Friday, November 14, 2008

Happy Days are Here for Now

While the data sample is small (there just aren't enough US market crashes to go around), here is the simplistic view of how to position this slippery-slope, now that the technicals have shifted:

Volatility has declined (which is bullish), but remains historically high. This is a good thing for the bulls (and 'the stuck').

It is good, because it implies the retracement (bounce) will be significant and at times violent. Remember, volatility and panic operates in both directions. And don't listen to me, but we have now begun the retracement rally. The question is how big a bounce we will see (20, 33, 50, 66%, etc.).

As for chart-geeks, I would put the platinum pencils and Elliot Wave-runners aside - we don't know yet how far the retracement will run. Typically, the sharper the advance, the more short-lived the duration, while the more slow-and-constructive the advance, the longer one can pursue it. I don't like to box myself in, I prefer simply to know it when I see it. But a general rule while we build this in the meantime is to sell the close when the market rushes 6% or more in a day and sell/short a broken stock at the close when it rallies 10% or more in a day (yesterday being a good example of these rules).

When the retracement period has concluded however (cover your ears), we should enter first, a period of lengthy apathy and then ultimately, a new period of panic. The trend drudges lower, lower and lower still; seemingly endless; thereby rendering anyone still clutching their pathetically eroding portfolio ripe for panicking as soon as the first major nation goes bust and/or the first nuclear bomb is launched and/or the next world war has begun. It may not be so dramatic (I absolutely hope it will not be), but the point is that volatility returns again at the end of the cycle (after all the slow, bitter drudgery) and major world or national news can then create the catalyst for late-stage panic. For better or for worse, instead of asking when we will recover - investors will finally be asking if we will recover; the investment game-plans from the past will no longer make sense as everything will have changed (seemingly); the majority of sellers will 'never want to buy another stock again as long as they live' (and ironically, that will be the period for long-term buying in the US market - just don't ask Suze Orman when we get there because she will finally have just sold her stock certificates on eBay).

But that is down the road (smiles). The point to be taken regarding present time is that this is your last chance to reap reasonable gains, or get out at reasonably higher prices, or just grab a lemonade from the sidelines before worrying about the world's end.

Clearly, the scenario that plays out will play as it actually plays out and hopefully nothing terribly dramatic takes place to cause such a panic. But the bottom line is that when markets gets this dramatic, other drama tends to follow. Let's leave it at that.

These are my US stocks right now. I'm trading around (adding more on today's pullback for instance, after selling more-still at yesterday's close), but I am now holding an actual portfolio during this retracement period. I will still continue to hedge when I deem this necessary (not today), however I am no longer merely day-trading - I'm long an actual portfolio of stocks:

GXDX (thin)
EMS (thin)

I'm also holding my newer Asian (long-term) index plays (primarily Shanghai). When and if that region resumes a bull market I will look to trade individual stocks on that side of the Earth, but in the meantime I continue to dollar-cost average in the indices, adding slightly each time the world makes a fresh plunge.

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