Act Defensively, But Not from Fear

Oct.10.08 | About: ProShares UltraShort (SDS)

Yesterday, sort of early in the day I sold the rest of SDS when the market was about flat. I also sold another stock (not so widely held) along with it as a partial offset to being wrong on the sale, and for the tax loss.

The cash level is now very high but still,anyone who has used inverse products during the bear market has probably come to view them quite fondly as either a crutch, emotional support or an old friend (lol). So I sent an old friend packing yesterday with the market down 37% from its high.

The logic is simple and posted before: The risk of the market going down a lot is much less after it has already gone down a lot, yesterday's closing notwithstanding.

Clearly this has been bad on a historical level, as market action goes. I don't think it changes the notion that at some point it must exhaust and work higher. Reader TomK left a comment boldly (not being sarcastic) calling the bottom as being yesterday. I simply don't know.

As I wrote about taking defensive action more than a year ago, I commented that being correct about magnitude was not a priority -- just missing a chunk of the decline was the priority. The biggest difficulty for me personally is that people are worried despite the action taken.

Being worried is reasonable, as this is what happens during panics; seemingly no end to the selling in sight. A 20% decline in a couple of weeks is real gut check time. If you have been reading this blog for a while you know where I am coming from in terms of faith that as the market has malfunctioned before it then works higher. Whatever fear you feel now, I am telling you the fear in 1987 and the summer of 2002 was the same. I try to post a tone that reflects my emotion -- which, as my brother told me the other day, I have no emotion.

Here's why: I take my own advice about bracing for periods like now, knowing what has happened before and realizing that the only thing I can control is the action I take (which I've obviously been writing about for years now). I have no control over what the stock market does. I have enough to worry about with the bridge from the Red Sox starting pitching to Jonathan Papelbon. The middle relief has been tough all season.