Is this a market crash or is this just a ‘buy the dip’ correction?
Theory says you should hold on regardless but that is not great advice if you can tell the difference between a pull back and a market crash.
Over the years I’ve got it right and my calling of the Credit Crunch crash of 2007-2008 is probably knocking around here on Forbes somewhere.
Getting out near the top of a crash and even a correction like Februaries can be very lucrative but timing is extremely difficult.
I am 75% in cash and will likely go 100% cash this week if we head down by much.
I think the chances are 50/50 we are in for a crash but that 50/50 as far as Im concerned is near enough of a certainty to clear the decks because the downside is huge and that money will go a long way buying on the other side of the crash.
I really shouldn’t hedge by saying 50/50 because many people wont understand what a high probability that is for calling a pull back as a crash. So I will say as far as I’m concerned we are in a crash and it will be up to the market to show me I’m wrong by developing otherwise.
What we need is a clear set of signals to make the decision as to whether this is a crash or a February style pull back.
In my mind there are two scenarios.
Crash
Correction where liquidity is injected by the Fed to try and limited the fall to the sort of levels we saw in Februaries correction.
I have been clinging to ‘Correction’ because I do believe the Fed can and might try and navigate a sideways channel for a couple of years while they reverse-QE and economic growth counterbalances the liquidity withdrawal. This will always be a possibility. The Federal reserve can open up liquidity and drive the market up through encouraging carry trades, but there is a ‘bug.’ In a heavily gfalling market carry trades are dangerous because the underlying can lose you more than ‘carry trade.’ In a heavily falling market the cost of hedging becomes prohibitive for a carry trade. So a reverse-QE attempt might not end up supporting assets if the players in the market feared a market fall to much because free money is only useful if you have a way of applying it and if a market goes into a slump the new liquidity might not finds its way into stock market assets.
Sowhat am I looking at that has me so scared.
It’s the Nasdaq.
In a way Idont think any comment is required to fear a crash from this chart.
Or this one but I’ve annotated it a little:
This slump is world wide, another indicator that it is systemic and while local media might say the UK’s slump is caused by Brexit or the DAX and CAC slump is cause by Italy the realityis its being caused by the fear of rising interest rates and the reality of trillions of dollars of reverse QE in process and that liquidity that is being withdrawn probably has a significant liquidity multiplier attached to make the prospects even scarier.
So where would the market go if this is a crash. 25% is normally considered a crash but for the Nasdaq with its greater beta that could easily translate into 40%+
Nasdaq valuations are off the dial in many companies both large and small, yet another reason to be wary. 10x sales as a valuation for a company is at best fragile and trillion dollar valuations a ‘red flag’ in its own right that the end of one of the longest bull markets in history is nigh.
My heart sank recently when an old friend told me he loved Apple because when he had to sell some to fund his retirement, the stock simply went up and refilled the financial hole. If only the world could work like that all the time
To me it seemed like a flash of ‘déjà vu’ and glimpse at a future post-crash article relating the sad stories of devastated pensions remembering when.
But my opinions are not fate, the path ahead is going to be a bumpy road which will take full all our full attention.
What to do?
Firstly look at your investments and if you see anything you don’t know why you own, consider turning that into cash.
Then split the rest into three categories OK holdings, strong holdings and conviction holdings.
Then if the market continues to unravel and you start to sweat unload in three stages first the OK holdings, then if it gets worse the strong holdings and finally if you are convinced that you are in mid crash and there is a ways to go, sell the conviction holdings.
Likewise once its all over you can look to rebuy starting with the conviction holding and working backwards on the look-out for other bargains.
If you don’t see the above as a possibility then you should follow the text books and buy the dip but for everyone else, it’s a good time go risk off and start battening the hatches on your portfolio.
My ship is most of the way to port.