Saturday, May 16, 2009

Fighting with the bear.

The first chart is about what I suspect has happened to most retail investors trying to outsmart the bear. They've made multiple attempts to sell short the market and gotten stopped out. What they are actually trying to do, whether they know it or not, is pick a top. That 's pretty hard to do. Actually it's damn near impossible.

All they are doing by trying to pick a top is whittling away at their cash. Now let me remind you that this is a bear market. As such the second chart probably depicts the most likely future direction of the market.

If that's the case (and I believe it is) any one of those entries in the first chart will most likely end up being a great short entry by the time the next leg down hits bottom .

What’s the point of taking multiple losses trying to time the exact top? I can guarantee you won't do it other than by sheer luck. Any of those entries is ultimately going to be a great trade if one would only let their trade work.

If you are going to be a trader (as opposed to an investor) it's always going to come down to position size. Unfortunately most traders probably had too large of a position and couldn't weather the draw down as the market continued higher.

Now let me show you what else is probably going to happen to the average retail investor (chart 3).

He’s going to be so nervous from the multiple losses taken trying to pick the top that he won’t be able to hang on for the run down into the bottom. Every little pop higher is going to knock him out of his position. Ultimately I expect he will finally have the confidence to hold his position right about the time we get the next major low and then of course he will cover way too late and lose almost all of the profits (if he actually made any) on the way down.

I'll say it again. Bear markets are tough to make money in. If there isn't a bull market then and only then will I fight with the bear. However as long as there is a market that's going higher it's much easier to just jump on the bull and let it do what bull markets do.

Timing mistakes get corrected in bull markets. Profits are unlimited. Timing mistakes in bear markets get amplified and profits are limited to 100%.

This is why I don't waste my time and capital on trying to short the market. I'm not going to get rich by shorting stocks ...well unless I'm willing to use leverage.

Leverage is the reason the global economy is in the shape it's in. Many of the brightest people in the world have now been taken down by leverage. Do you realistically think that you can play with fire and not eventually get burned? I can assure you that you aren't fire proof. You probably aren't even flame retardant.