Bull Market or Bear Market Rally? Who Cares

All this banter and wild speculation about what to make of our current rally is starting to make my head hurt.

Is it just a bear market rally or is it the start of a new bull market?

I haven’t the slightest opinion and I don’t really care to conjure one up, because at the end of the day, for active long/short traders, it just doesn’t matter.

Warning: this next bit will look a little like shameless self-promotion, but it’s really not…there’s a point (promise).

Below is the combined real-time performance of our programs during the BULL market from 01/2006 (when our results began to be independently-audited) through 10/2007. This is the same data you’ll find updated monthly on our Strategies page.

Click to enlarge:

And below is that same combined real-time performance during the BEAR market from 11/2007 through 04/2009. (Click to enlarge)

See the point? Scary that bear, eh?

Over a long enough horizon, an active long/short trader with a well-crafted game plan should excel in any and every market trend be it up, down, or sideways.

We’re not alone and we’re also not bulletproof. There are many, many other traders doing exactly what we’re doing if not better, and we will go through rough patches and take it on the chin in the future (I promise). But the trend I do not fear.

There are only two things that I fear as a trader:

First, monster market volatility. I am both scared of market vol. (read: YK and the catastrophic meltdown in October of 2008) and utterly enamored by it (read: RH and YK and the ridiculous profits in December of 2008).

And second, abnormal markets (a’la October of 2008) that make long divergences from historical norms (which are painful when you trade based on those historical norms).

That’s it. That’s what keeps me awake at night. Everything else? This financial press/blogosphere/water cooler/Uncle Ted’s house speculation about the rally? You can keep it.

Comments

[rick12345:]

A. It didn't take a genius to predict this thing (the market crash)
B. It doesn't take a financial wiz to realize you should invest in bonds, cash, gold, defensives during a bear market.
C. I'ts not the greedy, "wally" street fat cats who were burned last year. It was the poor, unsuspecting (ill-advised) average mother and father investor, who suddenly through no fault of their own, lost half of their hard earned wealth before they knew it.

I am afraid to say that if the average person were to take your advise and invest in the market at present, the "long term" (as you like to call it) will be at least 5 years.

My advice is to invest in foreign dollars, as most people are at the moment.

May 11 03:13 AM

[AJB7:]

Michael, congratulations on a good record. As a long-short investor myself (at least in part), I find much merit in your post as it breaks out of the usual "where is the top/bottom?" etc kind of thinking and enters into portfolio composition which to me at least is a more interesting question.

One should note that long-short does not necessarily mean market-neutral although that is one type of long-short strategy. So too are fixed ratio long-shorts, e.g. 100/30 funds, etc; but also variable long-short strategies which I tend to pursue which do take into account market direction.

But I've found that shorting can be tricky and short stocks do act as inverse longs. If one is interested in pursuing this strategy be very cautious in the begining and be prepared for surprises. Perhaps you could discuss more how you construct the portfolio. Let's start the "Long-Short" section on SA!

May 11 06:24 AM

[AJB7:]

Sorry, I meant to say "short stocks do not act like inverse longs" on the previous post.

May 11 06:27 AM