jaudio shorts

staying away from the market

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I have held out on making trades up to this point in time because the market is way to volatile for my tastes. However, I am forced to trade or I am gone, so I will trade. My first few buys have all been ultra short ETFs tracking the Dow, Nasdaq, S&P, and so on. After all, the majority of us can't beat the market, right? I chose these ETFs at this time because I believe the latest market correction was only a prelude of things to come. As a student of history, I know that a bull market can only last so long, then we will go into a bear market. These ultra short ETFs will keep me on the right side of the trend once the bear has begun, and thus being able to beat others in the market. However, beating other players is a lot easier than beating the market itself. More to come.

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Strategy in the world of volatility

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"If I can do it, it isn't art"

How many times have we heard that one while going through our local art museum? A few splats of paint on some canvas, and its worth millions. We look down our noses at so called artists for creating pieces that we could create. However, when it comes to investing, we tend to puff our chests out and walk with a spring in our step when we have picked stocks that equaled or barely beaten some of the investing professionals. Furthermore, if we do better than 60% of everyone else, we elevate ourselves to lofty heights reserved for deity.

Please.

We have one benchmark to compare ourselves to, and that is the market itself. The majority of the population can't even equal the market returns, let alone beat it, but we always keep telling ourselves we can. You got to admire the effort and optimism.

At this time, I have only one stock, Pfizer, that I have bought with the hopes of it going up. Everything else is in ProShares short and ultra short ETFs. In fact, I am going to put the rest of my money in more Ultra Short ETFs this morning. Why?

I base my strategy on knowing that I know next to nothing. Either the market is going to go up in the next 6 months, or it is going to go down. My bet is that it is going down. I base this not on sophisticated quant models, dangerous looking yield curves, contrarian principles, P/E Ratios, and the like. I base it on history.

Bull markets and bear markets are cyclical. We don't know if we have entered the bear market yet, but if we haven't, it is close. I don't say so, history says so. Bull markets only last so long. Just because we may have missed the true market top or the true market bottom, it doesn't mean we missed the time to make good money. If the market topped out a month ago, then we still have time to short the market and ride the wave. If the market still hasn't topped, what have we lost when it does top no more than 6-8 months from now?

My money is in the short ETFs. History is on my side. Market psychology be damned.

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Buy on the peaks, sell on the dips

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"If you are so smart, why aint you rich?"

The above is quoted from the book, A Mathematician Plays the Market by John Allen Paulos, describing an encounter with a security guard that took out his money from his 401k against the advice of his adviser before the market downturn in 2000. Paulos laments that he didn't do what the security guard did, but instead dollar cost averaged World Com until it was almost zero. Paulos says that you can be right for the wrong reasons and wrong for the right reasons, but to the market, you are just right or wrong, plain and simple. The same applies here in the Strategy Lab Open.

It looks like I am going to get hammered today since the markets are on fire and most of my money is in short ETFs. Everyone is giddy over the help Bernanke and Co. will provide, but it doesn't solve the long term problem. I still have about 200,000 in cash, and I see a buying opportunity to increase my position in 4 sector short ETFs and the three Ultra Short Index trackers. Why am I doing this?

1. I believe we are at the market top. As traders, we should not care if the market is going up in the next 6 months or going down in the next 6 months. All that matters is that you are on the right side of the wave. I am on the side that will ride the wave to the bottom.

2. Other SLO players are all long in the market. Regardless of what other players are doing, I would still be short in the market because of the reason stated above. However, it works out better for me because almost everyone is long in the market, and they will probably breathe a big sigh of relief when the market goes up today. This may encourage them to buy more stocks long. Because of this, I will increase my short stake so when the market turns downward in the next month, I will move past the others rather quickly.

3. Short term strategy vs. long term strategy. Most players blog about making frequent trades because this game is short term. That is perfectly fine, except for the fact that the majority of frequent traders in any setting get trounced. The game encourages frequent trading, and when all is said and done, I would like to see a statistical analysis of frequency of trades vs. final ranking. I have been buying, but not selling. I can forsee one sale in the next 3 months for me, and that will be PFE, the only stock I own. I somewhat regret the long position I took in PFE, but it is what it is. I may just cash it out once I am in positive territory again and not look back.

I believe the market we are in is just below its peak, and we aren't on the way back up. We are on the leeward side of the mountain chart, and there is still time to cash ride the wave down. Don't follow the herd, innovate!

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