Sit on the sidelines

It’s been one hell of a week for markets around the world. ASX (FTSE All Share) stands at 2739. It has a 52-week high of 3168, and 52 week low of 2494, and a YTD high of 3098. It currently sits on a YTD low. It is down 13.5% from its 52 week high.

Motley Fool has run an article yesterday: "I’ve Been Panic Buying", claiming that "blue-chip bargains abound". The problem with value investors is that they’re always too early.

I am actually quite bearish at the moment on account of the fact that the VIX has now exceeded 25. When I’ve looked at the VIX chart, it seems that a climb to 25 always proceeds to a climb to 30. My vision isn’t perfect, as it relies on eye-balling the charts. Just because something has happened a certain way in the past doesn’t, of course, mean that it is guaranteed to happen in the future. Sometimes the VIX appears to dip from 25 to 20 – but 30 was attained a short time thereafter.

I am also unimpressed by the ASX only being down 13.5% from its 52-week high. I’m not feeling burnt yet. I think we have more pain to come, despite what the dip buyers might think.

Interesting comment on TMF article "15 Shares Hitting 52-Week Lows":

Statistically the shares that have done worst over the last 6 months will continue to be the worst performers over the next 3 months.

I’m currently holding 15% cash, with the equity portion consisting of about 55% defensives and 45% growth/value. That’s largely a historic accident, though – although it’s probably not a bad setup. I think cash and defensives are the place to be right now. Defensives act as an "each way bet" – you wont lose much if the market goes lower, and you will participate in some of the upside. Plus you get to collect those dividends that we all love. I know many disagree with a defensive strategy right now, arguing that it is currently too popular to succeed right now.

The easiest way to make money from the shares is when Mr. Market is acting patently irrationally. There’s a kind of twist to that, though. In order to benefit from the irrationality, you have to have dry powder. If you have shares that have high beta, then you’re just riding Mr. Market all the way down, so there’s no real way to benefit from Mr. Market’s insanity. Only by holding low beta (or cash) can you really benefit. So you kinda need a view of the market and how you should be positioned, otherwise you’re just handcuffed to Mr. Market on his wild roller-coaster ride. And inevitably, that view might be wrong. For all I know, the markets will breathe a sigh of relief if Greece left the EU, rally, and go on to make new highs.

To paraphrase one wag on Twitter: don’t dash for trash, take flight from shite.

We shall see.

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About mcturra2000

Computer programmer living in Scotland.
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