February 9th, 2010

A Strategy That Doesn’t Work In A Down Market

All the pro’s who come on the air to sell their latest safe, conservative long position make me laugh. Do they really believe that there is such a thing? Are there any stocks to move into that can insulate against a bear market? How have individual stocks fared since the recent high close of 1150 on January 19?

The Telechart database categorizes just over 6810 charts they as “Stocks”. When you strip out ETFs, companies that no longer trade due to mergers and acquisitions, shell investment companies, closed end funds and indexes, what remains is just over 5000 individual U.S. company stocks and foreign ADRs. As the S&P 500 Index fell 8.3% since the January top to yesterday’s close, what are the odds that you could have bought a stock that went up? The answer: only 15%! There were only 751 stocks of a total of 5027 that didn’t show a loss in their price, only one of 7.

And what kind of stocks were able to generate an advance while 85 out of 100 stocks declined? Were they the big consumer staple stocks like PEP, KO, PG, CL or SLE that all the pundits were touting as a safe haven? Not quite; Sarah Lee was the only one of the bunch that was able to show an increase while the other four declined along with the rest of the market. Actually, here’s a recap of these “winners” (click on image to enlarge):

The key points are:

  • More than half the stocks that moved up over the past several weeks were under $7.00 on January 19
  • The amount of the move was relatively small with half increasing 5.0% or less, and
  • Surprisingly, 22% of the stocks that moved up were small, regional banks, stocks were market laggards shunned due to supposed large commercial real estate exposures.

The point is that the odds of beating the market are slim when it’s declining:

  • Trying to pick winners against the headwinds of a market that’s going down has high odds of resulting in failure.
  • If you hold on to stocks, no matter how safe they are supposed to be, you will probably still wind up at the end of a market correction or bear market with a smaller total portfolio than you started with.
  • Stop beating yourself up. The safest strategy for insulating your portfolio is to have moved into cash (or hedging through strategies such as buying puts, Short ETFs, or covered call writing).
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  • Anonymous

    GURU,could you someday do a post about Silver ?Also advise on Silver mining stock charts ,ETFs,your picks on this sector ? Thanks for any info.

  • Joe

    Check out the Facebook link for a chart. Since April, 2006, old has beaten both silver and stocks by a whopping margin.

    Will it continue? Who knows but I'd put my larger bet on GLD and just cover my flank with just a small bet on SLV.

  • Charts and Coffee


    This post is why I almost never watch CNBC.

    One guy yesterday said it was time to be in cyclicals now and it made sense to be in safe stocks in 2008 during the crash. That is the mentality of these guys. To be 100% invested long all the time. They operate on a relative basis. So if there safe stocks go down 30% and the market declines 50% they consider it a great portfolio.

    I don't think most of the guys/gals on CNBC are pros at all. They are marketing people. The real traders don't go on CNBC.

  • Anonymous

    xlb go from 325 to 21 (-15%) take 2 month in 2004 .. only take 2 weeks in 2010..

  • Anonymous

    GURU,,I maybe way off base here with this ? but have to ask.If an investor thinks the US will attack Iran sometime in the future,,what should be a good hedge to do now ?

  • Joe

    Not sure I would buy any stocks today on a 2% likely outcome but, if you force me to think outside the box I'd consider energy and defense-related stocks.

    However, you'd probably have better results looking at what you could short (or buy short etf's on) because, at the outbreak of an invasion, the whole market would likely implode; there are thousands of good short candidates under that scenario and, therefore, you are more likely to shorts that wind up being profitable.