Monday, September 15, 2008

Shooting Bears

Turning on CNBC last night was inadvertant. I was looking for the football game, unaware that my dear mother's clock is forty-minutes fast. Clicking through the channels, I heard the words, "Merrill Lynch gone. That was unexpected." Whoa! Across the bottom, "Lehman brothers discussion fail. Bankruptcy filing expected tomorrow" Whoa! The Steelers game would wait.

Since then I have been seeking to turn the "whoa" into something more dispassionate than throwing dice. Obviously these are remarkable changes. One hundred-fifty year old institutions don't disappear everyday. A brokerage house that holds $1.6 Trillion in client assets doesn't simply go away without a pretty good (or bad) reason. It is very easy to panic. But what has been the market reaction to this as per the broad S&P 500 index?

Over the past week, the index is down less than 2%, and is dead even from a month ago. Obviously accumulating equities against the trend is not a profitable endeavor, but it does show there are still long side trading opportunities for the nimble. In our management of investments rather than trading this is a call for patience until the market shows us the way up and a more ambitious strategy is called for.

The chart below shows the S&P 500 on the bottom half, and the VIX index on the top half. Whenever the VIX spiked above 30, there was a tradable bounce, although not an investable buy, yet. I will be looking for a break out of the downtrend before making additional long investments and using the using the lower VIX readings to pull pull back on long positions if still in the downtrend.