11.13.08 Market Thoughts

On a message board yesterday someone asked for predictions on what the low for the DJIA would be. All the given responses are below:

6500
6500 - 7200
6900
6900
5900
6500
6499

I have no idea why so many picked 6500 particularly, but the responses were extremely skeptical of the market. This isn't the acute panic/fear of October 10, but rather massively resigned skepticism.

As of 2:30 PM, I bought 100% on margin SSO at 26.11. I initially had a stop order in at today's low, but moved it up to my buy price at the close. Why did I buy?

We never really got the panic buying that should result from the panic selling of early October. Sooner or later, panic buying has got to happen.

Also, November, Decemeber, and January are historically the most bullish months of the year.

The market can do what it wants now. I can't really lose anything other than commission.

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Ha,I did the same thing.

Ha,I did the same thing.

Got out of DUG right around the bottom, and into BGU (lightly, since these triple thingamawatchits are new and untested) and SSO.

Good luck!

Alright Keenan, I just went all in on BGU

I'd never heard of the 3xers till yesterday. If I lose all my money, I'm blaming you.

If you like the leverage,

If you like the leverage, why don't you play index futures on CME or CBOT?

And the time frame?

Your post leaves out the time frame for the predictions. Were they talking about this particular downturn, say Oct through YE2008 or maybe Jan 2009? If so, I would project it has a bit farther to to before you get the panic buying that usually follows such a dramatic decline. I would expect 7200, or maybe down to 6900, potentially very quickly. Then I see a rather significant rally, lasting months.

HOWEVER, I don't for a minute think that whatever low occurs in the next couple of months is the end of the stock market decline. Thinking longer term, I see 3000 in the next couple of years. The state has stepped in and thoroughly blown up the information content that markets usually contain, and by changing the rules of the game (and leaving the new rules uncertain) has seriously distorted the incentives that a functioning market normally exerts. They are making (ham-fisted) attempts to restrain the free flow of prices, at least in the real-estate sector and favored industry union wages. All of this will reduce economic performance far more than is generally understood now, and will lengthen the time it takes the market to recover.

In case anyone cares...

...I got stopped out at my original buy price.

leveraged ETFs

It's just as well you got stopped out; the leveraged ETFs do not hold up well over time.

Personally, I treat them as strictly intraday plays, which does limit their effectiveness for me (since I can't take advantage of opening price changes and have to take care not to fall into Pattern Day Trader rules). Still, I've done well with DIG and DUG over the past two months.

Two questions

1) Are you the same Kevin White who was part of this blog 5 years ago? If so, nice to see you again. It seems like your career has taken off.

2) What's the problem with leveraged ETFs? Why do they not hold up well over time?

Here's an article and chart

Here's an article and chart showing long-term (one month) performance of leveraged ETFs compared to the underlying index.

http://seekingalpha.com/article/109109-tracking-trouble-for-the-triple-levered-etfs

Hmm, that's odd

I tried to post several days ago, and thought it had told me my message would be evaluated and posted later. I came back to the post just to add the link above, but this time the comment was added immediately. Oh well. I had written a lengthy explanation of why the leveraged ETFs can drop over time (it's mathematics) but how if you only hold for a few days at the most you're probably still okay. It's disappeared into the ether I think.

Anyway, yes, this is Kevin White of Nepenthe Island and (for a few posts anyway) Catallarchy. Good to see you too. :o)