lentinman: bearish forecast
Thanks for sharing your view in a more precise and mathematical manor. After all, forecasts are always subject to uncertainty, and without expressing things in a mathematical manor, a forecast cannot be properly judged. In fact a mathematician might say that a forecaster has not really made a forecast at all if the language is too couched and is itself subject to various interpretations. I'm not nearly as bearish as you are, though as I stated earlier I think the likelihood of a down market is greater than an up market at least till year end. But I've never felt that I can predict the overall market direction with sufficient certainty to allow it to significantly alter my long term strategy of remaining fully or nearly fully invested.
If I felt as confident as you about the strong downward bias of the market indices in the coming 18 months I would definitely raise cash and also put perhaps 5% or more of my portfolio in the SPY put options. If indeed you are correct and the S&P index has a 75% likelihood of falling at least a further 20% at some point over the next 18 months, then a 300% or greater gain could be realized by buying 'at the money' puts on the SPY ETF which mimicks the S&P500. At the money puts expiring in March '06 currently are quoted at about 5.4% of the index valuation, while puts out to December '06 cost about 7.6%. According to your mathematical depiction of the market's grim prospects, these PUT options offer an excellent risk/reward opportunity with perfect liquidity. Have you considered index PUTs as a means of hedging or profiting from a down market ?
AI
