day in the markets. Two things happen last week that have NEVER happen before. Thursday continuous sell off into the close coupled with the same trading pattern on Friday has never occurred two day in a row. Even in the dark days of 08 we always got a bounce. Additionally, the VIX (volatility index)has NEVER gone up as fast as it did over those two days. A continuation of the trading pattern on Monday might set off real panic selling by the end of the day. We did see what looked like some panic selling at the end of the day on Friday. So what does that mean to ordinary investors with IRAs and 401ks?
Remember the S&P 500 was at 940 in 2009 so we have more than doubled since then. One of famed investor Harvey McKay's rules of investing, which have stood the test of time, is that indices ALWAYS revert to the mean. The mean in this case is around 1,350 (plus or minus) on the S&P. That means we could pull back 33% and not be in a systemic event, which it will surely feel like if it happens. If the pull back is not systemic investors should do nothing.
Here's my two cents on how to tell if the pull back breaks (and it will happen suddenly) into a systemic event. There is something called the TED spread that measures the credit worthiness of corporations by comparing the short term US Treasury rate to European inter bank lending rates. The US Treasury rate is thought to be "risk free". It has never been negative in nominal terms. If the short term US Treasury rate goes negative it means the Chinese are selling their US Treasury debt (i.e. they are way up a creek). You'll know this first by an increase in the TED spread.
Know what the rate is on the 10 year treasury debt (2.04 Friday after being 2.2 on Monday) if it breaks below 1.50 get worried, really worried.
I believe a systemic event will be a world currency crisis, not just Asia. If the dollar gets outrageously expensive get worried. Another way of putting it, if oil doesn't bottom soon look out. (How Black Swannish is it that low commodity prices trigger a worldwide depression because the strongest global economies sell oil!)
If any of these things happen I would think about moving to cash otherwise just ride it out. You'll never effectively time the market. (note- although gold might be a good hedge right now, it tells you nothing about systemic risk v just a sell off. As panic spreads the price of gold goes up irrespective of the underlying cause).
Free advice is worth what you pay for it. Just thought a "heads up" might be in order.
Remember the S&P 500 was at 940 in 2009 so we have more than doubled since then. One of famed investor Harvey McKay's rules of investing, which have stood the test of time, is that indices ALWAYS revert to the mean. The mean in this case is around 1,350 (plus or minus) on the S&P. That means we could pull back 33% and not be in a systemic event, which it will surely feel like if it happens. If the pull back is not systemic investors should do nothing.
Here's my two cents on how to tell if the pull back breaks (and it will happen suddenly) into a systemic event. There is something called the TED spread that measures the credit worthiness of corporations by comparing the short term US Treasury rate to European inter bank lending rates. The US Treasury rate is thought to be "risk free". It has never been negative in nominal terms. If the short term US Treasury rate goes negative it means the Chinese are selling their US Treasury debt (i.e. they are way up a creek). You'll know this first by an increase in the TED spread.
Know what the rate is on the 10 year treasury debt (2.04 Friday after being 2.2 on Monday) if it breaks below 1.50 get worried, really worried.
I believe a systemic event will be a world currency crisis, not just Asia. If the dollar gets outrageously expensive get worried. Another way of putting it, if oil doesn't bottom soon look out. (How Black Swannish is it that low commodity prices trigger a worldwide depression because the strongest global economies sell oil!)
If any of these things happen I would think about moving to cash otherwise just ride it out. You'll never effectively time the market. (note- although gold might be a good hedge right now, it tells you nothing about systemic risk v just a sell off. As panic spreads the price of gold goes up irrespective of the underlying cause).
Free advice is worth what you pay for it. Just thought a "heads up" might be in order.
