Forced Selling

Oct.09, 2008 in General Market Commentary, Scanning For Things To Trade

I wouldn’t get cute with the technicals. All of the oversold indicators are broken. TWO stocks in the S&P 500 above their 50 dma? SEVEN above their 200 dma? And the VIX isn’t showing panic (trust me on this) because it ISN’T panic. It’s forced selling.

Whether it’s margin calls, hedge fund redemptions, mutual fund redemptions, or preparations for CDS settlement - doesn’t matter.

Here’s an example for those that might think this selloff has much to do with the fundamentals of the underlying economies.

Does anybody really think that the economic prospects for Brazilian companies improved tenfold in five years?

Does anybody really think that the Brazilian companies’ long-term economic prospects were cut by 90% in the last six months?

This is another one that’s setting up for a fantastic discretionary buy+hold, along with emerging markets in general and junk debt, the kind of stuff the good-lookin’, good-cookin’ Wifeykins might just pop in her self-directed IRA and forget about for year or three.

The forced selling will pass, just a matter of time. I plan on being around after it’s done, how about you? Sticking to plan, which for me is mechanical system trading.

6 Comments on “Forced Selling”

Tom
October 10th, 2008 at 10:54 am
I spoke to my wifeykins too, we’re going to cut expenses and max out our 401k’s and IRAs in the coming months. What we have here is a once in a lifetime buy opportunity.

Nice WP theme! :)

Richard
October 10th, 2008 at 11:42 am
Sooner or later the sellers will become exhausted. Then after all the blood dries up, and an inventory is taken, will buyers safely return.

Its all comes down to trying to time the stages. When the sellers are truly finished, when some confidence is assured that a bottom has been reached, and when the next uptrend begins.

7,500 looks pretty safe, but then so did 10,000. We’ll have to wait and see where support really is.

Roger
October 11th, 2008 at 2:45 am
About EWZ - you forgot to factor in currency appreciation/devaluation in your analysis. subtract from that chart the performance of the BR Real and you will understand why EWZ grew so much and lost to much. Going forward it will face headwind with a stronger dollar, even if markets improve.
And instead of EWZ, you may want to investigate DXZLX, twice the performance of ILF. It’s an incredible bargain, and guaranteed to place a smile in kins faces in a short days/weeks.
I know, as a Brazilian and investor.

peterthepainter
October 11th, 2008 at 11:38 am
buying opportunity of a lifetime…hope so!
..a bottom in next week?
..but not the bottom…yet! right?

Bill
October 11th, 2008 at 11:52 am
@ Roger

Good point, but here’s the five-year chart of Real Vs. Dollar. Not quite a double. Only a 20% at most decline. Adjusting for that still yields price changes in the MSCI Brazil index ETF that are totally out of line with the economics behind the situation.

@ others

All of the typical bottom indicators are broken because of the huge amounts of forced selling. It’s a Wall Street crisis and not a Main Street crisis. It’s a good point for long-term capital deployment, no doubt, but may or may not be THE bottom. THE bottom is ALWAYS surrounded by months of time where long-term capital can be deployed profitably, as long we don’t get stupid with our leverage amounts.

Another debate we’re having, the Wifeykins and I, is about putting more capital into rental real estate at these prices. Looks like a good long-term diversification opportunity to me.