Saturday, August 22, 2009

Katsenelson's Secular Range-Bound Market Thesis Updated

Below is a presentation of Vitaliy Katsenelson's secular range-bound market thesis, updated as of this month (longtime readers may recall I linked to an earlier version of this last year). It's worth taking a few minutes to scroll through this. I think Katsenelson is right in his diagnosis, and his prescriptions (slide 29) seem reasonable, for the most part, but for me the raise a question: why be net long at all, if we are in a secular bear or range-bound market? Why not be market-neutral1 or even net short?

Avi Presentation

1I'm adding this footnote on 12/30/09. After I wrote the post above, I found a professional investor who had the same idea ten years ago, and has produced some impressive returns since then: Marc Mayor of Inside ALPHA. I found out about Mayor when he joined Short Screen as a premium member earlier this month.


Paul Price said...

With the major averages up about 50% from the March 9th lows, it would have been a shame to have not been 'net long' simply because you bought into that range-bound theory.

That's much too big a move to ignore as a minor fluctuation.

All those bearish people that have been sitting on cash waiting for the economy to recover, have missed one of the greatest 5-month rallies in history.

My option writing account has gone from down 25% in early March to up 86% through last week. That could never have happened had I been hedged or shy about buying when things looked bleakest.

DaveinHackensack said...


The bigger shame was being long only and un-hedged last year. In that case, if you stayed fully invested, you're still down ~25% since the beginning of 2008, even after the recent rally.

More broadly though, the thesis that we are in a secular range-bound market in no way denies the existence of cyclical bull and bear markets within that secular range-bound market, as Katsenelson makes clear. And acknowledging that we are most likely in a secular range-bound market doesn't preclude an investor from trying to play those cyclical market trends, if he is so inclined. But it does imply (to me at least, though not perhaps to Katsenelson), that an investor not so inclined would be better off if he were net short or market neutral over the entire length of the secular market than if he were long only.

Anonymous said...

All that assumes that you are definitely right on the idea of a range bound market.

You might very well be dead wrong.

DaveinHackensack said...

Being wrong is always a possibility, Anon, but if you aren't confident one way or another, you could always construct a market-neutral portfolio by being 50% long and 50% short.

Paul Price said...

From the March lows I was very confident that prices would get better.

I was intentionally unhedged and it's thr reason I did so well since then.

It made no difference whether you called the 50% move a 'counter-cyclical' upturn or a 'new bull market'.

Hedging, like insurance, looks great when you need it, but the costs are so high that you can seriously impair your total returns over the long haul.