Don't get caught in your shorts.... CAP's will FLIP OVER.
There are shorts, naked shorts, (ugly!), &#@# shorts, smart shorts, money making shorts and losing shorts. There are also Stubborn shorts! (Just are there are Stubborn Longs).
I contend that CAP's was not built/designed for a recession. Now we are traders, not investors. The Fools (in Fooldom terms)...who were all GREEN Thumbs and collected the "yes man" charm were pretty common a year ago and often at the top of the game, (if they realized that they had to not only make UP THUMB calls, they had to make them on stocks that would beat the S&P which was also rising).
CAPs started as an investment tool. In my opinion, it wasn't designed for a deep recession as we are in now. The beneift of sharing stock knowledge is getting lost in the bear/bull debates. People in CAPs at the right time, (updraft in the markets) made good points by finding the stocks that rose faster than the S&P. You might red thumb one occasionally, but unless you were looking for a Bankruptcy (BK) candidate, there was not a lot of points to be gained. There is some talk about the Caps Baby Boom that happened last November. The darker market brought the small investors in who gave up on big institutions. Better to trade yourself than listen to the "experts" who proved they were anything but. It also brought the fearful in, the curious, the people looking for enlightenment, the people looking for solace, (misery loves company). Those who added to the ranks last October through Dec may have made up for those who left, but it was pretty much a generational style shift.
Now I see CAP's players with pages of RED Thumbs! This is good for accuracy if you pick the right downs, but it's not so good for points. Up thumb point potential is vastly greater than down thumb on a rising market. I don't know where the bottom is. I suspect that 667 on the S&P a scant two weeks ago was a bottom. If it breaks down again below that then I'll still be buying as you have to get in somewhere.
Now since the Markets, typically, and granted, there ain't a lot of typical in this market, generally lead the way out of recessions by about two quarters, then we could be in for a turn sometime in the next few months, if not sooner. Capitulation, and other theories lead to this, but unemployment and bank foreclosures tell the opposite tale. So let's just be more pessimistic and say that with the reality of the housing market and unemployment that the bears will win much longer.... (again, not my call, but hard to argue)....my question still stands....
What will happen on CAP's when the market turns?
1. Well, real bears will be in denial for awhile. Those more bullish with mostly green thumbs will start to see their points/accuracy rise. (Depending again on their choices and how they far against the SPY).
2. Bears will have red thumb calls that will never get back in the paint, but they will be stubborn, (as many are now with calls that have been open for a year(s) that won't die faster than the SPY).
3. Since the range from 20% CAPS to 90% caps is very narrow, (about 300 points and a 55% accuracy will put you into the top 20%), new players will be confused. Old players will slip. Some of the top 50 will go down hard/fast.
My plan....start moving Red Thumbs that come into the paint into green thumb calls. Start thinking longer term, rather than daily. Risk some down for a quarter to have the green thumb finds that will benefit most when the turn comes. Find companies (generally smaller CAP) that could double or triple on their way back up. Find the companies that took a beating during this recession, but are still healthy and stand to gain market share from their less fortunate peers. These can be found in almost every sector. Even housing as FloridaBuilder points out will have a few good ones rise to the top and take advantage of their peers who are selling assets below value to get cash flow. Yes, it may take a long time still to make the calls of the "strongest" in a sector, but the sectors are breaking down. Rather than moving as a group, there are starting to be a few companies in each sector that are starting to buck the trend, either more down than the others, or occasionally more up.
Now, I just hear the bears thinking that it will be a long time before any meaningful turn and even then it will be a sideways drift up. No big spikes coming. Lots of time to switch the CAP's strategy and stay in the paint. Again, hard to argue, but I see a lot of signs of bottoming. Any more dropping and we could crash, which is possible, but I think unlikely. If we crash then CAP's won't be much of a game for awhile, so I'm willing to bet agains a crash (at least on CAPS). As far as big spikes, I think that if/when we turn, we will see a pretty good rise over a short period of time. This has been demonstrated by the past week. People are fearful of losing money by getting in, but they are just as fearful of not making some money back by staying out.
Did you see the recession coming...well early enough to make CAP's points from it...not after it flattened you? Will you see the bottom? Will you see the turn???
My other point, is that I don't think the market has a long term memory....I'll leave that for another blog......
Up-thumbs, here I come.