A drop of 8.8% from its April recovery high isn’t anything to call home about, but, as Briefing.com points out in a very interesting piece of analysis today, that makes the Standard & Poor’s 500 Stock Index one of the best performing in the world.
And, as Briefing.com goes on to note, the index is showing some signs of stabilizing.
The index bounced off its 200-day moving average for the third time in the past two weeks today, May 19. That kind of testing of a support level can be a sign that a market is finding a base.
Certainly the S&P has done better than the Shanghai Composite Index, now down 25.6% from its peak, France’s CAC down 14%, Hong Kong’s Hang Seng down 12.5%, London’s FTSE down 11.6%, Japan’s Nikkei down 10.7%, and India’s Sensex down 9.1%.
Only Germany’s DAX, oddly enough, has outperformed the U.S. S&P 500. It’s down just 5.6% from its peak.
Ed..thank you as always, thanks to loettle and francolargo, its intresting you find my name funny.. its my real name… I find it funny too 🙂
Ed:
I am sure you know it. I just make sure others too.
yx,
I’d rather pay a tax on a profit then get a deduction for a loss. Deductions are only nice once, whereas profits are forever. 😉
cwt334,
There are several factors causing gold to drop:
1. We are in a borderline deflationary environment. If businesses keep expanding production, we could see full blown deflation. Industrial metals, food, and energy are already showing signs of delation.
2. After the initial euro drop, there was a lot of gold buying in Europe, which was driving demand, and causing the price of gold to go up. At the same time, the euro dropping also led to an increase in the dollar’s strength. The initial gold demand is over, but the dollar is still strengthening, which is causing a drop in the value of gold.
3. There have been rumors that some of the central banks have been dumping gold to depress the price. I don’t necessarily buy this, although it is plausible.
4. Last but not least: profit taking by gold owners.
All:
Make sure you take care of the tax man before you “short” any thing or buy “options” or ETF. You may face potentially very high taxes depending on what.
Sorry for the bad news.
marr.bo: we both are correct. I didn’t say NOT to be long the market. Indeed, one should be long most of the time for the very reasons you cite, and I applaud! I said simply to stay tuned to the underlying driver of the market, i.e., the collective perception of risk, and position your portfolio accordingly. (Who would not like to have been in cash during 2008? Many 401Ks turned into 101Ks. I know, because I’ve led a number of Dave Ramsey seminars, and I’ve seen real tears over real losses that will likely never be regained.)
The real problem with the bias is that it conditions one to “see” only what confirms the bias, and to ignore, or at least discount, what does not confirm the bias.
By the way, have you looked at REAL (inflation adjusted) market returns since 2000. Take a look at “online data” at http://www.econ.yale.edu/~shiller/
Kind regards.
Ed
I see that you are shorting gold and the euro. I understand why the euro is going down and why commodities such as copper and oil are going down (inflation in china and brazil) but why is gold?
lotteollie: it’s not that sophisticated. Just keep your eye on the collective financial health of people like you and me. If we collectively are feeling pretty good about our financial well being, we will spend, businesses will benefit, earnings will grow, and the market will go up. Otherwise, it will go down, or maybe sideways.
Remember, just because you have cash to invest doesn’t mean you have to. As Buffet likes to say, “Wait for the really fat pitch.”
*Your
Javos,
You’re statement is incorrect, and there is a reason there is a bias. Historically over the long term, the market will increase 8-10% per year. This is because the market reflects the growth over time of our best and brightest companies, and the 40-80 hours of labor per week millions of people put into these companies.
First, this means by shorting the market, you will be wrong and lose money more times than not. Second, the entire world’s investment strategy, a.k.a. retirement plans, college savings, house down payments are invested in this concept of the market in general increasing.
Saurin:
There is more to shorting stocks than simply deciding to short. There can be significant carrying costs with an ETF that is short. You also have to “borrow” an individual stock before you can short it. I was told you can’t do that in an IRA.
I held a short ETF once (TBT) and was lucky that I made a bit of money as I had no idea how the carrying costs would eat away at profits. Basically I didn’t understand what I bought (stupid).
IMHO…shorting is for fools, gamblers and people that really know what they are doing.
The are 2 important short ETFs that no one has mentioned:
SH: Short S&P500
SDS: Double Short S&P500
(My contribution to the discussion)
Saurin,
(interesting login name, BTW)
“Short” simply means that you make money if the market price of the underlying security (sector, whatever) goes down. There are many ways to structure a short position. The opposite is ‘long’, which I wish I was ‘less-of’ right now! 😉
Thursday AM: those who control this sell-off asl of late: News flash: THEY’RE ON DRUGS; CERTIFIALBY INSANE!!! There’s NO way you can justify this kind of nonsense!
Ed…
Wonderful explanation above, thanks!!
Saurin,
When you buy a stock normally with the intent to sell when it goes up, then you are considered “long” in that position. Whereas, if you bought an option on that stock based on it going down, you would be considered “short”.
There are “short” ETF’s and ETN’s which trade like stocks on the markets, but move in opposition to an index. The index can be anything from the S&P 500 to the price of a commodity (like gold) or a currency (like the euro).
To give you an example, a short ETN like DZZ moves opposite the price of gold. When the price of gold goes up, DZZ goes down. When the price of gold goes down, DZZ goes up.
Now to make things really confusing for you. DZZ is a “double short”. This means DZZ is supposed to move twice as much as the price of gold does, although in the opposite direction. In theory, this should mean that for every 1% that gold goes down, DZZ should go up 2%. In reality, the ups and downs tend to level off over time, so your return will actually be closer to the actual movement of gold. The only benefit in such an ETF/ETN is if you see a one direction movement over a short period of time and then sell it.
Ok people; what does it mean by Short Gold or short Euro?
Javos:
I am not that sophisticated of an investor. Still, I appreciate what you are saying and have been trying to take on that sort of outlook. I am not comfortable shorting stocks…as of yet. However, if have a large portion of my assets in cash and short term bonds, it doesn’t hurt my feelings if the market goes down so I can load up.
Looking over trades it seems that we are seeing a lot of small trades of 100/200 shares. This says to me that the big money is out of the market now or holding on.
For another example, when I saw the headline this morning, “Futures Drop As Euro Continues Slide”, it was music to my ears (or is that a “painting to my eyes” since I read it?).
Some days, it’s good to be contrarian. 🙂
javos,
Well said!
To give a good example of your point, my portfolio is currently made up of short ETF’s on multiple equity indexes (for example, Nasdaq and the Dow), as well as short ETF’s on gold and the euro.
I tease my wife, “If civilization collapses, we’ll be rich!”
Observation: there seems to be an inherent bias in most of the comments I read here, and that bias, if unrecognized, can be harmful to one’s financial health. The bias is that a market going UP is good, and a market going down is BAD. That bias is quite contrary to those who make the most money in the market, that is, those who have learned to make money regardless of which way the market moves. I’m not talking about traders here. I’m talking about those who try to see objectively, rather than emotionally, the underlying drivers of willingness to take more risk by buying, or less risk by selling, or even by selling short. It is this collective risk perception that moves markets, and once one becomes attune to that collective perception of risk, one can position one’s portfolio to enhance one’s investment returns. This approach is captured by the old adage, “Don’t fight the tape!” I would add that there are now numerous investment vehicles today that allow the common investor to participate fruitfully in either an up market or a down market, while also providing a good measure of diversity.
Does anyone have anything to say about Canada?
Actually it is 2nd time today it has bounced off from 200DMA, because first time MAy6th it pierced through 200 convincingly and closed way above 200. So not quite bouncing off the 200MA.
Data on markets in Jim’s post shows that the markets are not perfectly coupled but only coupled to varying degrees.
The S&P 500 is just off its 200 day moving average. If it breaks through, then there may be a burst of selling. (S&P last crossed the 200 day moving average on the way down in November 2007 and on the way up in June 2009). However, the history of this occuring has shown that the index has usually done “well” (no dramatic drop) at 1, 3 and maybe 6 months after a break through.
With Euro dropping so much, would there be a export company over there that can maximum the benefit from it?
Jim,
With commodity prices coming down and economies outside the US having some trouble now I would like to know what your thoughts on CNI going forward? Would you pick up shares if they continue to pullback over the next months?
Data just released by the Mortgage Bankers’ Assn show that more than one-tenth of all US mortgages are delinquent, a new record high.
The Swiss National bank intervenes in the Euro-Swiss Franc exchange rate pushing the rate by 300 pips.
Japan’s GDP is below expectations.
Equity Fund outflows of $9 billion since the fat fingered-crash.
Volume increases on down days and is very low on up days.
Centrals banks in Russia, Iran are now getting jittery about Euro.
The fact that S&P and DOW are near the 200 day MA is very risky, since if this average is decisively broken, many more stops and sell orders will be subsequently hit.
Jim, you haven’t posted your performance since October ’09, could you update it to 2nd Qtr. 10 ?
Perhaps the DAX has responded to the downward spiral of the euro and the anticipation of being able to sell more “affordable ” BMW’s, electronics (Siemens), chemicals (BSAF), etc to the world outside of Europe.