This trade of the week will be a little bit different than previous ones. The market is in a very uncertain position. Bulls are trapped under heavy pressure and the bears have significant profits to protect, so we could see a short-squeeze at any time. The trade of the week is to hold high levels of cash until the markets settle down and better opportunities present itself.
When in a broken market, I’ve found the best style is to just let things play out and go to cash. We have officially been downgraded by the S&P500, so I expect a larger sell-off this week. Markets always run up too high and always fall down too low. This makes calling tops and bottoms impossible with any accuracy. Notice how anyone who has ever called a top or bottom correctly is rarely ever right again? They always talk about a top or bottom they called many years ago because they are a one-hit wonder, just lucky that one time which they always remind everyone of. Nobody keeps track of these statistics either and we should for educational purposes as many individuals are blinded by these pundits.
If you move to cash, you can not rack up extreme losses by trying to call a bottom in a stock. Unlike large funds, individual investors do not have unlimited capital to continually average down. So if you continue to try to average down and the market keeps falling to unforeseen lows, you run the risk of being fully invested in a strong downtrend. This will mean you will have to hold for a long period of time just to be break even again. That is why my long-term positions are no more than 20% of my portfolio, so that I can take my time averaging down in them while not feeling anxious to sell because I’m 80% cash.
In the meantime, I’ll make some modest day trades if I see opportunity present itself and I’ll systematically deploy some cash and pull in quick profits as well for possible swing trades. These small profits tend to add up over time and if they go wrong, the stop losses and modest sized positions won’t hurt me significantly.
Many of the bulls are invested to the point that they desperately need the market to go up whereas I am now so modestly invested that I actually would like to see it go lower because that means we will put ourselves in a position for a bull market that lasts a while. This could mean significant profits if we can overshoot to the downside even more. I’ll wait for about a 10-20% sustained bull movement before I have the confidence to jump in and nab the rest of large run, when it is safer. This protects me from calling a bottom that is wrong. I’d rather wait for sustained movement than try to predict when things will turn.
I still have long-term positions in Gastar Exploration (GST) and Dejour Energy (DEJ), per my SeekingAlpha articles from the other month. GST was a winning long-term position that I am slowly rebuilding on this collapse and DEJ is a highly speculative stock that has shown little change in all of this as it trades under the radar of the markets on most days. If DEJ drops towards $.29 or lower, I’d likely add some more and on any bullish runs, I’ll start reducing my position a bit, trading around a core position.
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I initiated a small index short on Friday to balance out a bit of my long positions. This index is ProShares UltraShort Russell2000 (TWM) which is a leveraged inverse ETF that automatically shorts the Russell (IWM) by 200% (2x inverse). Leveraged ETF’s are riskier than regular 100% ETF’s therefore always proceed with caution if you do not understand the risk and ensure you consult your accountant as many ETF’s are taxed differently than stocks.
In summary, just tread carefully this week and possibly a few weeks after this one. We are handcuffed to the headlines and the headlines are not pleasant. If you can’t keep up with all the headlines and don’t have the time to view all of this volatility, sitting in cash and waiting on certainty might be your best move to protect your hard-earned capital. When the bull market finally resumes, you’ll have plenty of capital to deploy and you’ll be happier to see quicker profits than trying to recover from large losses.
As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was long GST, DEJ, and TWM but positions may change at any time.
