# Just buy the SPY?



## dime (Jun 20, 2013)

You guys are so awesome I'd like to revive this endless debate and hear what the braintrust thinks. . .

Look at how high the market has come, know that QE is ending, that it's likely the market may have single digit returns this year.... what's an investor to do? 

We always have the option to just invest in the S&P500 which is THE index that portfolio managers are always trying to beat. You've got some great diversification and the MER is super low. They say its returned near 10% on average annualy in total return for the past 50 years. The strategy certainly involves very little effort and spare time! 

Certainly of course it's possible to end up waiting 5 more years to break even if the market tanks again. I don't think there's any investing strategy that didn't lose money in 2008 (except for maybe going 100% bonds?) But if you can find a strategy that lost less money than the index in 2008 that's pretty good. 

During the last crash, I held on to 50+ stocks for years hoping for recovery. I knew many people who called their advisor and demanded "sell everything now!" I'm still not sure what was the better approach. Some people locked in their losses at the absolute bottom when they ideally should have been buying. That and being overwhealmed by having to enter sell orders for all the different stocks kept me from doing it. But having a diversified portfolio and owning good quality stocks with dividend yields really helped me to survive the crash. In many ways I'm just pleased I didn't do far worse! 

Ever since I've been rather traumatized and remain paranoid (like so many others) that it'll happen again. And every year I hold onto cash the market has roared ahead because of QE. But QE is ending now, and the market will likely be much more volitle going forward. I'm sure the market will punish any stock with valuations that are unrealistic until they reach 'fair value'. 

Some investing gurus say you can't time the market perfectly picking market tops and bottoms. In hindsight we can see much clearer, but going forward it's harder to know what's going to happen. You need to have a long term horizon, knowing that it could take you the next 6 years just to break even!

For this reason I think it helps to be buying small positions regularly all the way through, rather than going "all in" if only for the peace of mind that you don't see only a 50% loss on your screen after you invested 100% at the market peak. 

The other big challenge is to find a stock picking strategy that gains more than the index during the bull market years, assuming the economy continues to improve and the bull market continues for the next few years. 

What do you all think about buying some SPY at this point and riding it out for the next 5 to 10 years?


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## lonewolf (Jun 12, 2012)

Buying the S&P 500 index years ago was one of the least crowded trades. Would have had to buy all 500 stocks individually could not buy a single ETF to buy the index. Now the trade of buying the S&P500 is becoming more crowded. When ever a trade becomes crowded the upside becomes limited. Will it be different this time ? When the trend was from being one of the least crowded trade to one of the most crowded trades it out performed.


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## Pluto (Sep 12, 2013)

dime said:


> Look at how high the market has come, know that QE is ending, that it's likely the market may have single digit returns this year.... what's an investor to do?
> 
> We always have the option to just invest in the S&P500 which is THE index that portfolio managers are always trying to beat. You've got some great diversification and the MER is super low. They say its returned near 10% on average annualy in total return for the past 50 years. The strategy certainly involves very little effort and spare time!
> 
> ...


Thanks for the opportunity to harp on my hobby horse. 

1. concern about market dropping. If you have quality stocks (businesses) they will come back. 
2. 50+ stocks is way too many. It isn't possible for you to keep good track of all those stocks. All you need is 4 to 10 quality stocks. (Buffett and Munger made most of their money from 5 stocks. They don't buy into the diversification theory. Moreover, their perspective is not inaccessible as some claim. It is easy to understand.)
3. Of the 50+ stocks, it is probably wise to weed out the weakest ones, and consider keeping the ones that reached their previous highs the soonest. 
4. Pull up a chart of the s&P 500 on yahoo charts back to maybe 1998. Then, using the compare feature plug in RY, BMO, CM, BNS, TD, NA and have a look. For good measure, also compare BRK-A to them. What would you rather have, especially after including dividends? I'd take the banks any day. Add a telco, and a pipline, and one or two other blue chips and you are done. Less than 10 stocks with probably less risk than the general market. 
5. And speaking of charts: while you have the s&P 500 chart up add the 270 day ma. That is the average price for the last 270 days. Go back 20, 30 or more years. When the market is considered over valued by total market cap > US gnp or GDP AND the S&P 500 falls below the 270 day ma, the bull is over. That can be clearly seen just by looking at the charts. What do you do? Some people might want to sell some stock so they have cash to buy at lower prices. But the objection to that is capital gains tax. That's why, if you have a selection of quality stocks, they will come back. So you can just hold and ride it out. You can also buy puts but not until the index falls below the 270 day ma. 

I wouldn't bother buying spy when I can have a selection of less than 10 quality stocks that usually outperform spy. Buying spy means you get all the crappy stocks as well as the good ones.


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## dime (Jun 20, 2013)

@lonewolf: I sort of follow but could you clarify a bit? You're saying the S&P500 is too widely invested in now to perform well since the mid 90's when the SPY ETF was invented?


@pluto: interesting stuff! Here's a few thoughts in response. 
1 Agreed! This is what saved my bacon in 2008. 
2 Disagree. I don't think 4-10 stocks is enough to mitigate the risks of having your life savings wiped out. Most professionally managed equity funds have at least 30 or so stocks. Benjamin Graham's book "The Intelligent Investor" from 50+ years ago claimed that 10 to 30 stocks provides adequate diversification. But in subsequent years modern portfolio theory research has raised the number to 30. A 2003 study Dr. Meir Statman, "How Much Diversification is Enough?" suggests 300 stocks. Interesting sites on this: here and here.
3. I agree. Regular weeding out of the stocks that have been performing poorly and are estimated by professional analysts to continue to perform poorly. Then put the money towards something of better quality. 
4. I see what you mean about the banks performing better than the S&P500 index or even BRK.a during the same period. And I do invest in those same banks. However, "past performance is no guarantee of future results" as they say. I wouldn't want to only invest in the banking sector to mitigate portfolio risk as discussed in #2. Just imagine a scenario where the Canadian Banking sector got hit hard.. for whatever reason... hackers... or Canadian mortgage crisis due to rising rates or whatever. 

5. Interesting strategy and I like the simplicity. So the idea is to just exit when the index drops below the MA and raise cash for buying back when it's climbing back above the MA. I don't object to just paying the capital gains tax. (Also, a yahoo chart going back 30 years looks like a weekly tick, so isn't the MA also in weeks? )


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## gibor365 (Apr 1, 2011)

_ 50+ stocks is way too many. It isn't possible for you to keep good track of all those stocks. _
What do you mean by "keeping track"?! If you mean to check news/earnings, that believe me, when you just open any report, all this stuff will be already priced on markets for a long time.
Nothing wrong and much safer to hold 50 stocks than 4-10... Pick up 20 from TSX60, pick up 30 from List of Dividend champions... base you selection on criteria you like, P/E, yield/growth, payout, debt ....
You will have ETF like portfolio with good chance overperforming indexes


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## james4beach (Nov 15, 2012)

The S&P 500 benefitted the most, globally, from the Fed's policy of ZIRP / QE. On the heels of this aberrant performance I think it would be a mistake to just conclude that you should only buy the S&P 500 and forget about the rest.

The Shiller PE (CAPE) ratio now stands at 26.5 versus the historical average of around 16. It is without question over-valued, though this provides NO guidance on timing. The S&P 500 has ben overvalued for around 20 years now.

Also I think 5-10 years is too short a time horizon to expect positive real returns in stocks.


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## Pluto (Sep 12, 2013)

dime said:


> @pluto: interesting stuff! Here's a few thoughts in response.
> 
> 2 Disagree. I don't think 4-10 stocks is enough to mitigate the risks of having your life savings wiped out. Most professionally managed equity funds have at least 30 or so stocks. Benjamin Graham's book "The Intelligent Investor" from 50+ years ago claimed that 10 to 30 stocks provides adequate diversification. But in subsequent years modern portfolio theory research has raised the number to 30. A 2003 study Dr. Meir Statman, "How Much Diversification is Enough?" suggests 300 stocks. Interesting sites on this: here and here.
> 3. I agree. Regular weeding out of the stocks that have been performing poorly and are estimated by professional analysts to continue to perform poorly. Then put the money towards something of better quality.
> ...


2. Portfolio theory and diversification is what Buffett and Munger call "standard Dogma". See _The Essays of Warren Buffett_ pp91 ff. where Buffett explains the issues in detail, and with great clarity. He explains why the risk is actually lower with fewer (quality) stocks. Essentially to follow modern portfolio theory is to to what most Mutual fund managers do, and as Morningstar usually reports annually, most do not beat the market, and the ones that do, rarely repeat the next year. So what to do? Concentrate in the best companies. If a company is providing a product or service where there is no end in sight for the (simple easy to understand) business, and its the dominant company in that industry, where is the risk? It isn't necessary to add lessor companies to ones portfolio (to diversify). Doing the latter weakens the portfolio. Ones portfolio is stronger if one concentrates in a handful of very high quality stocks. If one diversifies, one has to dip into stocks of lessor quality, which in turn, weakens the portfolio. 

5. Exit if and only if the market is over valued, and the indexes fall below the ma. When shifting from daily to weekly I believe the chart automatically adjusts the ma to keep the relationship the same.


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## Pluto (Sep 12, 2013)

gibor said:


> _ 50+ stocks is way too many. It isn't possible for you to keep good track of all those stocks. _
> What do you mean by "keeping track"?! If you mean to check news/earnings, that believe me, when you just open any report, all this stuff will be already priced on markets for a long time.
> Nothing wrong and much safer to hold 50 stocks than 4-10... Pick up 20 from TSX60, pick up 30 from List of Dividend champions... base you selection on criteria you like, P/E, yield/growth, payout, debt ....
> You will have ETF like portfolio with good chance overperforming indexes


I think it is actually safer to have < 10 very high quality stocks. Why would one need 30 dividend champions? The cream of the crop is probably < 10 stocks. Why not just have the cream of the crop? Why water it down by adding lessor quality? See, for example, The Essays of Warren Buffett, pp 91ff.


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## Pluto (Sep 12, 2013)

james4beach said:


> The S&P 500 benefitted the most, globally, from the Fed's policy of ZIRP / QE. On the heels of this aberrant performance I think it would be a mistake to just conclude that you should only buy the S&P 500 and forget about the rest.
> 
> The Shiller PE (CAPE) ratio now stands at 26.5 versus the historical average of around 16. It is without question over-valued, though this provides NO guidance on timing. The S&P 500 has ben overvalued for around 20 years now.
> 
> Also I think 5-10 years is too short a time horizon to expect positive real returns in stocks.


Re: Shiller shows over valuation for 20 years: that's why the total market cap to GDP (or GNP) is useful. It doesn't show over valuation for all those 20 years. Just some years. Interestingly, those some years preceded serious bear markets. but the other factor was the interest rate environment. Right now interest rates are so low, Shiller's P/e is close to justified. 

http://canadianmoneyforum.com/showthread.php/18921-What-is-value-rethought

5 to 10 years is too short if appreciation potential is low. That, of course, begs the question, how to determine appreciation potential?


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## gibor365 (Apr 1, 2011)

Pluto said:


> I think it is actually safer to have < 10 very high quality stocks. Why would one need 30 dividend champions? The cream of the crop is probably < 10 stocks. Why not just have the cream of the crop? Why water it down by adding lessor quality? See, for example, The Essays of Warren Buffett, pp 91ff.


Because term "very high quality stocks" is very vague.... there are many metrics that can be good for some stock and other metrics can be good for otheres... Stocks are not officially ranked tennis players . Tell me , guality on JNJ or PG is higher? KO or MCD? 
Also even good stocks have current valuation, some can be updervalued and some overvalued.
Also, any stock (even the highest quality) can be in big trouble OR investor wrongly assumed that this stock is of 'highest quality" , if you have <10 stocks, you portfolio will be in big trouble.... but with 50+ stocks portfolio, it won't be affected too much


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## james4beach (Nov 15, 2012)

Interesting pointer to market cap divided by GDP. Here are some charts, e.g. Wilshire 5000 to GDP:
http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php

While the market hasn't been continuously overvalued for 20 years, this indicator does show a similar result to the CAPE. Some key characteristics (common to both CAPE and market cap/GDP) are:

 Almost continuously above mean valuation, since 1996 or so (18 years)
 Very few points back at mean valuation: about one year (2002) then again one year (2008)
 High valuation today. Market cap/GDP shows us very close to the dot-com peak, near 2 standard deviations and considerably above the '07 peak

I can't see how Market cap/GDP is any more comforting than Shiller PE  It shows that valuation is very high and getting near the dot-com peak.

As an aside, I think we're just continuing to watch the effects of the Federal Reserve's game to keep blowing bubbles, one after the other, in an attempt to never let markets revert to the mean. Notice that the period of over-valuation aligns exactly with the Federal Reserve's new perspective on markets, starting with Greenspan who brought in the policy of flooding markets with free money to prop up asset prices instead of letting them normalize. Before Greenspan, there was no concept of a continuously-intervening central bank and free money to inflate assets to "protect you" from declines.


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## larry81 (Nov 22, 2010)

dime said:


> What do you all think about buying some SPY at this point and riding it out for the next 5 to 10 years?


Why would i buy an fund that track the SP 500 (large cap) when there funds that track the total market ? (ex: VTI, VUN) ?

dont get me wrong, SP 500 index fund are great but i would pick the better alternative

http://www.rickferri.com/blog/investments/sp-500-a-great-2nd-place-index-fund/
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=145784&newpost=2173072


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## james4beach (Nov 15, 2012)

james4beach said:


> As an aside, I think we're just continuing to watch the effects of the Federal Reserve's game to keep blowing bubbles, one after the other, in an attempt to never let markets revert to the mean.


And new information has been revealed on the market manipulation story. It was already revealed a couple months ago that central banks and sovereign funds are major players in stock markets; besides buying bonds (which we already knew) they also actively buy stocks.

The new info, today, is that *central banks actually buy S&P 500 futures* -- a direct market manipulation that uses high leverage to push the stock index higher.
http://www.zerohedge.com/news/2014-08-30/its-settled-central-banks-trade-sp500-futures

The CME Globex actually provides special rates and incentive discounts to central banks buying stock index futures. This shows how major a player the central banks are in the stock market. They're such big participants that the futures exchange has a special fee structure specifically for them!

Question for everyone: how can you feel comfortable putting your money in a market that is so overtly manipulated? Do you think the manipulation (bonds + stocks) will always be in your favour?


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## larry81 (Nov 22, 2010)

james4beach said:


> Question for everyone: how can you feel comfortable putting your money in a market that is so overtly manipulated? Do you think the manipulation (bonds + stocks) will always be in your favour?


You cant fight the fed !

As for myself, i am in for the long run, i will ride the roller coaster.


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## james4beach (Nov 15, 2012)

I agree, you can't fight the Fed (and friends... ECB, BoJ, Bank of Canada, etc)

So the question is, while their intervention activities are currently helping your trades, what will you do once it stops or reverses? There is no transparency of course so you won't even know when their active trading starts hurting you. Or do you think their interventions will continue perpetually, until the day you die?

Do you think the central banks have a picture of you up on the bulletin board with a heart drawn around it, with a note saying: folks we must do everything in our power to help Larry of 125 Oak St because he's going to have trouble retiring if we don't pull through for him!

I think it's naive to think that the central bank activities will always help our portfolios. Sometimes it will help, other times it will hurt. In the last 5 years it's certainly been helping. Historically it's been shown that long-term, market intervention is not sustainable and can not continue indefinitely.


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## larry81 (Nov 22, 2010)

I understand and share your concerns james but as a small investor, what can i do ? If one subscribe to this kind of thinking, then the alternative is gold, TIPS and GIC. I am also reading zeroedge (for entertainment), an investor following their doom and gloom prophecy would have missed the 125% recovery and lost his shirt in gold in the last 5 years.

I am an optimist and i believe we are just entering era of technological enlightenment. Think about how the world was 20 years ago and how fast things are changing. We have multi-billions dollars companies in market segments that simply did not exist few years ago. The future is bright, there might be a couple bumps down the road but i believe the SP500 will go much more higher than the current level.


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## james4beach (Nov 15, 2012)

larry81 said:


> I understand and share your concerns james but as a small investor, what can i do


I agree there's not much you can do. The best I can think of is to diversify and consider various possible outcomes.


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## fatcat (Nov 11, 2009)

james4beach said:


> Historically it's been shown that long-term, market intervention is not sustainable and can not continue indefinitely.


history always tell us stuff ... until it tells us _new_ stuff

whatever problems the fed had created are more than offset by the disaster they have averted 

the bernank recently said that the 2008 crisis was worse than the great depression and he was a student of the great depression (admittedly he was at the helm in 08 and so could be seen as polishing his version of "i saved humanity")

so far all this new money has been soaked up and the predictors of ruinous inflation have been dead wrong 
and it appears they may be wrong for a while to come

the zero hedgies have been proven wrong on almost all counts ... i wish i had stopped reading it about 18 months before i did


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## james4beach (Nov 15, 2012)

fatcat, certainly the Fed is "going for broke" here. As is the BoJ. Either their approach (never before tested in history) will work, and solve the US/Japan's problems with no serious negative consequences,
- or -
it will fail, in which case the US/Japanese market is toast, the central bank is finished, and the respective currencies (USD, JPY) are finished. Failure of the Federal Reserve's strategy will deter ALL investors away from American capital markets for good.

I certainly hope that the Fed's experiment works, but I think 5 years is a little early to call it a success when there's something like 200 years of market precedent before it. Best of luck to them.



> whatever problems the fed had created are more than offset by the disaster they have averted


That's an awfully bold claim, when we can't possibly know the long term consequence of this yet.


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## Pluto (Sep 12, 2013)

james4beach said:


> Interesting pointer to market cap divided by GDP. Here are some charts, e.g. Wilshire 5000 to GDP:
> http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php
> 
> While the market hasn't been continuously overvalued for 20 years, this indicator does show a similar result to the CAPE. Some key characteristics (common to both CAPE and market cap/GDP) are:
> ...


Good Link. 
The main comforting thing that these valuation measures do not account for is interest rates and inflation rates. My opinion is we are in a bull market not unlike the 1990's. It could go on and on and on....so I'm not fighting it. I'm just going with the flow.


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## Pluto (Sep 12, 2013)

james4beach said:


> And new information has been revealed on the market manipulation story. It was already revealed a couple months ago that central banks and sovereign funds are major players in stock markets; besides buying bonds (which we already knew) they also actively buy stocks.
> 
> The new info, today, is that *central banks actually buy S&P 500 futures* -- a direct market manipulation that uses high leverage to push the stock index higher.
> http://www.zerohedge.com/news/2014-08-30/its-settled-central-banks-trade-sp500-futures
> ...


Notwithstanding manipulations, the essence is earnings drive markets. Keep your eye on the essence.


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## Pluto (Sep 12, 2013)

gibor said:


> Because term "very high quality stocks" is very vague.... there are many metrics that can be good for some stock and other metrics can be good for otheres... Stocks are not officially ranked tennis players . Tell me , guality on JNJ or PG is higher? KO or MCD?
> Also even good stocks have current valuation, some can be updervalued and some overvalued.
> Also, any stock (even the highest quality) can be in big trouble OR investor wrongly assumed that this stock is of 'highest quality" , if you have <10 stocks, you portfolio will be in big trouble.... but with 50+ stocks portfolio, it won't be affected too much


gibor, 

What we have here is a quantity/quality dichotomy. Apparently you want me to distinguish highest quality by using metrics (quantification). To me that's impossible, because quality is not essentially accessible to mathematical measurement. It's like trying to pick a good wife only on her measurements. You seem to agree with me when you say stocks are not ranked tennis players: quality stocks can not be identified only by quantification. So when you ask me to distinguish the highest quality buy using metrics, its really a false dilemma. So I'm not biting. 

The efficient market hypothesis operates from a scientific mathematical ideal, assuming that if something is not mathematically accessible, it isn't meaningful. They thereby filter out non quantifiable quality features. With their assumption, they are trying to be objective, while all the time, they seem to forget their subjective assumption. Once we notice that their attempts at objectivity rely on a subjective assumption, we can abandon a purely mathematical approach and shift our perspective by starting with a quality idea, then use quantification methods. 

Take, for example, Buffett's idea that he wants a simple understandable business that is very likely to be around in 100 years, or more. That's not really accessible to mathematical ratios, and the like. For instance, it occurred to him that there is no reason to believe that shaving will go out of style. That's an idea that no mathematical formula could come up with. And it's part of a method that the efficient market hypothesis can not capture and test because it is essentially a personal judgment. Based on that personal evaluation, he narrowed the field to companies that produced shaving equipment, and found a well managed dominant company. that's where metrics came into play, after applying a quality idea to narrow the field. He bought that one. It's plain as day (to me) that diversifying by buying more companies that produce shaving equipment weakens the portfolio. But modern portfolio theory insists on diversification. That's one reason why they can't beat the market - they don't start with a quality idea to narrow the field. And since they filter out quality ideas that contribute to finding quality investments, they mistakenly say beating the market is only luck. It isn't luck, its good judgment. 

Anyway, I think you have one foot in the efficient market hypothesis and one foot out of it. That's good. Now pull the other foot out. Once you get both feet out of modern portfolio theory, you can pair down the 50, to less than 10 and have greater safety. You have the diversification bug, which is one foot in the theory, but you aim to beat the market and that's the part where you are outside the theory. Your latter aim is where you pair you list to 50 stocks using metrics. If you want to get out of the metrics only trap, you have to start thinking differently. ie, start with a quality idea to narrow the field, then apply some metrics.


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## lonewolf (Jun 12, 2012)

On a log scale the S&P is rising with in the boundaries of 2 converging lines (diagonal triangle) since the yr2009 low on diminishing volume & breadth. This pattern is in the late stages using history as a guide dramatic reversal should lie ahead. This is the largest diagonal triangle ending 5th wave I have ever seen on the charts. If my wave count is right this top could be of the largest degree any of us will live to see. ( unless wave B forms an orthodox top )


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## GoldStone (Mar 6, 2011)

lonewolf said:


> If my wave count is right this top could be of the largest degree any of us will live to see.


"Could be"? Smart choice of words.



lonewolf said:


> ( unless wave B forms an orthodox top )


Very smart! Always hedge your bets when making predictions, even of "could be" variety.

I say you are ready to be a TV analyst.


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## lonewolf (Jun 12, 2012)




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## lonewolf (Jun 12, 2012)

Will play my best work, Which so far based on price, sentiment, cycles, astro will be playing short the market for a crash scenario this Oct. 
The words "could be" will help with money management.


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## dime (Jun 20, 2013)

james4beach said:


> And new information has been revealed on the market manipulation story. It was already revealed a couple months ago that central banks and sovereign funds are major players in stock markets; besides buying bonds (which we already knew) they also actively buy stocks.
> 
> The new info, today, is that *central banks actually buy S&P 500 futures* -- a direct market manipulation that uses high leverage to push the stock index higher.
> http://www.zerohedge.com/news/2014-08-30/its-settled-central-banks-trade-sp500-futures
> ...


Yes, this surprised me when I learned that the BOJ was buying equities as well as bonds. The BOJ can never afford to pay back the debt and have entered a new era under "Abenomics" that's not based on any traditional economic theory of the past. Kyle Bass has given some rather profound talks on the subject of QE being the 'ultimate bailout of all time'. 
We've got QE in Europe now as well. It's all rather daunting to think of where we're going and what the future might hold. Kyle Bass often comments that this kind of thing in the pas has only ever resulted in war.


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## andrewf (Mar 1, 2010)

That's not exactly a smoking gun. It doesn't provide any evidence as to which CBs trade in those securities, and how large their positions may be.


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