In my opinion, the proper way to play the market is to have more of a longer term holding period but doing so requires you to do a whole lot of nothing. Probably the hardest thing to do in this game is to do nothing. By nothing what I mean is establishing a position/thesis and sticking to it until it is fully played out while ignoring the noise and the temptation to trade all the wiggles of the market. For those like me who do this for a living, this is especially difficult because you're looking at the market action all day and it's hard to just sit on your hands and do nothing. I fight temptation to make ST trades everyday. Sometimes I wish I had another job or distraction to make it easier. Well, I'm going to have a pretty good distraction shortly. On April 3, I'll be on my way to Korea for 6 weeks. Given the time difference the market will be open at 10:30 in the evening which means I will be able to enjoy the day without wondering what's going on and I'll be asleep most of the time while the market is open.
I said this before one time, for any given year, it would be optimal to have made only 2-5 trades the entire year. Take for instance last year. It would have been optimal to sell in January, buy in February, sell in April and then buy again in either early July or September. Or with a 2 trade strategy: Sell in April, buy in July or September. Making the above trades would have captured all the major moves in the market last year. Now, of course, hindsight is 20/20 and even if you're only making a few trades a year it still requires luck in addition to skill in timing everything right like this. But if you simply did nothing but buy and hold you came out on top as well and buying and holding doesn't require timing skills or luck aside from recognizing when a bull market is in place and having the conviction to stomach corrections and ride it until conditions are in place that suggest it's end is near. I guess the luck part would be that during this time there is no catastrophic disaster such as a nuclear attack that wipes out half the earth.
Riding the major trend to its fullest is a very, very difficult thing to do. Even if you are correct in identifiying the trend and staying with it for a while, somewhere along the way odds are high you will get bucked off it prematurely because either a) you thought the market had gone "too far too fast" and want to get back in on the correction that never materialized or b)something gets you worried that the trend is going to end and it turns out not to be case. I have seen this happen first hand with myself and to others including the so called "pros". During the bear market of 2007-2008 very few bears fully capitalized on the decline. They either covered shorts far too early (around SPX 1100-1000) and/or went long for a trade and got ran over. Some bears like Schiff thought they would be protected via gold and commodities and they too got hammered. Some guys like Hussman who were correct in identifying the bear market very early still lost money because they fell into the "too far too fast" trap. During the bull market some guys like Kass were bullish pretty much near the begining of it but they got bucked off the trend way too early (like at 900 or so) and then lost money betting against it because of...you got it... the "too far too fast" trap.
Man, did Livermore nail it 80+ years ago when he said:
You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched
mine that is, they made no real money out of it. Men who can both be right and sit tight
are uncommon. I found it one of the hardest things to learn. But it is only after a stock
operator has firmly grasped this that he can make big money.
Alright, that's enough philosophy for the today. Let me induldge in some myopia if you will and talk about the ST. During last's week mini-panic we saw the VIX spike to 30, 4 days in a row where the put/call ratio closed above 1, AAII sentiment showing 1.43 ratio of bears vs bulls and other sentiment measures showing traders fleeing stocks. As I suspected the downside was rather contained. In my view, the bare minimum threshold of pessimism to warrant a correction bottom was reached last week, meaning it would have been more ideal for pessimism to have been a bit higher such as seeing a 2:1 ratio of bears vs bulls. Maybe that will happen if we get a retest or marginal lower low of that bottom. I suspect sometime this year we will indeed see those lows get revisited but I have no sense as to whether that will happen in the immediate future or sometime in the months ahead which means it's quite possible to see the market go higher before it goes lower. I'd put the odds smack dab at 50/50 as to whether the next 50 points will be up or down. I know, I know, this sounds a like a pussy prediction because whatever happens I won't be wrong....but it's honestly the way I feel!
For me, I've done nothing. I've maintained my positions throughout all of this volatility. A retest of last week's lows would likely create a more solid foundation for a more sustainable advance. If we don't retest and simply keep advancing, then it's likely last week's low will be revisited sometime later on in the year which happens to fit well with my consolidation thesis.
Patience folks...but again I must stress not to get too fixated on the ST. Big money is made riding big trends.
No comments:
Post a Comment