), but with different basic strategies and objectives. In our semi-annual discussions, the other managers have made coherent and rational arguments for their activities, just as I have for mine: but they were all different.

    In the past couple of years, however, it feels like the ground is breaking under our feet: it’s difficult to make a coherent argument for any particular strategy because so much now depends not on true economic activity, but on political decisions. We wish to reduce unemployment, so we have QE, and more QE and even more QE. If we hadn’t had one (or any) of those QEs, then investment outcomes would have been very different — but the decision to ease is arguable and much depends on theories promulgated by one man, Ben Bernacke. If there’s a major increase in the capital gains tax, then equities are worth less — but that outcome depends on a back room “deal” in which the tax, or its size, may be on or off the table depending on factors that really can’t be known, including the individual politician’s calculations of personal risk. The markets can be affected by purely technical accidents involving software — tens of billions of dollars can be moved because a program somewhere had a 1 where it should have had a 0.

    So what do we do? No matter what we choose, the results of that choice can be drastically affected by somebody’s whim, or a simple technical flaw…which is a situation I’m not sure the markets have ever really been subject to, at least, not to the extent that they are now. Technical inflation is now so low that I’ve moved almost entirely to cash, where I’ll sit until this economy-by-whim begins to wear through, as I think it probably will. If my hand is forced by inflation, I’ll go to some basics like fertilizer (POT) and medical device companies and maybe nursing homes, and so on. But that’s still a good way off, I think, maybe five years. We’ll see.

  23. nofoulsontheplayground says:

    The low VIX is troublesome. The charts appear set up for the VIX to rise to 24 soon. Meanwhile, the NDX is close to a cluster of support in the 2400-2450 range, so it is likely there will be a bounce attempt coming. The percentage of stocks above their 10-day, 21-day, and 50-day moving average is getting in the extreme range.

    The SPX is nearing the .382 re-trace from the 1074 2011 lows to the recent highs. That is at the 1318 SPX area, and that should provide support due to the fib and the fact that it is near a prior pivot high.

    Probably the most bearish thing hanging over the market right now is the weekly XLF chart. That rollover is headed to 13.91, and quite possibly 13.18 in the near term and much lower in the intermediate term. That chart is scary bearish right now, and JPM is like the poster child for crappy looking weekly bank charts.

    If we get 5-day lows in the range of 320 on the SPX in the next day or two, we should be set up for a bounce, but it should be one that will be sold.

    The end of year sell-off kind of reminds me of 2000. However, unlike that time, the Fed today is quite low on effective bullets. Fundamentally, all this talk of the fiscal cliff will have people taking profits for tax reasons, even though it is likely a somewhat irrational fear. If we continue to sell off into the end of the year, we could be in for a face-ripping rally to start 2013 (maybe a somewhat muted version of January 2001).

  24. nofoulsontheplayground says:

    BR, how is the site redesign coming? I assume the storm has delayed the implementation, or maybe I’ve missed something.

  25. louis says:

    We are back to where we were before Lehman. Where’s Einhorn?

    http://www.youtube.com/watch?v=PD5Imb7vWSc

  26. gkm says:

    Still waiting for 14300 as LT top for the Dow. Be nice if they’d kick that can over the fiscal cliff and get’er done. I do like Spain as long as 7460 holds monthly.

  27. Expat says:

    Markets have been rallying thanks the largest injections of cash in history. Corporations, especially the finance sector, have been handed hundreds of billions in free money. Home prices have been propped up with ZIRP. Broke countries are sheltered from reality with the Mother of all Can Kicking.

    The true economic picture has been weak with glaring signs of catastrophe which have been ignored as media cheerleaders and hapless politicians point to superficial improvements or simply lie. Unemployment is still at record levels (7.9%, my ass!). Indebtedness is rising again. Banks are sucking billions out of the economy. The government is printing. Europe is foundering. Japan is withering. China is past a key inflection point and won’t drive the world any more.

    Reality has an odd way of catching up with us. The markets should start reflecting reality. That said, the financial markets no longer have much of a relationship to reality. Stocks no longer represent bricks and earnings. MBS’s are no longer associated with real houses. CDS’s are never triggered (doing so would pull down the house of cards). Bonds are bought and bought no matter how bad the issuers credit because there will always be a bailout.

    We should be revisiting the 2008-2009 lows and might in the end, but, frankly, who cares?

  28. dougc says:

    Could it be that Mr Market doesn’t think that QE3 is large enough to keep the stock and bond bubbles alive and also create a housing bubble? Fed is planning on supplying 40 B/mo by buying MBS but the government needs 80 B/mo to fund deficit. May have to wait until Yellen is Fed chief, I understand she thinks Bernanke is too conservative and will use B52 bombers instead of helicopters to drop 100 dollar bills.

  29. Petey Wheatstraw says:

    As I said in an earlier comment: We have already gone off the fiscal cliff. All that has been holding us up is hot air, dishonest GAAPS, ignorance of the hoi polloi, and denial. Eventually, those blowing the hot air will have to inhale. When the real descent begins, all political talking points will be the first thing jettisoned.

    That’s Entertainment.

  30. PeterR says:

    Europe stabilizing with DAX down less than 1/2 percent.

    SPX futures up 0.4%.

    Options-driven Santa Rally starts today?

    SPY MA(200) at 137.36 is first resistance.

    An Options short squeeze could ignite here IMO.

  31. Conan says:

    My model called to tighten stops & I’m now been stopped out. So far no signal to go short, so I’m out of the market until the next signal is generated.

    Other things to consider than technical signals:

    Earnings don’t look too good. Especially for the companies that get their earnings overseas.

    I keep hearing folks that are taking profits here as they rather lock in a known here vs doubts about the market and taxes for 2013.

    One reason to be careful about going short is historically a rally before the end of the year is probable.

    Bottom line best to be conservative here until the trend can be determined.

  32. Concerned Neighbour says:

    I see a number of reasons:

    1. As much as I like to joke that central banks will never let stocks go down again, there are diminishing returns to central bank action. I noted with interest that Yellen’s remarks about even more QE when twist ends (because apparently QE infinity is not enough) did not juice the market. We may have reached the point where the market finally realizes that central bank action is not a panacea.

    2. The market may finally be realizing that tax rates in general are unsustainably low for a developed economy. It’s inevitable in my view that taxes must go up, regardless of what happens on the spending side. If done wisely (what are the odds of that?), I think this will actually be a good thing for the economy, though probably not the market in the short-term.

    3. Stocks are ridiculously overvalued. We’ve got brand names like JNJ trading at 20+ P/E and huge multiples to tangible book value. Maybe if the economy was growing at 5% I could see that, but the reality is Europe is in a recession and the US is probably headed back to one soon.

    All that said, let’s keep things in perspective. The market is still up ~7% for the year, and down less than 10% from its peak. From my view, it has a lot further to fall before stocks are fairly valued. In reality, it’s probably just the powers that be taking a breather to make things look “plausible” on the DOW’s path to 36K and AMZN-like P/E’s for all!

  33. eurostoxx says:

    Wow all the Doom and Gloomers seem to be out recently. How have your portfolio’s done since 2009? The world isnt ending. I think a lot of this sell off is positioning. US markets over extended vs EM and Europe, tech sector in particular. There were a lot of ppl caught complacent about risk after the fed and now either they are in the red or not particularly interested in stepping in after a decent year so far.

    I do think a major trend change is near but its not like it will happen all at once, we will need to see some lower highs first after a rebound (which from 2009 -2012 hasnt happened).

    Fundamentally we are in a world of low rates and slow growth. Are stocks a bit expensive here, sure, and is the earnings cycles potientially turning, maybe. But where else you gonna put your money?

  34. grandwazoo says:

    I think that caution is more than justified and that after about a 100% gain history and logic would say there should be some type of drop and there are all sorts of data and headwinds to make that case, but I think just logic and common sense is enough. But I would say BR absolutely made the right call and it’s pretty hard to argue against caution with where we are right now. I am not talking doom and gloom as I don’t think it will get to that point, but merely exercising caution by taking some downside off the table in my opinion is totally justified. Personally, I got out at 13,500 on the Dow because I am not greedy and will take a nice profit and now go find something else to do with my time and not worry about things. Wake me up after a 20-30% drop.

  35. evans says:

    where else you gonna put your money?

    That’s the key question.

    Viewed in a comparative perspective, the US looks to be in a very strong position. The topics we are debating:

    1. The number of “respectable” financial commentators who were predicting (and betting on) a Romney victory? (If someone like John Maudlin (and he’s not the only one) could be so wrong politically, how can they be right financially?)

    2. The financial and investment consequences of US energy independence by 2030. This is surely bearish for the defense industry. It is unclear what this means for US energy companies.

    3. The demographic consequences of Southern European economic collapse. We are beginning to see large flows of money and people to UK, Germany, and (from Portugal) Brazil.

    4. Our one provisional conclusion: property markets in Singapore, London, and Hong Kong look to remain very strong. New York also looks strong subject to some concerns about repeats of Sandy in the next few years.
    2.

  36. Orange14 says:

    It’s a tough call for a retiree like me to deal with the equity portion of my portfolio. With the exception of BRK-B all my holdings provide a good income stream that can be used as need be to supplement my pension (don’t need to take SS yet and am waiting until I turn 70 to do that). Despite the angst of the last week, the portfolio (including dividends) is still up 13% on the year. As a value investor, a number of my holdings have appreciated significantly over the past five years and even with the low CG tax rate, would mean a big hit for me were I to sell. The fundamentals of these holdings are still strong and I see no reason to jump ship on the majority of the holdings. I guess this is the proverbial ‘rock and a hard place’ dilemma.

  37. icm63 says:

    I manage my money with the help of a mechnical model, its is unbiased, and makes one act when I fear the worst. The model finds strength in down turns, strength that turns into new trends.

    I got in after June 4th lows, and exited just after the high after trend line break.

    The model

    Google > RTT Market Timer