Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Classic TA Workplace -- Ignore unavailable to you. Want to Upgrade?

To: Shack who wrote (45561)	7/14/2002 12:31:23 AM
From: stomper	Respond to of 209892

Love those kind of charts...Les posted a nice set of them on his thread: amateur-investors.com -dave

To: Shack who wrote (45561)	7/14/2002 9:24:09 AM
From: At_The_Ask	Respond to of 209892

I read somewhere -I think in one of the wizards of wall st. books by Jack Schwager- that during the crash in 87, some of the call options were actually green because the volatility had increased so much that it outweighed the declines in the underlying. The increase on the puts must have been pretty astounding.

To: Shack who wrote (45561)	7/14/2002 12:22:12 PM
From: John Madarasz	Read Replies (1) \| Respond to of 209892

This guy is always a good read too... Thursday Morning July 11, 2002 : Special Hotline Update Press "Reload" on your browser to access the latest update file The Market Climate remains on a Warning condition. Year-to-date, the S&P 500 Index has lost 20% of its value. There was a brief period where a 20% decline became the commonly accepted definition of a bear market. That period coincided with the point when the S&P 500 initially hit a 20% loss from its high. As soon as that happened, analysts were eager to call it a bear market so they could immediately shift their attention to the "oncoming" bull market, which was invariably right around the corner. But actual bear markets are not so kind. As I note in the "Bear Market Insights" article on our Research & Insight page, the typical bear market involves a whole series of 10-20% losses, each punctuated by a sharp rally that gives temporary hope that the low has been set. The 73-74 decline included no less than 7 of these plunges. At each point along the way, investors are hooked into holding. On declines, the hook is "I can't sell now. We might be close to a bounce. I'll lighten up on the next good rally." And when that rally comes, the hook is "Hey! It's coming back! Glad I stuck to my guns!" And then the market breaks to a fresh low. At a durable bear market bottom, the sentiment is not "Buy the dip." It's "Get me out." The news articles are not about the coming rebound, but are instead about how much worse things are going to get. Look back at prior bear market lows and you'll see exactly that. So far, we see little evidence of panic. No lopsided breadth. No preponderance of bears in the Investors Intelligence survey. And no news headlines telling how much worse things are likely to get. That's a real concern here. Because the current widespread complacency leaves open the possibility that investors will begin to throw in the towel simultaneously. Major plunges are typically preceded by a period of relentless but "orderly" decline, followed by capitulation. That's why I view the persistent distribution of the past few months (as well as the series of 5 consecutive declines in the NYSE Composite a couple of weeks ago) very seriously. In general crashes are preceded by a bad week capped with a 4-5% loss late in the week (The 9% drop on Black Thursday - October 24 1929, which actually preceded the 17% plunge the following Tuesday, or the 4% Friday decline in 1987 that preceded Black Monday). That kind of decline leaves investors without sleep over an entire weekend. Needless to say, the next couple of sessions are worth watching closely. I want to emphasize that we are not forecasting or expecting a market crash. But as I've written frequently over the years, market crashes are first and foremost periods when the risk premium on stocks rises quickly from a very low level. Given risk premiums that remain quite low from a long-term perspective, the risk of a spike in the risk premium can't be ruled out. Given the strong oversold condition of the market, it is equally possible that the market could experience a typical fast, furious rally to clear that oversold condition. So as usual, I have no forecast of market direction here - particularly short term direction. And as usual, we don't need one. The current unfavorable status of valuations and trend uniformity is sufficient to hold us to a fully hedged position, so we are indifferent to market risk here. The point that should not be missed however, is that a market crash is possible, and investors should not rule out the potential for further losses, possibly substantial ones. Unfortunately, far too many investors are locked into investment positions because they fear regret, even though they are risking their entire financial security if the market fails to rebound. Once again, here is my "40% rule." If you are currently in an investment position that relies on a market advance, and a sharp further decline would result in unacceptable losses, you have to take immediate action. Determine what part of your investment position is inappropriate (for instance, if you feel comfortable having $20,000 in the S&P, but actually have $45,000 invested, then the inappropriate exposure is $25,000). The rule is simple. Shut down 40% of that inappropriate exposure immediately and without regard to price. When you're holding a position that balances a desired gain against an unacceptable loss, prospective return is no longer the important issue. The immediate issue is risk management. Shut down 40% of the inappropriate exposure. You'll still have the majority of your problem - 60% - that you can work your way out of as opportunities arise. When you do this, it is essential to understand and expect that you will regret it to some extent - either the investment will move up and you'll regret having sold 40%, or it will move down and you'll regret not having sold it all. But you'll be taking that certain, acceptable level of regret in order to avoid any possibility of unacceptable regret. That is always a good trade. hussman.net