# Why arn't we excited with October's market dip?



## ashin1 (Mar 22, 2014)

Its probably been a month since I've last logged into this forum and checking out all the threads made about the market declines I feel as though I'm the only one who is excited about all the dips in prices.
My portfolio took a pretty good hit too, and when majority of my liquid assets are in the market(~90%) and seeing the market go down initially surprised me. Truth be told i never even payed too much attention to the market or my portfolio this last month after going through a break with with my partner. In a way i think it was a good thing because it distracted me from getting to hung up on any losses that would have occurred during this month. Either way, I am trying to look at the situation as giant sale right now and you better get what you can now cause these deals wont last forever. I guess that's the beauty of dividend growth investing, don't forget that even though the stock prices may have gone down, the dividends still remain the same! Anyone else feel the same way?


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## banjopete (Feb 4, 2014)

I suspect you didn't look over the posts in here about the individual stock/equities as it's been a hive of activity regarding the last few week's activities. Many people have been very excited for many reasons.


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## ashin1 (Mar 22, 2014)

@banjopete

true, but i still am surprised at some of the things I read and some of the pessimism regarding the dip. Either way I thought I just share my thoughts on the current situation


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## Pluto (Sep 12, 2013)

the last time I was really really excited and positive was Oct 2008 and mar 2009. Those are the declines that really get me optimistic about stocks. Corrections in a more mature bull market make me cautious. Maybe too cautious. 
Maybe caution is not important to some people, and that's ok by me. I recall reading a book by John Train, preserving capital and making it grow. I guess his book influenced me. One thing I recall he wrote is markets get choppy near a major top. And he suggested that the stock one owns around the time markets get choppy in an old bull market maybe very pricey; if so, he suggested, be generous and let someone else have them. 

Holding stocks during a correction in a young bull market doesn't bother me, its the bigger declines I try to avoid. Yes some people are excited and buying right now. My enthusiasm is muted, perhaps unreasonably. However, I can not get excited about buying more of my favorite stocks when their p/e's are above their historical median, and there are, albeit, fallible signs, that we may have seen the top in the indexes for this cycle. Like you, I love dividend stocks, but I don't buy them when their yield is lower than their historical median. When their yield is lower than their median, and the bull is maturing, and the market gets choppy, that's when I start thinking of selling some shares. 

The last cycle I managed to be totally out of stocks by may 2008. If I was smarter, and I am not, I would have been out earlier. but the signs were there by May. Older bull market, market got choppy, no new highs in the indexes since dec 2007, rates had been rising. I didn't have a good feeling. Hope did not seem to be a good reason to stay in. What's different right now - 2014 - and stopping me from getting out entirely, is no rate rises, and out of the blue, lower oil prices which is putting cash in consumers pockets. 
I believe everyone has to use a strategy they are comfortable with. There is nothing wrong with a buy and hold strategy. For myself, I find it depressing to see stock assets shrink by 30% or more. And I start wishing I had sold some into rallies closer to the top. but I don't try to insist my way is the only way. I write my perspective only for people who see some sense in this strategy.


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## ashin1 (Mar 22, 2014)

Pluto
very informative write up! I appreciate your comment. There is definitely lots of factors to consider before getting too excited and buying as much as you can at the first dip in the market because it can lead to a greater loss. I completely agree with you that everyone needs a strategy they are comfortable with, but one thing i would like to add that if you find a strategy stick too it and be committed when it comes to investing. I find that consistency in the long run often plays out quite nice, especially for someone like me who doesn't have that much exposure to investing. heck I haven't even been a share holder of a single company for more than a year now! 

2008 was a rough time, and to an extent I'm reluctant that i wasn't investing back then because I'm sure I would have been scared and sold at a loss. But had i know what i do now, especially with the strategy I follow if we were to experience anything similar to 2008/09 i think I will be well prepared.


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## james4beach (Nov 15, 2012)

I'm not excited about the current drop because I think stocks are still dramatically overvalued and prices are inflated. USA anyway. The S&P 500 has doubled in the last 5 years. Doubled!

I also can't get excited because the Federal Reserve is such a huge actor in the current market; basically in the last few years, people have only bought/sold stocks based on QE expectations. It is the single largest driver of the stock (and bond) markets. That doesn't give me any confidence that natural price discovery is happening.


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## james4beach (Nov 15, 2012)

My sense by the way is that at the institutional level, one of the only real questions stock traders ask themselves is: will the Federal Reserve keep pumping money into markets? (QE)

If yes, then keep buying stocks and junk bonds. "Risk on".
If no, then sell everything. "Risk off".

Fundamentals, valuation, debt-to-equity, earnings, credit quality, derivatives, etc be damned... when you have a government-driven market, you get government-driven trading. Central bank policy becomes the word of God and everyone will live or die by the central bank policy


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## GoldStone (Mar 6, 2011)

james4beach said:


> Fundamentals, valuation, debt-to-equity, earnings, credit quality, derivatives, etc be damned...


Forward P/E ratios excluding cash on the balance sheet:

AAPL 12.5
GOOG 14.9
MSFT 11.5
IBM 9.2
ORCL 8.7
CSCO 6.5
EMC 11.5
SAP 14.3

So the questions is, who is ignoring fundamentals? Bulls or bears?


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## Cal (Jun 17, 2009)

The only reasons I may not have been excited for the market dip was that some of my buy price points still did not get hit. :frown:


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## cashinstinct (Apr 4, 2009)

GoldStone said:


> Forward P/E ratios excluding cash on the balance sheet


You should redo IBM calculation with today's price drop


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## Pluto (Sep 12, 2013)

GoldStone said:


> Forward P/E ratios excluding cash on the balance sheet:
> 
> AAPL 12.5
> GOOG 14.9
> ...


The main thing I can say is, forward estimates are not written in stone. Not saying you are mistaken, or they are mistaken. Also, fundamentals always look rosy at the top. By that I'm not saying we have seen the top, I'm saying you can't tell a top from the forward estimates.


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## Pluto (Sep 12, 2013)

james4beach said:


> I'm not excited about the current drop because I think stocks are still dramatically overvalued and prices are inflated. USA anyway. The S&P 500 has doubled in the last 5 years. Doubled!
> 
> .


from 2009 low to recent high, its a triple!


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## favelle75 (Feb 6, 2013)

james4beach said:


> I'm not excited about the current drop because I think stocks are still dramatically overvalued and prices are inflated. USA anyway. The S&P 500 has doubled in the last 5 years. Doubled!
> 
> I also can't get excited because the Federal Reserve is such a huge actor in the current market; basically in the last few years, people have only bought/sold stocks based on QE expectations. It is the single largest driver of the stock (and bond) markets. That doesn't give me any confidence that natural price discovery is happening.


Why is doubling after such a large drop/correction in 2008/2009 such a big deal? Wouldn't it be weird if it didn't?


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## james4beach (Nov 15, 2012)

favelle75 said:


> Why is doubling after such a large drop/correction in 2008/2009 such a big deal? Wouldn't it be weird if it didn't?


Because 2008 wasn't such a big correction. Some models show that stocks barely got down to fair value in 2008, not undervalued but just fair value. e.g. Shiller's CAPE

All they've done is re-inflate back up to over valuation. That doesn't make them a buy, necessarily.


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## Feruk (Aug 15, 2012)

Pluto said:


> The main thing I can say is, forward estimates are not written in stone. Not saying you are mistaken, or they are mistaken. Also, fundamentals always look rosy at the top. By that I'm not saying we have seen the top, I'm saying you can't tell a top from the forward estimates.


Agreed. Especially considering a number of large companies have already stated their 2015 earnings expectations aren't gonna happen. I look at what I think total 2014 earnings are gonna be to see if a stock is cheap.


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## Pluto (Sep 12, 2013)

Just to follow up on the earnings and forward earnings theme. My theme is stock prices lead earnings, not the other way around. So one can not rely on earnings and earnings estimates to predict stock prices in the near term ie for about up to, say, about 12 months. 

A case in point: -

In 2007 the market topped in October. 
But earnings continued to rise until January 2008. So clearly, rising earnings did not predict rising stock prices during that time frame. This is not an anomaly as generally prices precede earnings. By the time earnings peaked in January, prices (S&P500) had dropped 15%. So we say so what? Markets will correct 15%, then resume the rise most of the time. But that time, by May - June prices had not recovered, and had gone down further. That's when I bailed. I wasn't predicting what happened, rather, it just didn't look like the odds were in my favour. 

think about it: the market movers are institutions. They are the ones with enough buying and selling power to move prices up or down. So obviously, during that time Oct 2007 to middle of 2008, it was on balance institutional selling at lower prices than they would normally be willing to sell at that contributed to the decline. Why would they do that? Obviously, money managers stay in stocks if they think they can make money, and they get out when the think they can't. Regardless of what forward earnings estimates were, the price action told me market moves didn't think they could make money and were selling. So I thought, why shouldn't I step aside too? 

Moreover, earnings declined from Jan 2008 to May, then rose to Sept 2008. But the market didn't, on balance, go up, and in fact was poised for its exceptional plunge. Months earlier, back in the winter, the conventional wisdom was earnings are ok so it's safe to buy. Then in October, when value was improving rapidly, the conventional wisdom became don't catch a falling knife. 

There is noting wrong with conventional wisdom when it works. When it doesn't work, its really bad. Essentially, in 2008, conventional wisdom was like the cowboys herding cattle slowly to slaughter. It is worthwhile to learn when to suspend conventional wisdom, and when to follow it. 

But the main point is, earnings and earnings estimates are unreliable predictors of near term stock prices. And secondly, the clues to what the market movers - the institutions - are up to is to watch price and volume on the indexes. If one looks at price and volume of the latter half of 2009 you get an idea of what institutional buying enthusiasm looks like. And if you compare that period to the next 4 months, you get a relative gauge of current buying enthusiasm, or lack thereof. 

Some have wondered out loud, why do I write such posts? Just writing my perspective. Differing perspectives are valuable, I think. Dominant paradigms that get repeated over and over become dogma, particularly to new DIY investors. And once it becomes dogma, people stop looking at how they might enhance their approach. Also, some might think this is a bearish post. But I'm not a bear. This is a bull market. There is no clear case that it is over, but there is lots to be concerned about, so I'm on the fence.


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## doctrine (Sep 30, 2011)

I was excited about the dip. It's been four solid days up since the low. I made a few new acquisitions in the oil patch. I think traders just needed to get the fear of a correction out of their system; a few bears needed their backs scratched. Back to the real world of slow but steady growth and every central bank in the world ready to print money at the slightest hint of serious trouble. Up 2.76% today - that takes a big bite out of the decline. Pretty much even for October now.


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## lonewolf (Jun 12, 2012)

Looks like the DJI could test the lower trendline of the diagonal triangle right near the time of the solar eclipse. Could get interesting


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