Nasty day at the stock market today. Dow lost nearly 300 pts….

[capeman]

I wouldn’t be surprised to see the Fed go for the other knee real soon. It won’t help the market at all in the long term but will keep the shorts on their heels and less willing to go all in.

[one_muggle]

Doubt it will drop below the ~11k mark, and really don’t see it dropping below the 10k mark barring an unforeseeable and significant event–like a nuke going off in London or tsunami hitting Long Beach harbor.
Credit crunches and overheated RE is one thing, but the market isn’t in bad shape–maybe just a bit expensive (P/E-wise) when the new earnings reports roll in over the next 18 months. THe current PE is reasonable, but the ‘E’ part will take a hit during the contraction–already in progress IMHO.

-one muggle

[ucodegen]

My impression on the Market is that it is the Wall Street(ers) trying to game the system. They want lower rates because it will allow them cheaper financing for purchases on margin as well as mergers/acquisitions. Panic helps sell this idea to the Fed. The Wall Street(ers) also make money on transactions/movement. Right now the market doesn’t want to go anywhere until the risks on the sub-prime/Alt-A CDOs/MBS(s) have been figured out (as well as who owns them). Therefore the Wall Street(ers) try to cause churn in the market (up/down/up/down movement) to get their transactions/movement. A good read on this would be looking at the ‘Cramer’ games Jim Cramer was playing when he was a Hedge fund manager. Panic the crowds, followed by exciting the crowds, back to panic etc. I have given this behavior a term: “Trampolining the Market”.

Some items on the market are PE cheap, some are expensive. Just pick and choose.. and let the market fluctuations work for you…

[stockstradr]

In the short run, the Fed can goose the market. In the long run, the Fed will be ineffective in stopping a correction in a recession.

Exactly.

The Fed can only “drop a few more uppers in the punchbowl”

Here is my current allocation:

5% Puts on the S&P500, JAN08 and JAN09 expirations
50% PROSHARES SP500 2X INVERSE (SDS)
35% RYDEX SP500 2X INVERSE (RYTPX)
10% CASH

Of those, I recommmend the PROSHARES SP500 2X INVERSE (SDS) because you can trade it intra-day, which you cannot do with the RYDEX fund. The S&P 500 Puts are too expensive now. I bought mine before July, before volatility increased and was priced into the puts.

Yes, I know mine is an incredibly risky portfolio allocation, so I don’t need to read your scathing replies about how I don’t know how to manage risks. I’m young. I understand the risks. This is extreme gambling. It is also great fun, and since mid-July it has been a great money-maker, putting me well ahead of the indices for the year.

With that allocation you can imagine how much my accounts go up on days like this. I LOVE BAD NEWS for the markets.

My advice for everyone is don’t be long this market. This is a market with such dark vengeful fury that it will mow down anyone holding bullish positions. I see an additional correction of 10% before the end of the year, and it could be bloodier than that.

Yes, if I sound familiar to you old timers, that’s because I’ve been posting on here since about 2004, only under a different nickname that you know well. I switched to this far more anonymous nickname this month to provide myself more privacy. If you figure out who I am, please don’t post the old nick because that won’t be nice.

I’m still looking for a way to buy puts on the Shanghai A Shares index, and I haven’t found a way. If anyone has any ideas, do let me know. I seek puts because I cannot short in my retirement accounts.

[hipmatt]

Can someone explain to me how lowering the fed funds rate again could strengthen the dollar?

[LA_Renter]

I guess it depends if we go into a true recession. The historical record shows that the average decline in the S&P 500 is 34 percent and the average duration is 37 weeks. Using that as a metric, what is 34% off of 14000……….9200. I mean we really can go into a recession here (they do happen)….they usually do start out of some kind of turmoil in the credit markets. And buddy have we got some turmoil in the credit markets.

This is an interesting read about how nuttered our FED really is in this mess

http://www.atimes.com/atimes/Global_Economy/IH29Dj01.html

“Banks are slashing lines of credit, paring back trading positions and refusing to roll over commercial-paper obligations because they must husband their cash. That is why a 50-basis-point cut or a 400-basis-point reduction in Fed Funds will not do anything to restore confidence. It is also the reason the markets will panic the day after the Fed’s hand is forced on September 18, when they realize that financial institutions will still be unable to move the collateralized derivative structures off their books.”

I happen to agree with that statement. There is going to be a huge build up to a Fed Funds Rate Cut and it will do absolutely nothing to unfreeze the derivatives market. The market will react to the fact that our FED really has very limited power over this situation. Time will tell.

[CAwireman]

Okay,let’s see what the market does on Wednesday…

HiggyBaby

[bsrsharma]

how lowering the fed funds rate again could strengthen the dollar?

If I have to make a guess, it will be like this:

No rate cut -> severe recession -> Less demand for $ -> weaker $

Rate cut -> recession avoided -> demand for $ -> stronger $

I think the market might have figured in a recession into $ demand, and hence its value. By avoiding a recession, $ may get a boost.

[luchabee]

For those going long like stockstradr, how do you time the market going back up? While it’s clear there’s going to be a huge correction for the next few years, don’t you miss buying all these stocks now at a lower price through dollar cost averaging? From the studies I’ve seen in academic and financial planning articles, it’s very difficult to time the market. What about modern portfolio theory and the efficient market hypothesis? Have these been completely discredited in this new, brave (subprime meltdown) world?

When the market turns bullish again (in a few years), you’ll probably still be shorting. Moreover, the majority of the gains occur in just a few huge days of the year, so you won’t be able to time it when it goes up again. That means, and again I’m a relative novice, that most people who time it will take initial lossess seeing the market decline, but will not be ready to get back in when it (unpredicatably) recovers.

Don’t get me wrong, I’m a total bear on real estate, but we can follow the mortgage reset table, etc. In the financial markets, there seems to be too much uncertainty and noise to time it correctly, i.e. government intervention, international events, commodity prices, M&As, etc.? Maybe, I’m just of the old school (though I’m only 33).

Any thoughts?

[Anonymous]

Asia and Europe are down…could be another very interesting day.

luchabee, you have a good point there. I haven’t thought much yet about how to time the market going back long, but I don’t think it is something that really works without a lot of luck.

Off the top of my head, I’d imagine that there will be some good buys along the way. I’ll probably pick up those, at some point go to the short funds instead of the 2x ones and slowly transition back to mostly long positions. It’s definitely something I need to put a lot more thought/research into lol.

[Sandi Egan]

how lowering the fed funds rate again could strengthen the dollar?
The things media can do to us…
Last year good news about economy often caused downward trends on the market. Here’s the logic:

Good news -> economy is growing -> the FED is going to raise the rate again -> higher rates will slow down the economy… You get the picture.

[Coronita]

Contrarian viewpoint, I think as the market bounces around on panic, this is yet another great opportunity to enter on a selloff and sell when there's another another dead cat bounce. The markets have been extremely volatile, yo-yoing up and down. I've reentered some long positions yesterday and will probably continue to do today if we have another down day. There's about 8 stocks that I've been moving in and out of over the past two months, and it's been working out just fine. All the earning came in above expectations, and forecasts were inline or exceeded. It seems like the volatility of the markets though have caused big swings. This will be the sixth round I'm playing with these.

Of course, all my indexes are lower from the peak too, but oh well.  

[stockstradr]

“luchabee” writes:

For those going long like stockstradr, how do you time the market going back up?

lunchabee, I think you are mixing me (diehard bear mostly short this market) up with many on this forum who are buy-and-hold bulls in long positions. By the way, I respect the buy-and-hold investors, particularly those good at value-investing.

However, I’ll answer your question about how I time the markets, and when it is purely guessing.

For me, the key is to identify the economic trend or event that is certain to happen, and anticipate how it will hit the markets before most others see it coming. Then you take market positions that reduce risk associated with having to GUESS when that market event will happen.

I read all the forward-thinking analysis (of economic trends) i can get my hands on, and use it to brainstorm “what will likely happen when…” scenarios.

Often precipitating events make scenarios so certain that one need only guess on WHEN the shit will hit the fan, not IF it will. A housing crash, for example, was inevitable given the toxic loans, speculation, outright fraud that created the bubble.

I saw that a combination of events also meant a major stock market correction (30%) will hit along with a recession.

I guessed that correction would start about Dec06 to Jan07. I was wrong, but since I was guessing on timing I only put about half my portfolio short; however, the market then climbed up over 10% against my short positions. *ouch*

In Jul07, I guessed again the markets had finally topped out. I put the rest of my chips on the table. This time I was right and having increased my position just before the pullback meant I covered my losses from shorting half my portfolio six months early.

After the market fell 10%, I guessed just on instinct Aug 16th the bargain hunters would come in and markets would see a 5% fool’s rally. I closed all my short positions, except my puts (less than 5% of my portfolio)

I guessed right and markets did exactly that and by (Aug 24) I went short again with 30% of my portfolio. By Aug 27 I gained confidence in that guess (bear trend has resumed), so I put the other 2/3 back into short positions. The market fell -280 points the next day (yesterday), giving me nearly a full 5% gain just for that day. (My portfolio was in positions that gave 2X inverse market performance)

Last night I figured the market would continue falling today, so I held all my short positions. I was wrong. The market is up 1.3% as I write this. Win some, lose some.

However, I continue to believe today this is just normal volatility on top of a a nasty bear trend line down, which will take us 5% to 10% lower from here before we see another fool’s rally. Today’s rally is looking quite weak anyway. There is so much fear in the market that INCREDIBLY good news will be required to support a significant fool’s rally, and that kind of news is unlikely. More bad news is far more likely.

I saw that last night the Asian markets took a bit of a tumble. Remember, another pet theory I’m holding is that Asian (particularly Shanghai) exchanges are way way overbought, and currently offer a better shorting opportunity than western markets.

[HereWeGo]

Bernanke’s response to Schumer probably had the opposite effect of the release of the Fed minutes yesterday. The attitude of “ehh, it will work itself out, no biggie” from the minutes switched to “I want to assure you that the Federal Reserve, in cooperation with other federal agencies, is closely monitoring developments in financial markets …the Federal Open Market Committee has stated that it is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”

[luchabee]

Sorry, stockstrader, I meant to write going “short” in the market and not long. You’re definitely not a buy-and-hold investor, like me. (It was the last e-mail of the night and I was fading quickly.)

I’ll need some time to digest your generous response. Thank you for explaining your rationale. Given work today, I’ll need a little time to reply. Cheers.

Luchabee

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