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S&P-500 Target: ZERO on 11/1/09

March 5, 2009
S&P500: Extrapolating the trend

S&P500: Extrapolating the trend

The above chart is clear and succinct. If the current trend continues, the S&P-500 will trade at ZERO on November 1, 2009.

Rocky calculates that a disciplined investor who put $100 into the Vanguard S&P-500 fund every month for the past twenty years, now has a negative return on his entire investment (including dividends). This is a stark measure of the severity of this bear market, and it obviously shakes the confidence of many folks who responsibly “dollar-cost-average.”

Rocky (who believes in long-term-reversion-to-the-mean) finds this information to be bullish for the next 10 to 20 years. Folks who extrapolate perpetual losses today are repeating the same mistake as folks who extrapolated 15% annual compounded gains in the 1990’s.

Rocky continues to contently nibble at stocks. If the stock market reaches zero on November 1st, Rocky will happily own 100% of the US stock market. Noone knows whether the S&P will actually reach zero — but if it does, Rocky will savor firing the irresponsible CEO’s — who like Slim Pickens in Dr. Strangelove rode their companies into oblivion. (As Major Kong’s navigator says, “The Target is in sight.”)

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  1. allocator
    March 5, 2009 at 7:24 pm

    Kool,

    You only have to get back to 1370 to double your money. I’m in!

    I was thinking that at these market levels, the long 2x index ETFs could be great buys. The market’s down so much that it’s not going to take all that much money coming in at the same time to goose it. You could see 30-40% up in the blink of an eye over a few days, and if you double that with the leveraged ETFs … tempting

    Cheers,
    George

  2. March 5, 2009 at 8:56 pm

    Rocky (who importantly differentiates between speculating and investing) believes the following speculative statement to be true:

    The market will have a 30% rally in an extremely concentrated timeframe. The first 10-15% will occur over a 2-3 day period. The pundits will question the “sustainability” of the rally and willl call it a “dead cat bounce.” The next 10-15% will be slower and begrudging. At the end of the 30% rally, the moving averages will be in a bullish alignment, and the folks who exited the market because of a “bearish moving average,” will either buy at prices above their previous sales, or they will claim that the rally “isn’t real.” Rocky has no clue from where or when this 30% rally will begin. However he refers George to The First Law of Rocky https://onehonestman.wordpress.com/rockys-definitions/

    Rocky NEVER calls bottoms or tops. He notes (with a straight face), that there is a full moon on March 10th however. So that’s as good a date for a “bottom” as the other 364 days in the year.

    Rocky believes that there are many paths to heaven. However, the leveraged stock market ETF is a path-dependent path. That is, due to its internal construction, if the market chops violently, and then rallies, an investor may profit less than expected in a volatile rally. He notes, however, that the leveraged commodity etfs are, on balance, better, because they only rebalance monthly. Not nightly like many of the leveraged stock etfs. However, Rocky does not give investment advice. Ever. And in his entire career, he has never ever traded on margin.

  3. allocator
    March 5, 2009 at 9:22 pm

    o-kay, so if on 11/1/09 when stocks are free, would you trade on margin then? πŸ™‚

  4. March 5, 2009 at 9:44 pm

    No. Penny stocks are non-marginable.
    See: http://www.investopedia.com/terms/n/non_marginable_securities.asp

  5. Sam
    March 6, 2009 at 2:31 pm

    Are the “0” puts on the board yet? If so what months are available?

  6. masteroftheuniverse
    March 7, 2009 at 7:19 am

    Rocky can get very rich fading my stocks. I have to be the worst stock picker on the planet. I couldn’t pick a winning stock if it stood up and bit me.

    Jeff

  7. Murali
    March 7, 2009 at 6:22 pm

    Rocky,

    You briefly allude to ‘Dollar cost averaging’. I am yet to understand whether this is a good thing or a bad thing. It would be great if you could elaborate on DCA.

    Thanks

    PS: Enjoyed reading your blog.

  8. March 7, 2009 at 9:39 pm

    To Murali:

    Rocky is delighted that you enjoy the blog.
    See: http://en.wikipedia.org/wiki/Dollar_cost_averaging
    for a decent technical description of DCA.

    Asking Rocky, “is this a good thing or a bad thing?” is akin to asking Rocky, “When did you stop beating your wife?” [Rocky’s never laid a finger on Trophy Wife. And if anyone has a black eye, it’s Rocky.]

    Whether it’s “good” or “bad” is a function of one’s temperament, time horizon and risk tolerance.

    For the record, Rocky does not use DCA. He only buys stocks when he believes that he will achieve an attractive rate-of-return over a reasonable (5-10 year) holding period.

    If Friday was “the bottom,” in the stock market, Rocky will whip himself because he doesn’t own enough stocks. If the stock market loses another 50%, Rocky will whip himself because he started nibbling too early (but he will continue to nibble all the way to zero.)

    So … to conclude… the only sure bet is that there will be scars on Rocky’s back.

  9. Murali
    March 8, 2009 at 4:48 am

    Rocky,

    πŸ™‚

    Thanks for the link as well as for replying. There was an article on Daily spec on the same, and there was no consensus. I wanted to know your take on it.

    Btw, I hope the scars, if any, would be very light.

    Best,

  10. March 8, 2009 at 9:44 am

    Rocky – ld will be doing the same and has scars already.

    I think DCA and buy-and-hold only make sense around market bottoms. Unfortunately, both are highly doubted, discounted, and ignored exactly when they should be applied. The time horizons for market returns (especially those used in theoretical analysis) are often far greater than human lifetimes (see Rocky’s fascinating postage example), and worse yet, during a lifetime much can change in a 10 year period forcing changes in earlier strategies.

  11. March 8, 2009 at 3:16 pm

    LD:
    You make an excellent point: DCA works best exactly when it’s the most painful … and works worst when it feels easy and right.

    Interestingly, the iconic Benjamin Graham both wrote about and advocated DCA. He did a study of DCA from 1929 to 1949 (which included the 90% great depression bear market). In 1929, the Dow Jones Industrial Average (DJIA) was at 300 and in 1949, the DJAI closed at 177 (a decline of 41%). Nonetheless, DCA produced an annualized positive compounded return of more than 8% over that period. See: Benjamin Graham, The Intelligent Investor: A Boook of Practical Counsel, 4th rev ed. New York: Harper & Row, 1973, p. 280.

  12. A fan
    March 12, 2009 at 9:14 am

    Given the recent rally, can you give a new estimated date for the S&P to reach zero.
    Thanks

  13. allocator
    March 12, 2009 at 5:44 pm

    These are the prices at which you buy stock to stick in the drawer and forget about. Buy and hold good quality blue chips and low debt techs, and many will triple, quadruple or more from these levels. We’re talking about quality companies in the single digits that used to trade in $30’s or %40’s or higher. A friend of mine, a humble high school teacher (but a hell of stock-picker) used to do exactly this sort of thing and retired a millionaire – without using leverage (didn’t believe in it).

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