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How are you positioning for the eventual Market top?
- Thread starter Sean McLaughlin
- Start date
As for the question of this thread - the way I approach it is to be mostly market neutral most of the time. Hedge longs with shorts (or index shorts, if I can't find any good stock shorts), and only take on meaningful market exposure when you have a clear and strong conviction on market direction, and the risk seems low relative to the reward.
At least 80-90% of the time, I find it much easier to select a portfolio of 5-10 stocks that seem more attractive investments than the general market, and maybe 3-6 stocks that seem far worse investments than the market, than I do to select where the market is going in the next few few weeks, months or years. IMO the general indices only offer excellent trading setups a handful of times per year, and remember you are not going to catch 100% or even 75% of them. Running a hedged portfolio of multiple stocks allows you to employ stock selection skill without requiring timing skill, gives you far less risk than the general market, and yet you can still use timing on the rare occasions where it seems particularly favourable to do so.
This seems a far better and more consistent approach than at all times trying to work out what direction the general market is going. It also means that in quiet or flattish years such as 1994, 2005, 2007, you can earn significant returns by concentrating on very sound or hot sectors whilst also betting against those that look unattractive, whereas just taking on index positions means you get an average of both. This means you will miss many of the best opportunities in stocks in any given year.
At least 80-90% of the time, I find it much easier to select a portfolio of 5-10 stocks that seem more attractive investments than the general market, and maybe 3-6 stocks that seem far worse investments than the market, than I do to select where the market is going in the next few few weeks, months or years. IMO the general indices only offer excellent trading setups a handful of times per year, and remember you are not going to catch 100% or even 75% of them. Running a hedged portfolio of multiple stocks allows you to employ stock selection skill without requiring timing skill, gives you far less risk than the general market, and yet you can still use timing on the rare occasions where it seems particularly favourable to do so.
This seems a far better and more consistent approach than at all times trying to work out what direction the general market is going. It also means that in quiet or flattish years such as 1994, 2005, 2007, you can earn significant returns by concentrating on very sound or hot sectors whilst also betting against those that look unattractive, whereas just taking on index positions means you get an average of both. This means you will miss many of the best opportunities in stocks in any given year.
Great post.
Quote from Rabbitone:
I agree 100% with you and what Jesse Livermore said about âTradingâ general market conditions (and your fine quote below). I have read this work several times. Many of these fine sentiments are also part of my trading plan. I believe no one to this day has described better than he has how to define the probable trend and take advantage of that trend.
We seem to be at odds with the terminology and use of the word rigged. So let us scrap that word since it seems to be at odds with classical writings and draws out such deep held feelings about how these markets operate. There are other ways to express what has happened.
For all of accolades and honors I would bestow on Livermore he has IMO failed in one area that is critical to understanding how markets are influenced. By this I mean he did not to any great degree stipulate a set of rules of thumb for the trader in dealing with the influence of government on their trading.
To get a better prospective on the role government has played for centuries in destroying commerce (and trading) it is better documented IMO in Extraordinary Popular delusions and the Madness of Crowds. For example the south sea bubble it was stated:
ââ¦.In a prophetic spirit he added, that if the plan succeeded, the directors would become masters of the government, form a new and absolute aristocracy in the kingdom, and control the resolutions of the legislature. If it failed, which he was convinced it would, the result would bring general discontent and ruin upon the country. Such would be the delusion, that when the evil day came, as come it would, the people would start up, as from a dream, and ask themselves if these things could have been true. â¦â
This bubble of cheap housing was no different than the government madness of the Mississippi and south sea bubble: the Florida and Las Vegas boom of 2009 sounds no different to me than Florida boom of the 1920s. They are all bubbles that break.
Our government in recent times has created undue direct or indirect influence on how businesses and markets may function (which can facilitate bubbles.) This was also the case in the Livermore era. The trader can no longer sit back and trade with blinders on and ignore the role of government in their trading. This undue government influence is costing us the tax payers trillions and slowly redefining how we all trade.
So the question is: where is all of the printing of government money by the truck loads going to settle? Is it going to evaporate on its own or create a new bubble? Is it finding its way in to our stock market and buoying (notice I did not say rigged) prices?â Or will it âGo into the hands of consumers to create spending, then hyper inflation and the collapse of the dollar?
If inflation takes off I want to be prepared with trading strategies that will handle these markets especially if they become volatile. If money continues in to flow in to these current stock markets than I may trade them like I did from 2004 to 2007. But the bottom line is I as trader can no longer sit idle and ignore the economic affects that government is pushing at the markets. I must be proactive in deciding how this will influence the trading strategies I select. If we are not prepared for government actions we may be crushed by them on the trading floor.
Quote from S2007S:
Got a call from a boiler room operation today from NYC, they were selling me a stock, they said they would guarantee a 20-25% return and that the minimum investment was $2500. They asked for all my info and even asked for my SS#. They said they wanted me to try this small investment and that once this worked out would want me to go in with more money. Felt like fucking 1999 all over again!!!! I guess fools are starting to fall for all the dirty greed on wallstreet. Free money for everyone.
Did you get their contact information? I am pretty sure this kind of guarantee is illegal, and you could turn them over to the SEC, whatever...
Quote from S2007S:
Got a call from a boiler room operation today from NYC, they were selling me a stock, they said they would guarantee a 20-25% return and that the minimum investment was $2500. They asked for all my info and even asked for my SS#. They said they wanted me to try this small investment and that once this worked out would want me to go in with more money. Felt like fucking 1999 all over again!!!! I guess fools are starting to fall for all the dirty greed on wallstreet. Free money for everyone.
Did you get their contact information? I am pretty sure this kind of guarantee is illegal, and you could turn them over to the SEC, whatever...
If not, their phone# might be on incoming calls list of your phone for that day...