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Getting Defensive Here



August 09, 2011 – Comments (17) | RELATED TICKERS: GOV , T

I'll take this +4% day as an opportunity to sell the strength and get defensive. There are too many structural problems that need to be sorted out. The volatility for the next several weeks should be trending higher and the indexes trending lower. I think we retest the lows of the past 12 months in the Dow just below 10,000. If we fall below 10,000 then I think 9,000 is a real possiblity.

I say this with a grain of salt because so many companies have great balance sheets and trade at a fraction of forward earnings multiples. My theory is that these multiples can not be believed and that cheap really isn't cheap in many cases, especially if we are looking at a double dip recession.

Policy makers are stuck. If they supply more stimulus they create bigger deficits and rish further credit downgrades. If they cut budgets, they squash economic recovery and risk recession. It's a no win situation and they are running out of policy responses that have any sort of muscle.

This will not be sorted out anytime soon.


17 Comments – Post Your Own

#1) On August 09, 2011 at 4:33 PM, RallyCry (37.09) wrote:

risk* gotta spell that out correctly in these markets

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#2) On August 09, 2011 at 5:37 PM, amassafortune (29.23) wrote:

The S&P gained nearly 100 points off the overnight bottom. Rally, your defensive approach is prudent and it does seem that balance sheet strength may not result in stock price appreciation near-term.

SID is a good example. It had a forward P/E of 4 before this recent drop. It is a top steel producer in one of the strongest BRIC countries, yet it just keeps hitting new 52-wk lows. Its return on equity is 37%, recent quarterly earnings growth was 37.6%, operating margin of 36.94%, and its 45% dividend payout ratio produces a forward annual dividend yield of 7.1%. 

Its ties to lowered growth in China and industry segments like appliances, construction, and autos could be an issue, but even with a 20% drop in business its modest 7.55 P/E would still indicate value.

Either the market is mispricing the prospects, or the prospects are taking a serious hit. In the case of this Brazilian stock, there could also have been heavy leverage being unwound. I only held a handful of quality longs during this recent freefall and will be taking similar defensive action in this rebound that may be seriously aided by short covering. 

From a technical basis, the recent damage suggests a major market direction change, even if we get a good bounce here for the next week or two.

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#3) On August 09, 2011 at 5:59 PM, portefeuille (98.91) wrote:

trade at a fraction of forward earnings multiples


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#4) On August 09, 2011 at 6:06 PM, daveandrae (< 20) wrote:


The time to get defensive was twevle years ago. At these market prices, no long term investor in his right mind is going to sell out of stocks when they're yielding 9.11% in forward earnings power compared to less than 4% across the board for Treasury bonds and 0% for cash. Your argument must now defy logic AND arithmetic.  

Good luck  

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#5) On August 10, 2011 at 9:05 AM, RallyCry (37.09) wrote:

Port, I am implying that stocks are trading below historical forward earnings multiples. In general, I consider a current P/E  of 15 to be fair value and of 8 or 9 to be fair value for next years earning's multiple (foward P/E). Therefore, if a stock has a forward P/E of 4, then it is trading at a fraction or 1/2 my fair value forward earnings multiple. I am saying that many earning's projections are bogus and a wide range of stocks are not undervalued by 50% if they have a forward P/E of 4.

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#6) On August 10, 2011 at 4:43 PM, RallyCry (37.09) wrote:

Ok, glad I was out today to avoid another big haircut. I am sticking with the defensive posture. Cautiously jumping back in expecting a bounce tomorrow. This is a traders market and right now we are oversold. Volatility means big moves up and down. Down is the trend but this move down has been overdone. Look for another spike of 2-3% up on Thursday. Too risky to hold over the weekend, so I'd expect Friday to be down. I will be out by Thursday market close.


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#7) On August 12, 2011 at 4:12 PM, RallyCry (37.09) wrote:

I did not get out of the market yesterday at the close as I had planned to, and was lucky that today was an up day. I was convinced we would sell off hard into the close because of European headline risk with the markets closed for 2 days. There is also the risk of another after hours debt downgrade as well. It is important to remember that the ratings agencies tend to change their ratings in "packs" with one getting the ball rolling and the others following suit.

I sold out this afternoon back to the cash account. This morning I calculated in the time period 8/2 -8/11 the S&P 500 was down 5.6% and I was up 5.6% timing the market. If we include today's 1%+ gain, I figure I am outperforming the S&P 500 Index by about 13 + % in the past 9 trading sessions. 

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#8) On August 15, 2011 at 5:02 PM, RallyCry (37.09) wrote:

Being on the sidelines in cash today was certainly a detriment as we rallied 2% across the board from tech to industrials. I am still about 70% against a widescale rally the next few trading sessions. I am looking for the market to sell off Tuesday and Wednesday. I will reevaluate my forecast in the middle of the week and may look to reenter equities by the end of the week. I am still satisfied that I've been able to outperform the broader indexes by 10.5% in the past 10 trading sessions by holding a defensive bias. I would look for more negative news out of Italy and France very soon. Europe will be our bain for atleast the next 3-6 months and beyond. Therefore I will trade around the news.

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#9) On August 17, 2011 at 4:40 PM, RallyCry (37.09) wrote:

So this is turning into my "market timing" blog. Markets did sell off Tuesday 8/16 and I preserved 0.80% by staying in cash. Today was essentially flat so there was no benefit or detriment to being out of the market. I don't see conviction on the long side at these levels.  I may jump back in if we sell off a fair amount which I define as 2-3% in this climate. Overall, unless the markets sell off another 5-10% I am not compelled to give my full commitment to staying long. In the period 8/2 to 8/17 I am up over 11% compared to the S&P 500 by staying primaily in cash during a few very turbulent days. I genuinely feel that over the next 90 days I can push my return even higher (maybe 15-20% better than S&P performance)  if I am diligent and keep a defensive bias. I am also relatively sure that volatilty is here to stay in the short term.

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#10) On August 18, 2011 at 5:52 PM, RallyCry (37.09) wrote:

Today markets sold off 3.5-5% so I benefited from being in cash once again. I was looking for a 2-3% sell off but multiple economic indicators in the U.S reared their ugly head right in the middle of Europe's worsening banking crisis. I nervously jumped back in at market close and am hopeful we see a bounce tomorrow. I envision leaders of the U.S calling their European counterparts tonight and pressuring them to put together a sweeping package to bail out the Greece, Portugal, Italy and France. We will see. My most optimistic projection for Friday is a 3-4 % move up. If I can get that, I'll take it and move back to cash over the weekend. As long as we don't repeat today's meltdown, I should be fine. Overall, i'm now beating the S&P 500 by roughly 15% since Aug 2nd. If Europe can get resolved and the VIX calms down, I can see getting back fully invested and staying fully invested for several months. I think we still may be a few weeks from that point however.

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#11) On August 20, 2011 at 2:14 AM, RallyCry (37.09) wrote:

Today wasn't a great day to be back in equities. I got hit for a little under 1.4%. I expect a bargain hunting rally early next week. I may go back to cash in the next few sessions if we get a nice pop.

Here are the numbers from 8/2 through 8/19:

S&P 500 - 11.6%

Large Growth Fund -9.68% 

Personal return + 6.61%

So even though I missed some days, I have been right most of the big days and have outperformed my benchmarks by 18.2% and 16.29% respectively.


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#12) On August 24, 2011 at 2:35 PM, RallyCry (37.09) wrote:

Still fully invested in my large cap value fund. Monday 8/22 was a wash with my large cap value holdings declining 0.12% versus an increase of 0.03% in the S&P 500 Index. The S&P 500 advanced 3.42% versus only 2.93% for my large cap value holdings on Tuesday. I am now outperforming the S&P from 8/2 to 8/23 by about 15.5% and my large cap value fund by 17.5% by moving back and forth between cash equivalents to large cap value as tracked by these blog comments.

 The large cap value fund I am using is overweight financials so I may look to a different fund shortly as I expect continued underperformance in this sector. I will also move back into cash today or tomorrow as I expect a dollar rally and no immediate mention of QE3 in Jackson Hole by the Fed.

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#13) On August 24, 2011 at 11:56 PM, RallyCry (37.09) wrote:

Nice rally into the close has me back to cash 8/24 up 1.42% today in my large cap value vs a 1.31% advance for the S&P. As discussed before, I believe my large cap value holdings are too heavily weighted in financials so I may look to a different vehicle like a large cap growth play until the storm clouds retreat from the banks. In the meantime, I'm hoping the next two days Thursday and Friday give me a healthy declime of 2-4% and a nice entry point back into the market early next week. Overall my theme of timing the market based on likely outcomes and the news cycle has paid off well this month. I see a strong dollar rally continuing if the Fed does nothing in Wyoming. This should put stocks under pressure through Friday.

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#14) On August 26, 2011 at 9:12 AM, RallyCry (37.09) wrote:

Expecting a decline today as discussed earlier this week. I moved out of cash and into a bond fund that holds mainly highly rated corporate issues. I can see moving back to a large cap fund early next week. I avoided losing 1.4 percent by staying in cash on Thursday. versus large value. h

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#15) On August 26, 2011 at 7:36 PM, RallyCry (37.09) wrote:

bond fund  was up .50 percent versus 1.18 for the large cap value and 1.51 percent for the SPX. Defintely missed the move up today but there is still no single catalyst that should push markets higher next week. Im going to stay agile but with a defensive bias.

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#16) On August 30, 2011 at 4:25 PM, RallyCry (37.09) wrote:

I am ending the market timing experiment for now. I missed out on a 2.69% gain in the large value fund yesterday by staying in the bond fund. As of Monday market close, I am now invested in 80% equity index funds and 20% bond index funds. I'll know my ROR for August on Friday. I know it will turn out very favorable compared to S&P 500, the bond fund, and the large cap value fund I used at different points during the month by timing the news cycle. I will try to modify the strategy and try again later in the fall.

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#17) On September 02, 2011 at 4:01 PM, RallyCry (37.09) wrote:

The results of the August market timing experiment are as follows:

Rallycry Aug rate of return: +4.43%

S&P 500 August return: -5.29%  beat by 9.72%

Large Cap Value Fund Aug return: -5.27% beat by by 9.70%

World Bond Fund Aug return: -2.14% beat by 6.57%

 If markets stay volatile I may be tempted to time the market again. I have a hard time watching the account take a hit while I could be playing it defensive. I am a little more bullish now that traders are back from summer break and they expect more fed intervention.

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