Oct 14
Back to the Basics
What do we do now? The S&P 500 is down around 40% to 50% from its high. Once the market is cut in half the probability of going lower is shrinking to a smaller and smaller percentage. Cash seems to be king and there is no reason not to sit on it a little longer. However, there is something the investor can do. Take a little time to examine the StockCharts for each asset class in your portfolio. Set out four changes you are going to look for in the StockCharts. Don’t move back into the ETF until all of the following four indicators turn positive, and here they are.
- In the top graph, the 25-Day EMA must move from below to above the 50-Day EMA.
- In the RSI graph, the line must move from below to above the 30% line.
- In the MACD graph (third down from the top), the histogram must turn positive. The black line will cross from below to above the red line.
- Wait for the CMF graph to turn positive.
When all four technical indicators turn positive, the probability of moving forward is higher.
Note that I extended the EMA values in the top graph from 13/26 to 25/50. This slows the action and is an attempt to make sure the broad markets are turning around before making a move back into the ETF of interest.
The reason for waiting for all four indicators to turn positive is to avoid that old nemisis of the whipsaw. Even so, it can easily happen in this market environment.
Lowell Herr
PS I wrote this a few days ago, but the information still applies. There is no reason the 8,000 DJI will not be retested when additional negative economic information hits the wire.
Photograph: Chinese rug
Sphere: Related Content
October 14th, 2008 at 5:34 am
Lowell
I’ve been filing away a few older AAII articles and came across a useful one for asset allocators. It discusses how to calculate the value of SS and defined benefit pensions in one’s overall AA. It can be found in the July 2002 issue on page 24 and is authored by Willam Jennings and William Reichenstein. I’m 68 as is my wife and she is collecting 50% of my benefit. Based on our average life expectancy the value of this benefit to us is estimated to be ~$520k. This should be included as part of one’s “fixed income/cash” asset. This is a better formula than what I’d been using which was based on the asset value that would throw off the current SS benefit we collect. The AAII artical formula is based on actuarial tables.
Bob Warasila
October 14th, 2008 at 9:05 am
“Based on our average life expectancy the value of this benefit to us is estimated to be ~$520k.”
I generally evaluate the “bond equivalent” using an interest rate of 5% or 6% and the payout amount.
Example: Suppose one receives $1,000 per month from Social Security or $12,000 per year. If one assumes a 6% interest rate, then $12,000/.06 = $200,000 (bond equivalent).
Lowell
October 14th, 2008 at 11:57 am
Lowell,
That’s the way I did the calculation before and it is based IMHO on what one needs in the way of income, so it emphasizes cash flow. The AAII article argues one has a finite lifetime:^)) Based on family statistics my expected remaining lifetime is probably pretty close to the average numbers they use in their tables.
Bob
October 14th, 2008 at 1:58 pm
Bob,
Running out the calculation the way I did assumes one will live forever, or at least for a very long time.
The reason I used 6% comes from Bernstein’s book. Depending on how secure the “bond equivalent” that backs the pension or social security payment, one may use numbers such as 4%, 5%, or 6%. The smaller the percentage the larger the “bond equivalent.” I wanted to keep the value as small as seemed reasonable.
Lowell