LiveRocket Performance Week 9: Down 5.8%

We got hit hard this week. The most frustrating part is that the STOPs protected us but I didn’t act in time to buy back in order to take advantage. I expected a pullback and deliberately set the STOPs pretty tight precisely for this opportunity but was unable to move.

While we are still beating the market for the year, it is not much of a consolation: we are down ~6% this week (about the same as the broader market).

What to do next?
It really depends on which camp you fall into:

• Minor blip – In which case, jumping in now is the way to go because stocks will rebound hard
• Short term adjustment – Like the post Katrina thing. Expect some short term malaise followed by return to bullishness
• Game over – It’s Midnight at the Party and Cinderella is about to turn into a pumpkin. Cash out and buy CDs

The non-event camp assumes that there was a one-time panic. That is, that the recent pullback was just the fallout of a Chinese government attempt to slow down their economy and stock market. I’m not entirely sure that is why the market crashed – after all, in January the Chinese government forced pullbacks of similar size.

The game over camp assumes that the pullback was a response to the recognition that the US economy is hurtling towards a recession: credit problems, the related housing problems, the related consumer spending problems, and a slowing US economy are finally. Indeed, Greenspan said as much the day before the crash. While I agree that the US is heading to a recession simply because the housing market is crumbling, I think the global economy is still plugging along.

I think that this was more somewhere in the middle.

* Overdue pullback – In some ways the pullback was partly self-fulfilling (lots of chatter for the last 6 weeks suggesting a healthy pullback was overdue given the rapid rise). Indeed, a lot of the first day was exacerbated by automatic trading. A lock-in-profits mentality.
* Uncertainty and fear – The last time uncertainty and fear hit the market was last April/May. The market crashed and stayed down for 4 months only to zip up to new highs. The uncertainty is tied to the same issues: where is the economy going and where are interest rates going. The answers are more clear this time, and folks may not like the answers because it means a slowing economy. Slowing is never good for the stockmarket.

* Global economy is still strong – While we in the US are on the down slope, the rest of the world is till charging ahead. The former Soviet bloc is starting to fire on all cylinders, as are several Asian countries.

I remain positive but cautious about the year. I do think that the housing issue will drag us into a recession and that it is a problem mainly for how widely ignored and understated it the depth of it is. Just a few weeks ago, for example, most analysts saw no problems with the home builders. Now we see the #2 sub-prime lender is under criminal investigation and may declare bankruptcy shortly.

Right now, I see some malaise and tentative first steps. Tax season is coming up and that could play as a wild card. However, earnings season is coming up and I expect some solid hits for our current (and recent) stocks.

For the next few days, I see buying back in. Selectively. That means
1. Buy on down days
2. Buy according to business cycle (avoid housing, construction, consumer durables, materials) Assume that a recession is forthcoming and that healthcare and select stocks are immune