How to play a recession ?

[RL]

What Is the best way to play the market stay In stocks and If you do what ones do you play?

[New-born baby]

What Is the best way to play the market stay In stocks and If you do what ones do you play?

Get out of stocks and into cash. Put your money into CD's. Or play the market short. If it is all about "earnings, earnings, earnings," then a recession means lower prices for stocks.

[Lyehopper]

What he said!....

[ParkTwain]

You don't have to entirely leave the stock market, at all. You buy the defensive issues, like BUD and MO and the electric utilities. Some of those have been doing well during the latest downturn in the indexes. I was amazed during the last big downturn in 2001-2 how the stocks of the slow-growers like utilities were getting all the relative strength. There are plenty of funds that must stay invested almost no matter what. They will be moving their $$$ into the defensive stocks. Just watch the RS figures, even while the indexes drop, drop, drop.

[skiracer]

You don't have to entirely leave the stock market, at all. You buy the defensive issues, like BUD and MO and the electric utilities. Some of those have been doing well during the latest downturn in the indexes. I was amazed during the last big downturn in 2001-2 how the stocks of the slow-growers like utilities were getting all the relative strength. There are plenty of funds that must stay invested almost no matter what. They will be moving their $$$ into the defensive stocks. Just watch the RS figures, even while the indexes drop, drop, drop.

I agree with you 100 % Park. An it's why I love to trade the ETF's. So easy to track which ones are the leading or strong sectors and which ones are losing strength. These institutional guys move their money into the ones that are going to be strong as the economy ebbs and rises and the sectors gain and lose strength. The ETF's are an easy way to play those moves and then to find a few stocks in those baskets that make up the strong or weak sectors and their ETF's.

[ParkTwain]

Hey, ski, I'm reading here (http://www.investopedia.com/articles/01/082901.asp) about ETFs and I have a question that isn't answered there. Is there the notion of "net asset value" in the ETF's shares, or is each share a piece of an imaginary "basket" of the shares of all the stocks in that sector? Seems to me that because the ETF is freely traded "just like a stock", its value could get way out of whack versus the currently calculated index of the current market prices of all the shares found in the basket. That would make it one more level of "looseness" versus how those actual shares are trading in a given day/week/month/etc.

Oops, OK, here's the answer, I guess ("how to construct an ETF"):

http://www.investopedia.com/articles/mutualfund/05/062705.asp

//
The Role of Arbitrage
Critics of ETFs often cite the potential for ETFs to trade at a share price that is not aligned with the value of the underlying securities. To help us understand this concern, a simple representative example best tells the story.

Assume an ETF is made up of only two underlying securities:

* Security A, which is worth $1 per share
* Security B, which is also worth $1 per share

In this example, most investors would expect one share of the ETF to trade at $2.00 per share (the equivalent worth of Security A and Security B). While this is a reasonable expectation, it is not always the case. It is possible for the ETF to trade at $2.02 per share or $1.98 per share or some other value.

If the ETF is trading at $2.02, investors buying shares of the ETF are paying more for the shares than the underlying securities are worth. This would seem to be a dangerous scenario for the average investor, but in reality, it isn't a major problem because of arbitrage trading.

Here's how arbitrage sets the ETF back into equilibrium. The trading price of an ETF is established at the close of business each day, just like any other mutual fund. ETF sponsors also announce the value of the underlying shares on a daily basis. When the price of the ETF deviates from the value of the underlying shares, the arbitragers spring into action. If the underlying securities are trading at a lower price than the ETF shares, arbitragers buy the underlying securities, redeem them for creation units, and then sell the ETF shares on the open market for a profit. If underlying securities are trading at higher values than the ETF shares, arbitragers buy ETF shares on the open market, form creations units, redeem the creation units in order to get the underlying securities, and then sell the securities on the open market for a profit. The actions of the arbitragers set the supply and demand of the ETFs back into equilibrium to match the value of the underlying shares.

Because ETFs were used by institutional investors long before they were discovered by the investing public, active arbitrage among institutional investors has served to keep ETF shares trading at a range that is close to the value of the underlying securities.
//

OK, now I'm going to do some reading about ETF arbitrage...

OK, I just posted over on the $MM$ board's "What Do You Think of MM's System" thread my notes about this paper, which describes how a team created a neural-network applciation to predict and act upon certain narrowly defined ETF arbitrage opportunities:

http://www.kellogg.northwestern.edu/faculty/jagannathan/teaching/practicum/2004/files/Final-Reports/ETF%20Arbitrage%20.pdf

Here is another interesting article ("How Effective Is Arbitrage of Foreign Stocks? The Case of the Malaysia Exchange-Traded Fund") where a researcher examines a situation in the Malaysian stock market where ETFs existed but what happened to the ETF arbitrage premium during a period when the Malaysian government prohibited the operation of arbitrage. Here is paper's conclusion:

http://www.findarticles.com/p/articles/mi_qa3674/is_200310/ai_n9302097

//
This article tests the efficacy of fund arbitrage by examining the impact of the only extended suspension of arbitrage in an ETF [the iShares Malaysia Fund]. The capital controls imposed by the Malaysian government caused the managers of the iShares Malaysia Fund to suspend in-kind creations or redemptions of shares. In the period before the Asian financial crisis, the share price closely followed the portfolio value. During this time, 90 percent of the premiums were between -0.37 percent and 2.24 percent. After arbitrage was restricted, the absolute value of the daily premiums increased substantially, and the 10th percentile was -23.84 percent and the 90th percentile was 18.91 percent.

The primary conclusion of this study is that the fund-facilitated arbitrage feature is surprisingly successful in minimizing premiums, especially considering the transaction costs involved in an arbitrage. Without this check on the domestically traded share price, the shares in an international ETF could exhibit characteristics of closed-end country funds, which often trade at prices substantially different than their values. This would likely limit the diversification benefits of international ETFs.

This study has important implications for the evolution of exchange-traded funds, the number of which is expected to expand significantly in the next five years. New international ETFs will almost certainly invest in emerging markets since funds already exist for the major developed countries. The sec has already received filings associated with the offering of international ETFs for several countries in Eatin America and Southeast Asia. Investors in such countries are more likely to be impacted by capital controls and currency crises; these events may impede the arbitrage of ETFs and prevent investors from receiving prices in the domestic market that reflect the value in the foreign market. The experience in Malaysia demonstrates that such risks are real and can cause ETF premiums to exceed 30 percent.

This study also has implications for the domestic ETF market. The SEC recently published a concept release in formulating the rules on actively managed ETFs (SEC, 2001). Currently all U.S. ETFs track an index, but actively managed funds will allow a fund manager to determine the fund's investments. The share arbitrage of an actively managed fund is problematic because actively managed funds traditionally don't have adequate portfolio transparency to permit arbitrage. Regulators should be aware that the popularity of actively managed ETFs may depend on creating a vibrant arbitrage market in the fund shares. This study shows that without an effective in-kind arbitrage process ETFs can trade at significant premiums.
//

[TFred]

Greetings,

Why not trade index futures on the short side,death cross already happened on the NQ,YM and ES appear to be following.Im currently aiming for 40 points on the YM daily,once I get set up with Spikes Vector calls Im hping to double that.

E minis seem to me the best vehicle out there.I try to avoid all market news and hype,esp. CNBC,and watch pure price action.watching a YM chart will tell you when the Fed speaks,or bad news comes out,just go with the flow.

I start each day in cash,and neutral,and let the market do what it wants,if i can get +40points per day with 5 trades ,thats 50k a year,and thats my goal.

Real choppy today,and still managed 33 points overtrading.

Just my 2 cents.

cordially Tom

[kc14526]

Greetings,

Why not trade index futures on the short side,death cross already happened on the NQ,YM and ES appear to be following.Im currently aiming for 40 points on the YM daily,once I get set up with Spikes Vector calls Im hping to double that.

E minis seem to me the best vehicle out there.I try to avoid all market news and hype,esp. CNBC,and watch pure price action.watching a YM chart will tell you when the Fed speaks,or bad news comes out,just go with the flow.

I start each day in cash,and neutral,and let the market do what it wants,if i can get +40points per day with 5 trades ,thats 50k a year,and thats my goal.

Real choppy today,and still managed 33 points overtrading.
Just my 2 cents.
cordially Tom

Thanks for the info, Tom. What broker do you use for trading E minis?
How long have you been doing it for and how successful have you been?
Have you been using a system?

Kevin