Current Market Environment Warrants Short-Term Trading

The current market (by that we mean from 7/6/07 to present) has been characterized by volatility, erratic trading, and a tendency to pounce on the news of the day. Birinyi Associates published a research report last fall, as advertised several times, entitled The Next CRASH, which examined the impact of new investment vehicles and fewer regulations. Today's market requires nearly undivided attention, and long term investing is all but useless.

The first chart below shows the performance of a $1 investment in the S&P 500 on the close of 7/6/07. Assuming you are the most intelligent trader in the world and you sold the open and bought the close of the 10 worst days since then you would be up 14%. If you had bought and held you perform inline with the market, down 13%; if you had sold the open and bought the close of the 10 best days you would be down 31%.

click to enlarge

So what's the point? Between 7/6/07 and 2/6/08 there were 149 trading days, if you remove ten of those days from the picture the market is up! Point being: in this market, when you have a profit take it.

Example number two of the benefit of short term trading was seen on 1/30/08 when the FOMC cut interest rates by 50bps. Good news turned bad in the blink of an eye when Fitch cut their rating on FGIC.

The third example in our analysis occurred earlier this week when the Department of Justice issued an ill timed and unnecessary release that could impact CME's business model, the stock was down $100/share Wednesday...