Signals of The Next Cycle
Roger Nusbaum
Roger's blog: Roger's wealth management firm:
A reader left a question asking what I would be looking for to think a bear market has ended, and to become more bullish. He seemed to want to know if the reversing of the things I cite as reasons to get bearish would do the trick.
The short answer is mostly 'yes'.
The slope of the yield curve is an important determinant for the fate of financial stocks. Part of the equation (that is, not the entire explanation) in the blow-up was that a flat curve made normal lending less profitable. This caused banks to be willing to take more risk. (I'm sure there is some element of Hy Minsky in there too).
When the yield curve normalizes, things should get better for financial stocks, and the broader index will have an easier time going up if its largest sector is healthy.
When the market is below its 200 DMA, it is signaling a problem with demand for stocks. Perhaps we can figure that problem out or maybe not, but still, demand problems are a reason for defensive posturing.
The manner in which the market has danced around its 200 DMA for the last six months or so requires looking for a few more pieces of the puzzle. This is where things get complicated, and so the risk of being wrong is clearly on the front burner, which is why I always talk about not making big bets.
One contributing factor to my near-term outlook has been the length of the current (or recently ended?) bull market. If I somehow turn out to be right, and we have a normal bear, I would begin to expect a bull market to start in 12-18 months if not sooner. So if the market were dancing around its 200 DMA after 18 months of bear market, I'd be inclined to think a bull was starting.
What about sectors? Well, the sectors I am overweight are generally ones that should do well at the end of a cycle (expect for energy which is obviously doing very well, and media which should be doing well but isn't, probably because a lot of it is likely to die; by the way, I have no exposure to media). By the same token I would expect to be overweight things like Discretionary, when the bear starts getting long in the tooth.
I have disclosed being underweight volatility for quite a while, and I would expect to increase exposure at the start of the next cycle.
Let me reiterate that these changes that I expect to make in the future will not result in huge lopsided bets. Most of the changes can be accomplished with a few tweaks. Shaving off two staples stocks in favor of one or two Discretionary names, as an example, would not be a lot of trading. Swapping out a big pharma for a small biotech can make a big difference on the health care exposure of a portfolio.
That reminds me, I would be looking to reduce the average cap size of the overall portfolio when the next cycle starts. It only takes selling a couple of mega caps to make fast progress in this regard.
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This article has 2 comments:
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SmartGuyStocks.com
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66 Comments
Jan 10 01:21 PMIncoming information suggests that the outlook for economic activity for this year has worsened and that the "downside risks to growth have become more pronounced," Bernanke warned.
A housing slump, weaker home values, harder-to-get credit and high energy prices all "seem likely to weigh on consumer spending as we move into 2008," Bernanke said.
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Al Capital
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70 Comments
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