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The Most Inevitable Sell Off in Market History



August 27, 2013 – Comments (29)

Let me the backdrop for you. Some of the richest people in the world are underperforming

the major indexes by about 16% on average this year. They are taking a body blow right to the gut.

There are only 4 months left in the year and huge salaries depend on their performance for

the entire year. There is good news here. The year is not over!

Now, they can waive the white flag and simply ride along with the market and accept a major

beatdown or maybe just maybe they can look to pull a rabbit out of their hats.

What if by chance the market breaks down while a group of motivated money men

short the pants off of it to make up for their severe positioning. Seem far fetched?

These motivated folks are coming back from Labor Day vacation. Let's see where this returning

volume takes us. My guess is as good as yours. However, I think its just inevitable.

29 Comments – Post Your Own

#1) On August 27, 2013 at 6:04 PM, RallyCry (< 20) wrote:

*set the backdrop

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#2) On August 27, 2013 at 9:38 PM, constructive (99.99) wrote:

If it was inevitable, why didn't you make this blog yesterday?

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#3) On August 27, 2013 at 9:54 PM, awallejr (60.07) wrote:

If it was inevitable, why didn't you make this blog yesterday?

Ok that comment made me laugh yet it is so spot on.

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#4) On August 27, 2013 at 10:57 PM, RallyCry (< 20) wrote:

I am not basing my comments on what has happened today or the last couple weeks because today was a drop in the hat. I think we will see another 5 to 10 percent pullback from here. This doesn't even factor in news driven catalysts such as concern over tapering of QE, Syria, the debt ceiling, oil prices, and so on. Those factors alone form the basis of an uncertainty sell off without the accelerant of underperforming hedgies looking to chase performance.

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#5) On August 27, 2013 at 11:26 PM, Pancakes22 (79.16) wrote:

yes and I'm sure there will be a 10% pullback next year and the next year and the year after that

in due time there will be a market crash

just a prediction...

Therefore everyone in the world should be following my stock picks

and cnbc will be having me on anyday now..... 

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#6) On August 28, 2013 at 5:09 AM, RallyCry (< 20) wrote:

I'm not looking for an appearance on CNBC but if you check my blog from late 2011, I think my returns and sentiment during the European crisis where I traded based on the news cycle concluded a defensive strategy during a period of unknown geopolitical turmoil is prudent and pretty straightforward. You sell uncertainty and buy the hope of certainty. Negative sentiment tends to snowball at a stronger clip than positive catalysts so it should not be ignored. 

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#7) On August 28, 2013 at 9:16 AM, RallyCry (< 20) wrote:



Here are some links to my past predictions: 

2011 Market Timing

2012 Market Thesis

2013 Picks

Conclude what you will. Not looking for a world following, just trying to make the point that you can design a forecast or thesis based on reasonable assumptions and have good results over time.

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#8) On August 28, 2013 at 8:58 PM, HarryCaraysGhost (99.54) wrote:

You sell uncertainty and buy the hope of certainty.

I've taken an opposite approach.

For every buyer a seller must loom.

Every seller that freaks out about Syria (or whatever the flavor of the day may be) Is a net buyers best friend, as I'm purchasing stocks that will be higher in the near future, purchased at a discount.

Cheers Rally.

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#9) On August 29, 2013 at 12:50 AM, awallejr (60.07) wrote:

I'm purchasing stocks that will be higher in the near future, purchased at a discount.

That is what it really is all about Harry. 

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#10) On August 29, 2013 at 12:56 AM, RallyCry (< 20) wrote:

Hi Harry,

 What I am advocating is a more short term actively managed approach that requires a large degree of monitoring when volatility ramps up. For example in Britain, there is strong parliamentary opposition to attacking Syria which introduces more uncertainty to the situation which I believe will be an overhang on the market.

On a longer time frame, you could use a sell off as a chance to buy solid companies like Visa at close to a peg ratio of 1 for the first time in a while. I think time frame certainly matters.


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#11) On August 29, 2013 at 7:28 PM, Valyooo (99.29) wrote:

So this is what you are saying:


They have been short, and it hasnot worked for them at all.


So some how going going to fix it?


Great logic.... 

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#12) On August 29, 2013 at 11:05 PM, RallyCry (< 20) wrote:

They never stopped going short. It's a distinct way that they can catch up to the market. For every one percentage point the indexes come in, they get two points of performance back if they are short. If they're down 16% on average, an 8% move lower for the market has them right back on track.

Another method is to load up on high beta names and drive them up to the moon. The investment policy of the big players probably prohibits some of them from this kind of speculation so in many cases it's much more useful to have a falling market lift all boats...or in this case expensive yachts.

We will have a better picture in the next few weeks.


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#13) On August 30, 2013 at 12:26 AM, Valyooo (99.29) wrote:

So their plan to short has not worked this whole year, why would it all of a sudden work now?  That makes no sense.

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#14) On August 30, 2013 at 12:10 PM, RallyCry (< 20) wrote:

Lets see if it makes no sense on September 30th. 

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#15) On August 30, 2013 at 1:03 PM, Valyooo (99.29) wrote:

The market can very easily sell off. Your logic makes no sense though. You essentially said their shorting wasn't working all year so they need to short it for the short to work

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#16) On August 30, 2013 at 1:56 PM, RallyCry (< 20) wrote:

I'm saying that it doesnt matter if they are technically or fundamentally right or wrong year to date.  I am saying they are about to be validated through their own actions, ( maintaing or adding to shorts) coupled with the impact of external forces (political turmoil, fed QE wind down, debt limit showdown etc.) The time frame that matters is 1/1 to 12/31 and just because they are taking their lumps for the first 8 months, doesn't mean the year is lost.

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#17) On August 31, 2013 at 5:08 AM, RallyCry (< 20) wrote:

So the basis of our debate is how would increasing a short position that is unprofitable work in the favor of a big player?

For one, public disclosures in SEC filings where big wig A has increased his short  by x percent tends to move the market initially from a "follow the leader" standpoint. Also contrary to the belief of some, short interest figures aren't just useful for revealing good candidates for a short squeeze, but can also reveal a fair amount of companies deemed to be overvalued or in decline. A big hedge fund can move the needle on not just the percent of the float short but also on other things that pressure the stock like a big purchase of put contracts that is reported and tracked by option players. Also up until the last week, volatility has been fairly tame all year, so option contracts were cheaper to purchase than now so they now benefit from this increased volatility found in uncertainty.

Lastly, there is the more controversial and shady practice of short and distort campaigns  that people like Jim Cramer acknowledged goes on. You may remember John Stewart took him to the wood shed during the banking crisis for being part of the problem. A more recent example, just last week, someone claimed to hear rumors of battery trouble for Tesla and the stock dropped 3 points on what ended up being a 3 year old story.

 So I am going to monitor 3 things: 3rd quarter hedge fund disclosures for big short positions, large purchases of put contracts with strike prices before Jan 14, and rumors surrounding high flying companies before New Years Day. I think these are some of the tea leaves that spell out a rocky year end.

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#18) On September 03, 2013 at 1:15 AM, awallejr (60.07) wrote:

just because they are taking their lumps for the first 8 months, doesn't mean the year is lost.

It is if they continue to short into a rising market.  I say look at earnings, end of story.

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#19) On September 04, 2013 at 12:56 AM, RallyCry (< 20) wrote:

I believe the story will allow us to draw a conclusion by 12/31/13. Earnings at historical highs tend to normalize over time. Show me a multiple and a reasonable estimate for next year and I will tell you if prices should be higher or lower in 12 to 18 months. Even then it can be tough if I'm dealing with a cyclical business, higher interest rates, a wide range of analyst estimates, new products or competition, and countless other factors.

But here I am addressing 120 days which is governed by the voting machine instead of the weighing machine. I'm casting my vote for a sell off based on my poll of recent trends. Market sentiment isn't that much different than political sentiment. When we hear slogans and themes over and over again, they have a tendency to shape our opinions. Think WMD or hope and change. If we keep hearing the uncertainty of Syria, the debt limit, tapering QE, over and over and over again in the same way we heard about the eurozone crisis, Spain, Italy ,Greece, austerity, contagion, I am arguing these new fears will harvest the mentality of "sell and ask questions later" in the short run just as it did in late summer 2011.

And as a side note it is very likely that lost in this fear, many people will have forgotten how big money managers have underperformed this year, unless somehow they stage a which point we will be reminded by business news and annual shareholder letters how they closed 2013 on a high note. 


If this seems overly speculative or is too much of a stretch for your taste, consider the existing asset bases of large hedge funds and the competition for money coming out of bond funds. In this case, consider these entities not as too big to fail, but rather too big to not win. Follow the $$$.

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#20) On September 04, 2013 at 2:00 AM, TMFDukenewkirk (69.69) wrote:

A lot of fuss vs simply holding good companies, saving on transaction costs and reaping the benefits of patient long term investing. There is no shortage of evidence that simply sitting tight, even through a major pullback, if invested wisely, has you well ahead almost always in less than a year of the beginnings of a downturn.

What there is a shortage of, are notable market timers with documented track records that prove after all trading activity and quite possibly tax considerations, they have outdone any of the great long term investors of the last 60 years or so. If the suggestion that Fool Caps 7 day limitation is in fact what prevents documented proof of success over several years, then I'm sorry to say, and mean no offence, but I can't simply take a random person's word that they've unlocked the secret to market timing. Good luck, but without years of evidence this is all just wild, unproven theory and almost certainly not worth the tremendous extra time and effort. I am quite comfortable with 8 years of 16%+ annualized returns, trading on average possibly a half dozen, usually smallish positions, and even that has been excessive in my mind.

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#21) On September 04, 2013 at 3:08 AM, daveandrae (< 20) wrote:


I've been investing in equities since June of 1998, have grown my five figure equity portfolio at an annualized clip of 18.3% over that time frame and am currently up 18.84% year to date. Over the last fifteen plus years I've seen the market go down so many times, without warning, and far lower than most people predicted, let alone could stomach, that it ain't even funny. 

Thus, I speak from gut wrenching experience when I say that the dominant determinant of investor return is driven primarily by what YOU do. Investment performance and market timing, the two variables most people put the most energy into, account for less than 10% of ones total lifetime return, tops. 

Put simply, your continued decision to hold equties over all other asset classes accounts for well over 90% of your total return. Meaning, the only variable that you have any control over, your own behavior, is also the overhwelming variable driving your bottom line. Warren Buffett wasn't kidding when he said.... "Wall street makes its money off of activity. YOU make your money off of inactivity."

 Thus, the market is designed exactly the way that it should have been designed in the first place. With each and every investor having no one to blame or praise for their ultimate success or failure but themselves. 

Everything else is nothing more than commentary.  

This is the beginning of wisdom.  

Good day. 


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#22) On September 04, 2013 at 9:35 AM, RallyCry (< 20) wrote:

I've already made my case 2 years ago.

Since 2000, with the support of this article I believe following the 200 ma strategy on the S&P 500 would have netted a return of roughly 250%

 At the very worst, if you only bought and sold the SPX based on moves above and below the 200 ma you could have avoided 2 losses north of 50%. The S&P 500 was down 19% from 1498 in 2000 to 1214 today if you bought and held without dividends. To miss the swings in between substantially hurts your overall performance

I am not saying a "infrequent trading" approach can't make you a successful investor. But I am arguing you can't tell me that by default a more active approach during higher volatility periods will make me an unsuccessful investor. Buffett tends to buy deep value in large concentrated stakes which insulates him well from market declines and amplifies his gains. In many cases he is a market timer because he is buying when the market is underperforming, pessimistic, and P/E's are historically low. I agree that you have less chance to screw up if you are sitting tight and not arbitrarily buying and selling.  

But there are many strategies that can increase your returns over both shorter and longer time periods. You could say its too much work, but the plan above, using the 200 ma as your signal, doesn't require a large amount of monitoring and can save you from having to participate in deep corrections.

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#23) On September 04, 2013 at 4:49 PM, daveandrae (< 20) wrote:

There are 313 million people currently living in the United States. Of that 313 million, only 14.71 million of us, or less than 5% of the population has a net worth greater than $500,000. 

 I am one of the 14.71.  

Nuff said.  

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#24) On September 04, 2013 at 5:08 PM, RallyCry (< 20) wrote:

wow, ok then...

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#25) On September 04, 2013 at 5:46 PM, awallejr (60.07) wrote:

I am really not a TA guy, but I do see value in certain TA metrics.  While you can show moving in and out of the market at the right time could generate good profits, the problem is you (assuming you can be successful) will be making bigger and bigger "bets."  And I say "bet" because that is what you are really doing.  One miss and you could get crushed.

I guess I am in that 5% camp with #23 but I wasn't back in end 2008.  I got crushed but I re-evaluated, re-positioned and ignored the bears.  I knew Bernanke meant low interest rates for an extended period of time meant a LONG time.  So I concentrated on yield.  And that has helped my portfolio more than anything.

August was a down month.  But my portfolio held up mainly because of the distributions I received.

All we ever hear now is taper taper taper interest rates will go up.  Unless you lived through those interest rates of late 70s early 80s, trust me even with the recent spike interest rates are still incredibly low.  You have a stock paying you a sustainable 10% buy it because the banks aren't going to give you anything near that in the foreseeable future.

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#26) On September 04, 2013 at 7:19 PM, RallyCry (< 20) wrote:

I understand the arguments for looking at earnings yield and dividend payers over the long run, however I don't see how if you overlay at 200 simple moving average on top of the S&P 500 for the last 15 years how you would get crushed. Its easy enough to reverse course if the signal changes. And in most instances it takes a number of months or longer before it does, so you aren't trading a whole lot. You could even wait for the majority of your positions to go ex dividend for the quarter and still come out on top if you wanted to find a compromise. If you're investing in strong companies with solid balance sheets then when you repurchase you're actually getting paid a higher earnings yield on your stake assuming they did not have to cut their dividend during the downturn. 


























































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#27) On September 04, 2013 at 8:01 PM, awallejr (60.07) wrote:

Wow a lot of white in that last blog of yours heheh.  I thought something was wrong with my browser for a second.

Rally look at that  overlay chart again.  Notice how it is not perfectly aligned?  You pick the wrong moment and you can find yourself in a world of hurt.  Nothing wrong with using a portion of your portfolio but in order to maintain a 6.6% overall annual return you have to keep "betting" it all.

Being human you will panic if you start to see your entire portfolio crashing because you moved too soon. Then you wind up selling too soon and missing the bounce you expected and now your portfolio lost instead of gained.  What you might want to do is set up a separate account with money you can afford losing and test your theory.

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#28) On September 05, 2013 at 2:47 PM, RallyCry (< 20) wrote:

It's not betting. It's implementing a clear signal that works over time. The quote in comment #22 is my own, not the article I linked to. I tested the returns from 2000-2011 and you would have gained 250% versus a  loss of 19% excluding dividends during the same period.

Regarding comment #23, I'm still kind of shocked that people think because they are in the top x percent of wealth that it makes their opinion more valuable than others. In my opinion, it comes off as elitist and hurts the value of their argument. Furthermore, there is a large part of society that inherited their wealth which doesn't by default make them more intelligent or better suited to beat the market. Believe it or not, there are many poor people with above average ideas and intelligence. And because it clearly matters to some people, I consider myself middle to upper middle class, but certainly top 5%.

Also I'm not exactly inclined to think that being one of the top 14.71 million richest people is all that special. I mean, I graduated Phi Beta Kappa. I figure that is probably more exclusive. lol

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#29) On September 05, 2013 at 5:06 PM, awallejr (60.07) wrote:

Well look at your overlay again.  You would have been out of the market for 2000-2001 and then you would have jumped all in in 2002 when it briefly went above the 200 MA only to get crushed quickly thereafter.  Back-testing with fake money just is not the same thing as pulling the trigger with real money.  And it gets harder and harder with larger sums.

People are always free to ignore my advice.  I do give it free of charge, for the love of the game.  But as I said earlier do a separate account with money you can afford to lose and see where it goes.

And I wouldn't worry about #23.  In the end all that matters is the quality of one's sole all else is transitory.  Plus the guy made only 1 pick and it was a red thumb of KO back in 2010.  Warren Buffett would have corrected him heheh.

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