Influences on market in december

  • 60/40 funds must rebalance out of stocks.

  • Tax harvesting - anything that’s down is useful as a tax harvesting tool, it may get sold more.

  • TA people will be looking at the highs and lows and trading range.

  • Momentum people will be piling in on downward bets.

  • Cash reserves declining (job losses, inflationary costs on shopping, christmas, etc)

  • Bank accounts more tempting than ever.

any more? (up or down?)

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All are valid movers. To that I would add the interaction between the various algorithmic trading engines and news reports concerning China (both vis-a-vis the challenges regarding COVID and their interest in Taiwan), current US political interactions, verbiage from the Fed as well as an interpretation of the challenges in the Ukraine war.

Not every one of these affects the market equally on every day,

There is a presumption that selling of equities pushes the market down, but it is also true that a lack of buying has the same affect. The high-speed traders have the effect of amplifying the direction of movements in a version of a self-fulfilling prophecy (pump and dump may be illegal, but that’s the strategy these guys use on a miniature basis to make their vig.

That said, over the past week I’ve done my bit by selling off about 5% of my portfolio (actually about even realized gains and losses, so no particular tax benefit - just trimming back in preparation for the upcoming storm(s)

Jeff

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I can hunt that close in on the daily basis but it is less valuable and higher risk.

Getting into March we may see bottom…and stay there. There is no major up news for 2023. As pricing power is stripped of the major corporations it is just bad FA. Or so so FA no pop.

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Leap1, your answer has nothing to do with the question I asked. I appreciate you are blessed with many important thoughts you must urgently share, but if I can ask you to restrict yourself to those thoughts that relate to the question/focus of the thread, that would be helpful for everyone.

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Why “out of” stocks? If stocks were down 24% and bonds down 16%, wouldn’t there need to be some balancing INTO stocks?

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Lux

No

thanks for asking though…

…but you did set up the interpretation of day trading…

To the day traders…I know you hold longer than day…amazing…

Mark,

How long a period do the funds have before reinvesting the monies? The bottom might now be in sight for March…or so…The decision might be more practical to wait.

Why “out of” stocks? If stocks were down 24% and bonds down 16%, wouldn’t there need to be some balancing INTO stocks?

quarterly rebalancing is normal

Mark is asking why could out of stocks when they have gone down more than bonds? Why not put more money into stocks?

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Exactly. Rebalancing is automatic. If stocks are 58 and bonds are 42, they sell 2% bonds and buy 2% stocks.

• Stock rebalancing sells winners and buys losers

• Yield chasing sells underperforming funds and buys the darlings of the day

• Diehard bulls catch falling knives

• But the most powerful is margin calls triggering a chain reaction that wipes out lots of investors

The Captain
is sitting tight

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quarterly rebalancing is normal

Leap1: Mark is asking why could out of stocks when they have gone down more than bonds? Why not put more money into stocks?

MarkR: Exactly.

If a 60/40 fund rebalances quarterly, the question is, how have things changed since end of Q3? That will determine how they rebalance in late December for the end of Q4.

30th September $BND (Vanguard total bond fund): $71.33
today, $BND: $73.69

→ Bonds have gained 3.3% since end of quarter Q3 2022.

30th September $SPY: $357.18
today, $SPY: $383.27

→ Stocks have gained 7.3% since end of quarter Q3 2022.

Therefore, as things stand presently, stocks in a quarterly rebalancing 60/40 fund will need to be sold and bonds will need to be bought, to rebalance to 60/40.


OK, well, what about once-annually-rebalancing 60/40 funds?

$SPY, 31/12/21 was $474.96
$SPY, today is $383.27

→ Therefore the SP500 is down 19.3%

$BND 31/12/21 was $84.75
$BND, today is $73.69

—> Therefore, bonds are down 13.0%

For that type of fund, they’ll be moving from bonds to stocks.


The effects may cancel out. However, I looked up to see when Vanguard rebalance their 60/40 funds and found this interesting reply:

https://theinquiringinvestor.com/2012/06/03/how-often-do-vanguard-target-date-funds-rebalance/

After reviewing the fund’s prospectus, I decided to give Vanguard a call directly using their customer service line and ended up speaking with a representative named Robert.

Robert’s response to this was interesting – although in retrospect unsurprising. He said that Vanguard does not release that information because of the potential for abuse. If it was public knowledge that Vanguard rebalanced its funds on certain dates, then traders could take advantage of that fact by manipulating the price of the underlying funds that the VFIFX would have to buy in order to rebalance (In this case, VFIFX has 3 underlying funds: the Vanguard total stock market index, the Vanguard total international stock market index, and the Vanguard total bond index).

Then I looked up what Jack Bogle’s personal take was on rebalancing frequency for savings in bonds/stocks:

https://www.cnbc.com/2015/10/14/jack-bogle-follow-these-4-investing-rules-ignore-the-rest.html

“If you want to do it, once a year is probably enough,” he said.

On the other hand, the SP500 famously rebalances quarterly, as do many equity ETFs with Vanguard and iShares. However it rebalances on the third Friday each quarter.

https://www.nasdaq.com/articles/ishares-investigates%3A-the-cost-of-equity-index-rebalances

for example, the S&P 500 Index has been rebalancing quarterly since 1957


Conclusion: who knows?

A large outfit like vanguard has other methods of rebalancing. Because they constantly have inflows and outflows, they buy and sell all the time. So they can choose what to buy and what to sell all the time.

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