The Start of That Pullback

[twacowfca]

WSBASE has declined 8.2% over the last eight weeks since QE 3 ended mid October this Year.

 

Compare to the 9.1% decline in WSBASE that began 2/24/2010 after the end of QE1 and continued for 10 weeks.  That pull back preceded the 17% selloff in S&P 500 by eight weeks.

 

Red sky at night, sailor's delight.

Red sky in morning, sailor take warning.

 

Note: The recent, sharp downtrend in WSBASE should be put in perspective.  The current bull market has run much longer now than in 2010, and positive expectations are greater now.  Therefore, the recent decline may not have the same immediate effect as in first half 2010.

 

Also, December is by far the best month to buy on the dips after a spike in volatility like the one this past week.

 

The intelligent way to play this may be to buy a strangle, to go long slightly out of the money index puts and calls, with a strike price beyond the near dated month.  Then, a substantial move up or down should pay off nicely, but that strategy would lose money if the current US indices' prices stayed in range bound till option expiration.

 

A range bound market after the recent volatility in the WSBASE and the market indices seems less likely to me than a substantial move up or down.

WSBASE_09.2009-07.2010.pdf

[peter1234]

Could you please enlighten us on what WSBASE means?

TIA

;)

[LC]

research.stlouisfed.org/fred2/series/WSBASE/downloaddata

[A_Hamilton]

I assume the thought here being that a decline indicates deflation?

[meiroy]

twacowfca,

 

Thank you. Could you elaborate a bit on the why [probability] that the market would go up while the WSBASE has been going down?

 

Last time you humbly said 50% but you were right.

 

Also, if you may, how would you weigh the position as per percentage of total holdings and probabilities of the event taking place as you expect?

 

 

 

[TwoCitiesCapital]

Interesting. The velocity of money is still multidecade lows. Down from 2.2 to 1.5. That means dollars are being "recycled" through the economy less frequently and now the supply of money is reducing as well. Fewer dollars being recycled through less often sounds like a recipe for slower growth than even the dismal numbers that have been put up.

 

I do wonderif this is the beginning  with all geopolitical risks, the deflation in commodities, and now this. Might be time for me to deleveraging the portfolio some.

[Vish_ram]

I think the saying correlation doesn't mean causation may apply to this.

 

WSBASE bore no relation to market prior to 2008.

see graph http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=USL

 

The market wasn't supported by fundamentals but by Fed actions. To that extent, Fed action (WSBASE) supported stock prices, the correlation exists. Once economy recovers, the fundamentals will support stocks and we will start seeing that divergence soon.

 

 

 

[meiroy]

Vish_ram,

 

1. He's definitely not calling this a 100% causation. It's a reasonable probability correlation. (by reasonable I mean that you might want to do something about it but for sure not throw all your portfolio in. Which is why I asked about how to weigh this having no clue how to roll it in short duration.)

2. Before 2008 and after 2008 are completely two different environments.