When investors panic, opportunity arises.
“When they throw in the towel, catch it.” —Jim Browning
Years ago, a longtime journalist friend, Jim Browning of the Wall Street Journal, led his iconic column with an introduction that said, “David Kotok threw in the towel.” Jim’s words came to mind immediately when I thought of the recent drawdown in markets. We emailed and caught up.
The towel metaphor then was evoked in a much earlier incarnation of bull and bear markets. Volatilities were different; interest rates were higher. There actually was an interest rate other than zero. The world looked very different than it does today.
On Wednesday, when the Dow Jones industrial average was down about 400 points, we launched our first rebalancing buy program. Selectively, this market is now offering great opportunities. With ETF strategies, these may be seized quickly.
Action depends on the selection of the specific exchange-traded fund and its composition. That is how to determine whether to enter now or wait.
The Power Of ETFs
There are approximately 1,500 exchange-traded funds and exchange-traded notes. Using a collection of them, a person can construct nearly every kind of portfolio imaginable. Matt Hougan, Talley Leger and I discuss this in detail in our new book, the revised and second edition of “From Bear to Bull with ETFs.” (It’s available in e-book or paperback through our website: http://cumber.com).
The execution of most of these ETFs can be done efficiently, within a few pennies of net asset value. That assumes a knowledgeable trading desk and direct connections to skilled clearing brokers at an institutional level.
ETFs allow rapid transition in periods like October 2014. On Wednesday, some of those ETFs and their underlying component stocks reached extremes: Nearly every stock within the ETF was oversold by enough standard deviations to call for action.
When that happens, the question changes from “if” to “when.”
Once valuation, market movement and volatility remove the “if” and substitute the “when,” the whole dynamic of an equity transaction changes. “When” describes a specific day and time. “When” does not mean “do I?” or “don’t I?”; that is already decided. We do once several sigma moves are reached.
So now we have only the second question to deal with. Have we reached the “when?”
This market has corrected viciously, violently and with characteristics that showed forced short covering, crunching hedge funds that were extended with margin; and forced selling by mutual funds that received redemptions, blistering investors who are bewildered and shocked by the violence they have seen in the last few weeks.