Will It Ever Stop Going Down?

I was asked in an interview whether I was bullish or bearish on the market(best question ever in an interview). I generally like to just say ( or think) I am risk managed. I had made the statement that I don't necessarily think that the S&P was going to go to 600 or lower, however I don't believe anything is out of the question so you must continue to manage risk appropriately. I said people think that this time will be different than before and I said that seemed to be a stupid assumption, this time could actually be worse given all that is happening so if X happened because of Y before, why would you assume Z would happen( if Z is better than X) given the same input.

Do I think the bottom is in? We won't know that til it happens but I think it is much closer. There doesn't seem to be the same panic there was back in october and november which is good but still hasn't stopped the grind lower. We are about 55% off the highs, if we see another 10% downside I would be very comfortable committing long term capital to the market. The reason being that the average bear market has gone down about 50%, I would say this scenario is worse so a 65% decline would not be out of the question. Do I still think there is less downside risk than upside potential? Of course, but the thing that must be considered is time. There is unlimited upside (theoretically) and in my opinion probably a maximum of 20% more downside. We have to determine whether this is acceptable risk for our required return. If our time horizon is one year and we think MAYBE there is 20% upside over the next year is it a good trade if the risk to reward is 1:1? No. If you assume in 10 years we'll be back at the highs, is a 55% return good for 20% downside? maybe. Being young I have the advantage of time, I like to focus on more shorter term trading but for longer term investments in other portfolios I think it would be smart to put a portion to work. Generally I disagree with averaging in but there are some potentially "attractive" buying opportunities people are simply too scared to jump in, if you retire in a few years that is good to be scared but if you retire in 20 you are an idiot.

I myself am still beating the market but am down 4% to the markets 24% YTD, obviously I'd prefer a positive return. Right now there looks to be some positive things happening in the market. Commodities and commodity stocks seem to have bottomed, they are higher than the panic lows of october and november. Gold is not above 1000, and we are much lower than in october and november. Copper is moving higher which is a great global economic demand indicator. It could reverse but so far it has bottomed and I think a break about 1.71 would signal further upside in materials, crude oil is holding up as well.

As crude holds up, the energy sector is severly oversold which generally points to a short term and potentially long term recovery. Bullish percent figures are in the single digits. Same goes for financials. There is the hearing about changing mark to market accounting, if that happens and they pass a measure to alter it this could spark a rally that signals the bottom in the market. The idea is balance sheets would virtually improve overnight. I think the upside potential warrants taking some risk and I will be doing so on monday. That obviously doesn't solve all the economic problems it merely masks them to an extent however I think the ensuing rally would be hard to re-trace again without a lot more negative news. Plus there is so much bad news already built in to these stocks the downside is limited if it doesn't pass.

Another place I am looking is China, it seems to be holding up much better than the US, as evidenced by the FXI, we are at new lows and the FXI is significantly off of its lows and this relative strength could continue.

In the short term I am bullish given the significant oversold level of the market shown by the McClellan Oscillator and the bottoming formations in some leading indicators like commodities and long term treasuries. We'll see what happens, either way have to manage risk and diversify.