Monday, March 02, 2009

Optimism breaks the last support line

The S&P 500 index is trading around 705 as I write this, meaning it has decisively broken through the important barrier at 740. Many investors were convinced that 740 would be a firm support level off of which the next bull market would begin. In fact, so many were convinced of this that it was treated as received truth on several of the websites I visit. Being the contrarian that I am, this only made me more confident that 740 would not hold.

The bad news for stock prices (and good news for GRZZX) is that the market has essentially run out of support lines. The S&P 500 index is at its lowest point of this bear market, and is well below the previous bear market bottom that occurred in 2002. If a 1987-style crash were to occur now, the market might hit support around 500, but that's a long 30% drop from here.

With the Dow below 7000 and the S&P staring into a chasm, I expect the market-bottom optimists to give way to the "Oh my God we're doomed" pessimists in the near future. Time will tell. Until then I'm riding it out with my 75% GRZZX position.

9 comments:

Anonymous said...

I'm holding a GRZZX position. David Fry's recent post on seekingalpha.com (http://seekingalpha.com/article/111089-friday-outlook-another-rally-turns-south) alerted me to some interesting Bear Market charts on http://www.dshort.com. According to Mr Fry: "The typical length of these markets run roughly 30 months according to dshort.com and we're only 16 months into this one according to their estimates." How do you see it?

vv said...

Hey Jody

Couple of questions..

Why are people on CNBC etc talking about 700 on the S&P as a support level?

Where do you park your IRA and 401 K money? Fidelity? Schwab? I use Fidelity myself. They charge $75 bucks if you sell a mutual fund within 3 months of purchase.. :(

Jody said...

vv,

Your best strategy might be to sell it all at once when I make one of my partial cash-outs from GRZZX. As long as your pre-fee profit is greater than $75, you will win.

In the bigger picture you've brought up an important point that I've been ignoring for too long: not everyone has the freedom to buy and sell any fund at any time. I'm adding a sidebar item to address that. My Roth IRA is held by TDAmeritrade (GRZZX), and Fidelity holds my limited-choice 403(b), which has been in a money market fund (100%) for 13 months.

Thank you for your comment!

-Jody

Jody said...

Regarding the length of the bear market: if I had to place a bet, I would say 2 years give or take, however I won't make any investing decisions based on the time line. I would be more likely to use the P/E ratio or dividend yield to call a bottom.

Anonymous said...

Jody

As an astronomer, you must take an extra measure of satisfaction in predicting the "cratering" of the Dow and S&P. It is like a black hole on Wall St right now. Give us your latest comet...I mean comment...on the optimism/pessimism relativity scale after you consult your star(tlingly accurate) charts. An Earth-day without your postings is like a Pluto-day without sunshine.

Thanks, Jeff

Jody said...

Thank you for that very poetic post, Jeff!

Sentiment is gradually returning to neutral after the optimistic extremes of February, but I won't be cashing out any more of my GRZZX position until I see more pessimism - or until one of the other factors signals a medium-term bottom is near.

I do enjoy making money and seeing my predictions come true, but I can't let myself be too gleeful, because that can lead to overconfidence, complacency, and mistakes. I treat every successful transaction as "so far, so good."

Rob said...

Although I have been successful over the past few months trading put options in SPY (S&P Spider), I am to the point of letting that strategy go and either stay in cash or buy into GRZZX. My only concern is that I may now be too late. If you were in a cash position today, would you still get into GRZZX or would you just stand pat and wait for any confirmed uptick?

Jody said...

Assuming my broker gives the freedom to sell GRZZX the next day, I would be happy to put in a small fraction now (25%, or 10% if I were near retirement). If I weren't worried about derivatives, (but I am worried about them) I would use SH, which is far more flexible.

vv said...

Hey Jody,

Just saw this on Bloomberg.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4OJUF46wZ6c&refer=home