There is going to be market carnage! What will you do?

Monday, Jun 11 2018 by
40

We are heading towards a very painful market crash, there are few things of which I am more certain.

The trouble is that I have no idea whether it will be next week, next month, next year or next decade. I also have no idea how far the market may rise in the meantime nor how many ‘wobbles’ we may experience before the big event.

But I can be sure there will be a major meltdown sometime ,it is what markets do. At this point we will see the anointment of a new batch of economic gurus who “told us so” (irrespective of how long before they had been telling us so!)

This leads me to ponder (in part of course because I am nervous  that such an event might not be that far off) – What should I do about it?

For those investing “for the long term”, the answer might be :

Do Nothing

The underlying basis of this position is that over the long run the stock market is just such a great place to be invested that rather than risk value judgements about “short term” swings, the best bet is just to remain in the market.

This is not without merits, and indeed some of the things I found while researching this article sway me a little more towards this view than I had expected.

After all; if one had held the FTSE All share from its pre-2008 crash high point of 3,479 ( 15-Jun-07) through to the end of May this year [4,222] you would have seen a 21% increase in value (despite being down 50% in March-2009). This represents a CAGR over nearly 11 years of 1.8%, add maybe 2% pa to that for dividends, whilst that is a pretty meagre return, it is far short of being a disastrous melt-down   during such an ‘exceptionally’  turbulent period.

Except that may this period was not so exceptional after all. I recently read an article in the mainstream press  encouraging ordinary Joes and Josephines  to consider investing in the stock market. It contained a couple of comforting statistics (I cannot validate how they were calculated) from long term analysis of the market :

  • Over any 10 year period there is a 90% chance that investing in the market outperforms “cash”.
  • Over any 18 year period this chance rises…

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40 Posts on this Thread show/hide all

Zoiberg 14th Jun '18 21 of 40
1

I'm in cash. We have bubbles in both the bond and stock markets. Although timing is difficult as Mr Market is an irrational person, something is going to make him panic. The air is laden with petrol fumes and although I can't say where the spark will come from, come it will.
I'm drawing up a list of possible triggers - an obvious one is the EU announcing 'rebalancing' tariffs in July.
Two observations:
1. Gold went down in parallel with the market in 2008/9.
2. A return to previous levels after a fall of 50% is a rise of 100%.

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Jbarclay 27th Jul '18 22 of 40

Anyone invested in assets that are uncorrelated to the stock market?

Catco re-insurance is one example but I am on the lookout for many more

Any help would be greatly appreciated

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ls2g08 27th Jul '18 23 of 40
1

In reply to post #386154

Burford capital I think should be relatively uncorrelated to the market, as people sue other people rain or shine! However there will be an element of yield chasing.

Hipgnosis Song Fund also looked quite a good alternative.

Another angle would be to look at convertible bond funds - they limit your downside but give you the full upside of equities.

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mojomogoz 27th Jul '18 24 of 40
1

Expect the unexpected

Tomorrow’s surprise will not be 2008’s or 2000’s.

Most important to know is that we have a routine for bailing out debt overextended and exhausted markets. We learned that in 2009-10 and Japan continues to burn the way

The US needs a lot more $s to meet liabilities.

This is unlikely to be good for its value (relative to RMB and prob gold and other commodities). It’s a form of balance of payment crisis US style rather than Argentina.

This means that asset prices will rise not crash...

A crash and debt crisis is not survivable...so it won’t haplen. It will be contorted to a different flavour (as above)

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clarea 27th Jul '18 25 of 40

In reply to post #372614

Hi Gromley,

Good article out of interest what led you to feel it was time to get out before the 2009 crash and did you exit all in one go or stage out over time ?

Thanks

Andy

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Bonitabeach 27th Jul '18 26 of 40

In reply to post #373009

3. Focus on cashflow positive companies with strong balance sheets at reasonable multiples.

I'm with you on that one.

To say the US market is overpriced is too much of a generalisation. I like several companies that supply the muscle to technology, whatever that technology may be, and hence hold:

Micron Technology

Coherent Inc

Skyworks Solutions  amongst others.

In any real crash, as always, "Cash will be King"

Irving Kahn

Bonitabeach


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mmarkkj777 27th Jul '18 27 of 40
1

Hi Gromley,

I have been giving this some thought lately, for all the same reasons.

Your analysis makes a lot of sense. Warren Buffett says he can't time the market (but Jim Mellons say that he can). Personally, I don't know if I can or not (probably not) as in the last one I only had buy and hold stocks, I didn't need the returns from them, so I just continued to hold them.

But, thinking very simply and out-loud (dangerous, I know), how do I currently de-risk the drop in one stock? with stop losses.
Maybe when I feel most nervous that the market will take a deep dive I should place stop losses against all my stocks (almost a stop loss against my whole portfolio), then, as they sell, place this capital in shorts of the companies I think will do worst in a bear market.Then reverse the process again with the first buds of spring.

Easier said than done, but at least the stop losses will kick in automatically, taking me out of the market and into cash. I should try and model this. Maybe even run it against historic data. All of this assumes I can recognise the correction for what it is when it is happening and in the same way recognise the start of the recovery. I guess they are always recognisable at some stage, but I mean early enough to prevent permanent capital erosion and early enough to make opportunistic gains in the recovery.

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andrewdb 29th Jul '18 28 of 40
1

The economist agrees with you

https://www.economist.com/finance-and-economics/2018/07/26/bond-yields-reliably-predict-recessions.-why

Part of the first paragraph:

... what it lacks in panache, the inverted yield curve more than makes up for in predictive potency. Just before each of America’s most recent three recessions the yield curve for government bonds “inverted”, meaning that yields on long-term bonds fell below those on short-term bonds.
...

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Trident 30th Jul '18 29 of 40

Purely an anecdotal reference but FundSmith, the fund baby of Terry Smith, generally stipulates a few cores rules which it applies. Buy good companies, don't over pay, do nothing. Of course behind that they factor in more elements, such as a strong element of buying companies which provide staples, which people are likely to buy in good times and bad.

One of his key key criteria is Return on Capital (ROC).

He also, says he will never get market timing right, so once they have gone through the process of filtering their selections, they sit there for a long time, doing nothing.

Obviously there is a lot more to the selection process than I have summarised. So arguably, you could put part of your portfolio into this sort of balanced approach, or other similar funds. That way, most of the thinking is done for you.

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Carey Blunt 10th Oct '18 30 of 40

In reply to post #372679

Hi Phil,
Just bumping this thread and replying to your interesting post on when to get out. In your "Crash Indicator" chart are you always looking for the S&P as the indicator or would you apply the local index for every market that you are in.
For example, if the FTSE100 broke out below the cloud and showed a couple of drops in that direction would you sell out or tighten stop losses on FTSE 100 shares you own or are you looking for one main global indicator (The S&P 100).
I think the UK indexes could be about to break out under the Kumo which would be the first part of the indicator you are looking out for, although of course that doesn't mean they will then set 2 lows below the cloud.
cheers
Carey

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Velo 11th Oct '18 31 of 40
1

In reply to post #406844

Volatility index has been steadily worsening over the past half dozen days. With 30 minutes to close on the futures tonight I opened some short positions at 9:30pm in readiness for a bad day for the FTSE tomorrow, Thursday.  (Appears to be trading through the night, thought it had closed at 10pm).

Profits just kept on multiplying in that 30 minutes. Optimistic for a continuance tomorrow which of course is bad for UK markets tomorrow.

So some bearishness developing - possibly just a temporary bear market correction. Trying to make some money out of it, if so.

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iwright7 11th Oct '18 32 of 40
2

In view of the current market uncertainty an interesting Meb Faber podcast this month with the legendary investor Howard Marks, (who has a new book out - Mastering the Market Cycle)

....We should celebrate our portfolio where 100 is maximum in the stock market and 0 is completely out. Your score  should be depend on the market cycle and attitude to risk. Think about what your normal score should be and adjust up or down depending on where you think we are in the cycle.

https://mebfaber.com/2018/10/0...

https://www.amazon.co.uk/Maste...

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DaviStoVest 11th Oct '18 33 of 40

In reply to post #406934

Well ... a week or two ago I was certainly celebrating my portfolio. Not something I feel like doing today, unfortunately.

Was that meant to read "calibrate" by any chance?

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PhilH 11th Oct '18 34 of 40
4

In reply to post #406844

Hi Carey,

Here's the weekly chart for the FTSE 100 ...

5bbf224509d16ukxoct.png


It's certainly looking as if the blue lagging line (chikou) is threatening to break out below the Kumo this week. Before taking any action on this though I'd probably want to see a break below the significant 7000 mark. Would I sell all of my UK holdings? Or would I seek to hedge their positions by selling the market short?

My main focus is on the US market ...

Here's the weekly chart for the S&P 500 and this is the one that calms me. The recent pullbacks are relatively insignificant ...

5bbf20c815754spxoct.png

At present the lagging blue line (chikou) hasn't even crossed the historic price action let alone gone anywhere near the cloud (Kumo). So whilst the drops are uncomfortable my choice at the moment is to sit on my hands. I'll wait to see if the wider market rallies over the next few weeks (which is what usually happens), selling any stocks that don't recover.

If the market continues to fall then the chikou will pierce the cloud and that'll suggest to me that we're in a bear market. If that does happen in the US it could be that my UK holdings could be significantly underwater. So beware!

So what I think I'll do is review my holdings and cuts  stocks that have had reductions in earnings estimates (reducing their momentum score). This will leave me with stocks that have positive earnings estimates momentum despite wider market price weakness. Hopefully this will mean that when/if prices recover I'll have a set of strong candidates to ride that recovery. I've been 30% cash for a while now so that has helped too.

Best of luck to everyone, there is no right answer as we each have our own risk profile. 

Phil

Professional Services: Sunflower Counselling
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Howard Adams 11th Oct '18 35 of 40
4

Hi

These pics (below), several commentators I respect and some recent Bloomberg coverage has caught my attention over the past few days.

Also, recent personal experiences of odd (lockstep) volatility with investments in US markets.

I refer to the relationship (inverse correlation) illustrated below, between US 10-Yr treasury vs S&P 500, since 1983.

5bbf281628262US_bonds_vs_Eq_since_1982_g


Then this shorter time frame graphic.


5bbf288219908CNBC_rates_vs_equities_grap


As some commentators noted, why should (large scale) investors seek returns in equities, with risks of capital erosion, when they can obtain over 3% (it might go higher) with relative safety in US bonds. 

A trigger such as this is arguably a realistic catalyst for large-scale investors to pivot out of equities into bonds. Then further ripples occur as ETFs copy each other selling the fall (I understand 40% of US market is held in ETFs). Following these moves, funds then hit their sell rules, and so on a so forth.

In lockstep, US dollar rates, Sterling and Euro rates all get impacted. With both short term valuation shocks (e.g. buying/selling equities across markets and currencies) as well as longer-term implications (e.g. foreign earnings being repatriated, export/import impacts)

Therefore, for me, this does not feel like the 'V' shaped fall as we experienced with the Brexit result and then the Trump result. Rather, I feel this fall might be more protracted (US bond rates are unlikely to reduce quickly).

Clearly I have no idea if my thoughts will play out. But, I am concerned enough that I am 100% cash now until I see how things play out (just to be clear I am a proverbial bull at heart).


Regards

Howard

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pka 11th Oct '18 36 of 40
2

My reaction to the falls in markets over the last few days has been to sell some of the most volatile stocks in my portfolio, in an attempt to reduce the remaining portfolio's sensitivity to possible further falls in market indices. I will keep the proceeds in cash for the time being and see what happens over the next few days and weeks before deciding what to do next.

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vik2001 11th Oct '18 37 of 40
5

my take on the market is if things bounce back up from now, unless the issues causing the fall such as fed rate hikes, trump china trade war, bond yields, brexit etc get resolved THEN its just a fake bounce, and I expect further falls later on down the line. just because prices drop then bounce back up a bit doesn't mean anything has been resolved so be cautious and have a plan....

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mmarkkj777 11th Oct '18 38 of 40
1

Hi Gromley,

I owe you a debt of gratitude. It was your excellent article that made me start to think about my portfolio, risk and where we might be in the overall cycle. I have been slowly moving to a higher ratio of cash over the last 4 weeks or so.

My portfolio for the last week still doesn't look pretty, but its much better than it might have been.

I'm still looking for opportunities, but will now only buy if I think its a defensive stock with a good reason to suggest it can swim against the tide. In the main I'm happy to sit on cash for a while and wait and see what happens.

Still not sure if this is the best strategy, but my previous approach of just ignoring the downturns ( "time in the market") rather than trying to "time the markets" as I am doing now, is too high risk as I don't have the 10-18 years investment time horizon required to rest easy in the knowledge that it always recovers, eventually.

There is a FT short ETF (ticker £5SIS) that I'm looking at as a possible short term hedge/part strategy (but haven't bought yet).

Thanks again for the sterling work and thought provoking catalyst.

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vik2001 11th Oct '18 39 of 40

What about cannabis stocks such as sativa investments. Was announced today cannabis now available on the nhs with prescription.. 
Also what about adding gold as a hedge in portfolio. I knw also gold doesnt like interest rates going up. But in unstability it can outperform

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covkid 11th Oct '18 40 of 40
2

Certainly the cannabis helps as you consider your portfolio..............or so i’m told...........

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