How To Be Right On 40 out of 44 Trades in ANY Market
Do you think the market looks overextended here? Or are you comfortable with the market at these levels? Did you know that all of the market tops of the past have been when the market looked the most bullish (to most people?) If you ask the next 10 investors that you know, whether they be individual investors, fund managers, brokers or yourself, how many stocks they are short, or how many stocks they own put options on, I'll bet that at least eight will say ZERO. Everything is bullish. "What - do - you - mean - protection?"
This isn't my opinion here. I have indicators that tell me exactly what's going on in the market, how comfortable people are and how much protection people have against a correction, and I can tell you for a fact that people are at historically comfortable (unprotected) levels. I'm talking levels of comfort that we saw right before the crash of 1987 and also about the same level of comfort that we had at the end of 1993 which was followed by a two-month 9% correction for the S&P500 in early 1994 (early February - late March.) Complacency, however, doesn't necessarily spell disaster. The one other time since 1993/1994 that investors were this comfortable was in July of 2005 which was followed by a 4.8% correction in the S&P500. I assume that you know what happened after that.
A SIDE NOTE: If you invested in any one of the market corrections that followed the super high level of complacency, then you bought at a market bottom which was right before a massive bull run.
I stopped trying to call the direction of the market a long time ago (after reviewing my track record of being right vs. being wrong.) I'm not going to try to call market direction ever again. But when the market looks the way that it looks right now, people tend to get complacent, lazy, dull, whatever you want to call it. This complacency may cause you to (not exactly abandon completely, but) loosen your grip on your strategy. The very system that positioned you to profit from this market is something that you might turn your back on for the simple fact that you don't want to miss out on profiting from the next market surge.
If you've been investing in the market long enough, you already know how that movie ends. If you haven't seen it yet, then I'll save you some time...
You realize after the first "healthy market pullback," that your account that just went from being valued at $100,000.00 to a value of $140,000.00 is now only valued at $120,000.00. You say to yourself, "Stay calm, this is just a correction." And you pull the reins back, so to speak, and you evaluate what just went wrong with your strategy. What makes you sick to your stomach is that this should NOT have happened.
Why not? It was your fault that you didn't follow your own rules. Because based on the rules that you already had in place, the trading strategy that you had been using, you never would have made this move or that move, or if you had your eye on the ball with this position, you would have sold it up there, that is of course, if you had followed your own rules. But you got too comfortable.
"Okay. This is okay. I'm a big boy/girl, and I know what I did wrong, and it's my fault this has happened, but I'm still up 20% for the year. That ain't bad. All I have to do is go back to my strategy, pay a little more attention, don't slack off again, and don't be so complacent. I'll follow my selling rules, I won't make another careless purchase, I'll sell the second my indicators tell me to, and if I follow my gameplan as tightly as I usually do, I'll be back to $140,000.00 in no time."
Here's the problem: That $20,000.00 wake-up call that just kicked you in the rump wasn't just "a sign" that you shouldn't sleep on the market's ability to whip you into shape if you swing outside of your "strike zone." That reduction of value of your stock portfolio (which happened to wake you up) was actually a result of the stock market's "new rules."
While you keep your strategy tight, and you go back to the rules that have made you that (once 40% but now) 20% return, you notice that your strategy isn't working as well. Your account is now worth $105,000.00 and you are considering getting out, or trying to eek out a quick $10,000.00 profit. But little do you know, the rules have changed! This can go in a number of directions... Take your pick.
You see, there are two ways to play the stock market:
1) Follow the market intensely. Know exactly what is going on, and have a strict game plan that has worked for you time and time again. The key is to be willing to adjust your game plan to the new rules at the drop of a hat and to flip from one play book which had worked well with that one rule book, to the new play book that works for the new rule book. The rules of the market change rapidly so you should forget about the expression "stick to your guns." You can't be stuck in the old play book after the new rule book has been issued to the savvy traders. (What, you didn't get the memo?)
But even if you are on top of everything, and you have been strict with sticking to your trading rules and your game plan, would that have protected you from the crash of 1987, the 9% correction in early 1994, the 22% correction of 1998? (I'll stop there.) Well, the answer for 1987 is no. In 1994, it was possible, but not easy, and sure, it was possible in the 1998 sell-off and definitely in the 21st century declines.
But that isn't enough for me. And when it comes to being flawless, and being able to quickly adjust to swift changes like that (and I only addressed the recent majors,) I just don't think that I'm that good. But playing the market in example #1 is one philosophy that I follow as best I can. But the real reason that I have had a 95% win rate since late 2004, and about a 90% win rate in all of my closed out trades since launching The Trend Rider last year is by playing the market with this second example...
2) Hedging the model portfolio, and taking several measures of safety. Planning for disaster, or at least to be wrong. I can't get into the exact ways that I do this since it wouldn't be fair to the paying members of The Trend Rider, but I'll give you a general idea (and I have a year-end report coming out in a week or two that gets into serious detail on how to EASILY take these safety measures.)
First of all, you absolutely must take some bearish positions. There are very simple ways of doing this which are not complex at all. You don't have to take insane risk here, you can just stay invested in a few things that will explode to the upside if the market tanks. If you do this, there is more of a benefit than just easing the pain of a bad market...
The other benefits are:
a) That you have a level head. When all of your positions are losing money, it can be hard even to think straight. You make stupid purchases, silly sales, and you just feel like it has gotten out of control. But when you know that you have some winners working for you, you don't go crazy, and you can grab the bull by the horns (or the bear by the, um... )
b) You may have been in a steep correction before with all positions down 50%, knowing in your heart that the stocks will come back. But doesn't that mean that they will trade 100% higher? You might not have had the money to buy at the time, or you might be too depressed or afraid to do anything with the cash that you do have. But if you have profitable bearish positions, you can sell them and plug the money into the basement sale-priced stocks (or options.) While everyone is praying that they break even, you played the market and made some big money on the correction.
I get into this in detail in my year-end report, but the actual model portfolio can only be found in The Trend Rider. I'm sure that if you do a little research, you can find out on your own how to do this, and you just might write me a long thank-you letter in the future. (Speaking of which, I do read ALL of your comments that you type in the "rate this article" section below, believe it or not. It doesn't take much time to read through hundreds of comments. So if you ever left a comment, I definitely saw it. Awesome feedback, whether positive or negative.)
I mentioned two ways to "play the market", and the truth is that they should be used in conjunction with one another. In either case, it's important to understand the mechanics of the stock market starting with the seasonality. When I say seasonality, I mean the four-year election cycle where I know that the strongest of the four-year cycle is the pre-election year (next year.) I mean understanding the January effect where from late/mid-November to about December 19th Large Caps tend to out-perform Small Caps, and from December 19th through about January 5th, Small Caps tend to out-perfrom Large Caps. Or knowing that November - January are typically the strongest months for the market, but May - November are the weakest. It's important to know what usually happens and why. You want to know in which direction the current is moving and whether the tide is rising or lowering. You want to know which way the wind is blowing in order to navigate your sailboat most effectively.
Okay, I'll stop rambling. I'm just worried about you, that's all. Be careful. You don't have to do anything too complicated to protect your portfolio and make money in any kind of market. But you have to have money to make money, and if you are sucker-punched by this market ,and you have no protection, where will you find yourself, given your currect portfolio?