Wednesday, May 17, 2006

The good, the bad, and the ugly

The Dow ended the day down over 200 pts, while all kinds of resistance levels were broken in other indicies. If you've been reading this blog for a while, you know that I have had a bearish view and have considerably reduced my equities exposure in the past weeks, even though I have refrained from calling it a correction in the general stock market. The following is my take on today's action.
The Good
The long anticipated correction has finally arrived! I have been bidding my time in calling this, but finally the general market meanders no more. It will be an awful time for the longs (read buy-and-holders), but if one remains flexible, a down trend is far more preferable to no trend at all.
The Bad
My actively managed portfolio is still about 15% net long, not to mention the asset allocation part. The bounce in the Q's and home builders never materialized, which meant I never did increase my short exposure. That situation will be remedied quickly though. I’ll probably be at least neutral by the end of the week. The word in the Q’s is that the put writers for the May 41 and 42’s (now the 40's too) are so much in the red that they have given up trying to rally the market. Instead they are “delta hedging” by going short.
The Ugly
I don’t read/watch mainstream financial media much these days. But I ‘m willing to wager, by the end of TONIGHT, there will be pundits on bubble vision (aka CNBC) spewing platitudes like “the stock market has returned 10% since world war II”, “buy and hold is the best strategy”… While I agree with part of the substance of what they say, I detest the result of their one-sided arguments which is akin to herding the small investors marching towards the fleecing station. There is nothing wrong with “buy-and-hold” provided it is executed faithfully. As a matter of fact, a substantial portion of our assets are in asset allocation accounts that remain fully invested. I have discussed my allocation strategy in detail in this blog and consider those accounts the bedrock of my portfolio that allows more risk taking elsewhere. The trouble with CNBC and the other mainstream financial media is that they effect a three part strategy: “buy high, hold through the drop, then sell low”. The cheer-leading up to the Dow approaching the old high was the first part of the trilogy, and now we are entering the second.
I think some rough times are ahead. May you and your investment be safe!