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Old 07-12-2008, 03:10 PM   #21
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Moving targets, oscillating markets, lots of trades, lots of paperwork. Sounds like a lot of work, but then I'm a lazy oik.

Good luck with it.
My dream senario would be just one target, 11500.... one trade, when the crisis clears and the bull resumes.... no paperwork, and..... no work other than a few phone calls to make the moves.

Ok, I'll beat you to it.....if it sounds too good to be true....

I've been involved in markets long enough to know there is no holy grail, but scary times like this may lend themselves to a simple timing system. It's better than saying two years from now if things get nasty, god I wish I had done something to save my butt. To each their own though. If you are a true optimist, you might feel secure enough without thinking like this.
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Old 07-12-2008, 03:24 PM   #22
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I've been involved in markets long enough to know there is no holy grail, but scary times like this may lend themselves to a simple timing system. It's better than saying two years from now if things get nasty, god I wish I had done something to save my butt. To each their own though. If you are a true optimist, you might feel secure enough without thinking like this.
Truth is I expect to be able not to touch my stock funds for a very long time. I have 40% of my stash in stocks so a big cushion in bonds and cash, plus I'm drawing one small pension now ($5k/yr), will start drawing my main pension March 2010 then at 62 I'll have SS and DW's SS plus at 65 I'll have another small pension (12k COLA'd) and at 67 a UK SS.

If my butt was on the line, I don't know if I would be quite so optimistic.
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Old 07-12-2008, 03:32 PM   #23
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Go for it, Dude! You may win, you may lose, but in any case you will be captain of your ship-and you will be able to add to the group knowledge of investing on this board. I don't think anyone has reported carefully on their experiences with kind of protocol before.

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I agree. If I remember correctly, a lot of guys got really rich day trading in 1999 and 2000. Make sure you use alot of leverage to amplify the gains.

Keep us posted.
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Old 07-12-2008, 03:33 PM   #24
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Truth is I expect to be able not to touch my stock funds for a very long time. I have 40% of my stash in stocks so a big cushion in bonds and cash, plus I'm drawing one small pension now ($5k/yr), will start drawing my main pension March 2010 then at 62 I'll have SS and DW's SS plus at 65 I'll have another small pension (12k COLA'd) and at 67 a UK SS.

If my butt was on the line, I don't know if I would be quite so optimistic.
In your case and the case of many younger people, it makes less sense to try to protect oneself. I'm not sure what percentage of ER's are in those boats but I think many would be hurt seriously if things turn out badly and the market was 30% lower 2 years from now along with another fall in real estate prices.

We don't know what will happen but the bad senario does seem at least possible with what I see developing. Everyone has to evaluate that on their own. If someone knows things will not get much worse, please tell me so I can buy into any fruther declines and not have to think about downside protection.
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Old 07-12-2008, 03:40 PM   #25
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I agree. If I remember correctly, a lot of guys got really rich day trading in 1999 and 2000. Make sure you use alot of leverage to amplify the gains.

Keep us posted.
What I am talking about is not day trading. I'm a bit surprised you cannot see the difference. I'm looking to substitute some potential upside gain for short term downside protection. That is slightly different than what the much wiser financial industry did to us with leverage in recent years.
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Old 07-12-2008, 03:54 PM   #26
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What if the market gaps down on you?

In 1987, you wouldn't have been able to sell when the market dropped to your number, because the market opened well below it. You could well have a day where the DOW opens 2000 points lower than where it closed (Imagine a horrible scenario like Fannie and Freddie defaulting and the government NOT backing their bonds).

You can't remove the risk of losing a lot of money in the stock market without removing most of the upside too.

All you can do is try to buy solid businesses at good prices and hope for the best.

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All great points. On the last point, that its true. But isn't that superior to possible financial ruin at what feels like a highly risky time in the market? (I see Financial institutions tanking and read there may be much more in losses to come.) May a little dirty but very simple market timing be in line?
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Old 07-12-2008, 03:54 PM   #27
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RockOn,

If you are being scared out of the market, get out and sleep better. The big question is will you have the courage to get back in when it moves back over your target? The market had fully recovered its 2008 losses in mid-May. We're now down below the earlier lows in just 6 weeks. We can be back up 20% in another 6 weeks or less. Yes, we may still fall another 30%. We might go to zero.

Why didn't you put all of your money into annuities when you were talking about them before? You wouldn't have lost anything.
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Old 07-12-2008, 04:00 PM   #28
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What if the market gaps down on you?

In 1987, you wouldn't have been able to sell when the market dropped to your number, because the market opened well below it. You could well have a day where the DOW opens 2000 points lower than where it closed (Imagine a horrible scenario like Fannie and Freddie defaulting and the government NOT backing their bonds).

You can't remove the risk of losing a lot of money in the stock market without removing most of the upside too.

All you can do is try to buy solid businesses at good prices and hope for the best.
You have to admit you are cherry picking the one day in history where the black swan would have hit. It could happen again in the next year (or ?) until the next bull market comes, but really how likely is that?

On the last point, I know you believe that and that is fine.

I think there are ways to remove some of the risk, you do not. Many people agree with both of us.
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Old 07-12-2008, 04:12 PM   #29
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RockOn,

If you are being scared out of the market, get out and sleep better. The big question is will you have the courage to get back in when it moves back over your target? The market had fully recovered its 2008 losses in mid-May. We're now down below the earlier lows in just 6 weeks. We can be back up 20% in another 6 weeks or less. Yes, we may still fall another 30%. We might go to zero.

Why didn't you put all of your money into annuities when you were talking about them before? You wouldn't have lost anything.
I know following even a simple system is very hard. I also know markets can change quickly. I also know that when I see the financial problems in this country, things "could" be on the verge of getting very serious. Please tell me if you know otherwise.

On the annuities, I still might buy them. I already might have been better off ultimately if I had. I didn't because I haven't fully retired yet and can still handle some lower risk investments for now, at least I thought I could . Hopefully if I pull the plug on annuities which will be in about 6 years or so, they will still allow me to get a 6% IRR if I live to the mid to late 80's. Maybe they will be dropping the IRR if the markets don't do well in the next few years. That would s*ck.

P.S. by the way, the Preferred Stock funds I own lost about 17% in the last 8 weeks, so much for that being a much better plan than a guaranteed 6% annuity.
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Old 07-12-2008, 05:03 PM   #30
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Options are another option to excute the system, the trouble is they have cost and that cost isn't really minimal in percentage terms. If one can trade without fees, my way is a cheaper way to go as I calculate it. Options are a close second since the whipsaws might be less slightly less costly, maybe a tossup.
This is the "trap" that the dynamic portfolio insurers fell into. They thought they could create the option more cheaply by trading the underlying asset, in that case, the S&P 500 futures, which were relatively cheap to trade.

When you say your way is cheaper, what you really are saying is that you think the subsequent realized volatility will be less than that implied by the option price. So you are making a volatility bet.

Think of an at-the-money option with one day until expiration. You buy it today, and tomorrow it pays off your desired return pattern. You're 100% in if the market is above the strike, and 0% in if below. You are correct that this option will be relatively expensive in percentage terms - I calculate a Black-Scholes value of 0.63% for a one day at-the-money option with an implied volatility of 30% (roughly the current VIX value). But you have to think of the cost of creating that option dynamically. If the realized volatility is 30% over the next day, your actual cost of creating this option will be roughly 0.63%, and that's assuming no gap moves. If the market whipsaws back and forth through the strike price so that your trading volatility is greater than 30%, then your dynamically-created option will cost more than 0.63%. Wall Street is littered with the carcasses of people who thought they could create an option more cheaply by trying to replicate it with the underlying asset. The dynamic portfolio insurers of 1987 were the textbook example.

Since the option premium grows slower than linearly with time (more like the square root), you can reduce the percentage cost per unit time by purchasing longer dated options, e.g one week, or one month. If you hold it until expiration, the payoff will be the same binary one that you are looking for. At least with the purchased option your cost is known up front, and the payoff pattern at expiration is guaranteed
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Old 07-12-2008, 05:29 PM   #31
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This is the "trap" that the dynamic portfolio insurers fell into. They thought they could create the option more cheaply by trading the underlying asset, in that case, the S&P 500 futures, which were relatively cheap to trade.

When you say your way is cheaper, what you really are saying is that you think the subsequent realized volatility will be less than that implied by the option price. So you are making a volatility bet.

Think of an at-the-money option with one day until expiration. You buy it today, and tomorrow it pays off your desired return pattern. You're 100% in if the market is above the strike, and 0% in if below. You are correct that this option will be relatively expensive in percentage terms - I calculate a Black-Scholes value of 0.63% for a one day at-the-money option with an implied volatility of 30% (roughly the current VIX value). But you have to think of the cost of creating that option dynamically. If the realized volatility is 30% over the next day, your actual cost of creating this option will be roughly 0.63%, and that's assuming no gap moves. If the market whipsaws back and forth through the strike price so that your trading volatility is greater than 30%, then your dynamically-created option will cost more than 0.63%. Wall Street is littered with the carcasses of people who thought they could create an option more cheaply by trying to replicate it with the underlying asset. The dynamic portfolio insurers of 1987 were the textbook example.

Since the option premium grows slower than linearly with time (more like the square root), you can reduce the percentage cost per unit time by purchasing longer dated options, e.g one week, or one month. If you hold it until expiration, the payoff will be the same binary one that you are looking for. At least with the purchased option your cost is known up front, and the payoff pattern at expiration is guaranteed
If I cn buy a million dollars of a mutual fund for $0.00 and sell it the next day if I need to for $0.00. How can I beat that?
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Old 07-12-2008, 06:17 PM   #32
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If I cn buy a million dollars of a mutual fund for $0.00 and sell it the next day if I need to for $0.00. How can I beat that?
But how do you know it will be worth $1 million the next day? That would only be true if the realized volatility were zero. Otherwise, you would still be subject to whipsaws.
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Old 07-12-2008, 06:35 PM   #33
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But how do you know it will be worth $1 million the next day? That would only be true if the realized volatility were zero. Otherwise, you would still be subject to whipsaws.
I'm not following, sorry. If I buy a million dollars of a Dow fund when the Dow was 11501 and sold it in two days when the DOW was 11499 and didn't have to pay any commisions, my total loss for that whipsaw was 0.017%. Almost a free trade that time. I understand those prices are not reality and I would be subject to greater losses (whipsaws).

Now how would that work with options? I'd pay the premium for 1 million dollars worth of the DOW index. If the DOW went down below "my number" two days later and I sold my options, my option loss would be much more than 0.017% and I would have paid two commisions. What don't I understand? Are you saying not to sell the options and invest as if I were buying longer term isurance?

I'll go back and reread your post, I am talking about something way more basic than dynamic portfolio insurance. Simply getting in and out of the market through indexed mutual funds. I am not trying to create an at-the-money option. I am just placing a buy stop order above the market, and selling on the day of first loss after the buy stop was triggered. I understand I will be whipsawed as many times as necessary to insure I am totally invested for a bull market, and safely out during a continued bear market. As I see it the same could be done with options, higher trading costs, but "possibly" slightly less painful whipsaws. I am trying to keep it very simple but avoid a possible serious sell off that could be coming. I would be giving up some upside and suffering potential whipsaws to accomplish that. In this environment, it seems to me to be worth it.
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Old 07-12-2008, 06:45 PM   #34
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I'm not following, sorry. If I buy a million dollars of a Dow fund when the Dow was 11501 and sold it in two days when the DOW was 11499 and didn't have to pay any commisions, my total loss for that whipsaw was 0.017%. Almost a free trade that time. I understand those prices are not reality and I would be subject to greater losses (whipsaws).
I think what he is saying is that this is in fact dynamic portfolio insurance, no matter what you choose to name it. And it has been tried by well informed people with large resources- and they got kicked in the butt, good and hard.

Still, although I would never try it, I think it would be peachy if you gave it a shot. After all, it's only money.

Ha
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Old 07-12-2008, 06:58 PM   #35
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I understand those prices are not reality and I would be subject to greater losses (whipsaws).
That is my point, and those losses could be significantly greater than the 0.63% I used in my example. A 30% annual volatility (standard deviation) translates into 1.8% per day, which means that there is a probability of 16% that the market could be down more than 1.8% in one day. If I worked out the arithmetic from the standard normal distribution properly, the probably of a decrease by more than 0.63% would be 36%. If the volatility turns out to be lower, you will come out ahead. I'm just trying to point out the bet you are making if you do it your way.

I know many traders who thought they could sell "overpriced" options (high implied volatility) and hedge them dynamically. Often they were right. But when they were wrong, they blew themselves up.
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Old 07-12-2008, 07:13 PM   #36
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That is my point, and those losses could be significantly greater than the 0.63% I used in my example. A 30% annual volatility (standard deviation) translates into 1.8% per day, which means that there is a probability of 16% that the market could be down more than 1.8% in one day. If I worked out the arithmetic from standard normal distribution properly, the probably of a decrease by more than 0.63% would be 36%. If the volatility turns out to be lower, you will come out ahead. I'm just trying to point out the bet you are making if you do it your way.

I know many traders who thought they could sell "overpriced" options (high implied volatility) and hedge them dynamically. Often they were right. But when they were wrong, they blew themselves up.
Ok, I get it.

I am looking at this as being a one time thing, just for this single environment (the current possible financial crisis) not a full time trading system. I do understand how the whipsaws could be minimized somewhat with options and that would be a worthwhile thing to do. If I am only planning on suffering through a few whipsaws, I see the size of the whipsaw as less of an issue. I see suffering a few whipsaws and going with a delayed buy stop as fairly cheap insurance in case things really start to fall apart. (Granted, doing it with options might be a little cheaper, especially if things take a long time to resolve). If things don't fall apart, I have lost a little upside but am back in the game.
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Old 07-12-2008, 07:41 PM   #37
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I just wonder why an individual who believes he has the ability to discern that the great meltdown is upon us AND that he can detect when it is time to get out off the market AND that he has the ability (or a system) to know when to get back in . . . why would such an individual ever have spent time considering the purchase of an annuity? Seems like squandering a special gift.
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Old 07-12-2008, 08:09 PM   #38
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I just wonder why an individual who believes he has the ability to discern that the great meltdown is upon us AND that he can detect when it is time to get out off the market AND that he has the ability (or a system) to know when to get back in . . . why would such an individual ever have spent time considering the purchase of an annuity? Seems like squandering a special gift.
You are not reading me correctly.

I believe a great meltdown "could be" upon us, the signs of it are apparent.

I believe it is better to be safe right now as the financial institutions are crashing around us. I am not sure this is the end but when was the last time this took place? Also hyper-inflation is not completely out of the question.

I believe I do not know when to get back in so I prefer to set a price level to make sure I am back in if this all passes without much more damage.

I might buy an annuity because all of investing is so uncertain and risks are actually really risks when investing in risky markets. Also a guaranteed 6% steady IRR (if it is indeed really safe) is about as much as many knowledgeable people tell me to expect from a 50/50 or 40/60 portfolio which is my maximum stock risk tolerance.

See I really don't have a special gift, I just do not like losing money and think about timely ways to avoid it. I am just throwing this idea out there, to see whether I can learn something. I may follow it or may not, I haven't decided yet. I understand its risks and rewards I think. So far, I haven't really heard much downside to this idea though. Other than the usual "timers will lose all their money and burn in hell".
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Old 07-12-2008, 08:18 PM   #39
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the best buy and sell signals i've seen are finding divergences in MACD and other indicators and the market indexes. the market is supposed to trend the technicals. MACD will give warning of a rally or correction that will last a month or more and other indicators depending on the length of time they cover

the rally that started in mid-march had a 2 month long bullish divergence in the MACD and RSI. basically the market kept falling while the average closing price started rising. the reason this happens is you can have a bunch of up days and a few big down days to drop the price really low, but the average will still be trending up.

early june there was a bearish divergence on the MACD for the SP500 and nasdaq. it started trending down while the market was still rising.

the length usually gives you an idea how powerfull the rally is going to be. in 2002 the bullish MACD divergence was around 3 months long. if you see it on a weekly chart as well than it carries a lot of significance.

another leading indicator i've read about is the Dow Transports. they lead the rally that started in march and started falling in early june with the market

doesn't mean it's the start of a new bull market, but a chance to buy and hold for a few months to make some cash and then see how things are going.
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Old 07-12-2008, 08:25 PM   #40
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So where are we now? Any current technical readings?
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