Weekend Wrap, Part 1: Goldilocks and the 300 Million Bears

Includes: DIA, QQQ, SPY
by: Philip Davis

Talk about feeling outnumbered!

As the guy in Airplane kind of said - "Looks like I pricked the wrong week to get bullish!" Of course, as I often tell people, I am neither bullish nor bearish - I’m rangeish - and our range is the 5% band between around Dow 10,200 and S&P 1,070, which takes us as low as Dow 9,690 and S&P 1,016 and as high as Dow 10,710 and S&P 1,123 before I really "flip flop" my positions. Despite the fact that this is the range we predicted last October and is the range we’ve been in (other than a brief trip to 11,200, which we shorted the hell out of) all year - people still seem to find it necessary to call me either bullish or bearish as we navigate the channel.

I suppose I have been HOPEFUL for the month (now heading into day 14) that we will finally make a little progress and establish a higher floor at our usual mid-points while, at the same time, the MSM have decided that we are all going to die. That does make me kind of bullish by comparison doesn’t it? We are mainly in cash and we are well hedged to the downside so, unless we are REALLY heading much, much lower, there is little profit in speculating to the downside, other than our quick trades. As PT Barnum once said:

"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "’change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success."

Balance is the key to long-term success and we’ve had many conversations about that in Member Chat. Our goal is to be neither bullish or bearish but rather to sell premium to both the bulls and the bears when conditions permit us. As 'Ravalos' said Friday in Member Chat:

"Ever since I became member (actually before I became member I was already following your newsletter for quite some time) I find it hard for me to BUY PREMIUM. Over time, I’ve realized that buying the premium results in my portfolio account reflecting red numbers as the time progresses.. on the other hand, selling the premium almost inevitably results in green numbers all over my portfolio (confirming indeed the whole premise of being the house in a casino)."

Nothing makes me happier than seeing our Members "getting it." If PT Barnum were able to sell options to the suckers (who are born every minute) I doubt he would have bothered doing anything else. Selling option premium to others is the epitome of caution AND boldness and, as Ravalos notes, the best way to insure success. So we don’t really care whether the market goes up or down - as long as it stays in our fairly narrow 5% range on each side of our midpoints, we’ll be just fine as long as we remember to sell contracts to the bears when we are near the bottom and to the bulls when we are near the top. Watching the economy should be incidental compared to watching our ranges!


Yet I see a lot of people getting all hot and bothered about the economy, which is clearly a mess and needs fixing, but that shouldn’t prevent us from TRADING THE MARKETS - which have a little, but not too much, to do with the actual economy. I pointed out in Friday’s post that the Dow rallied from 580 in August of 1975, when we were losing 500,000 jobs a week, back to over 1,000 in Q1 of 1976, when we were losing 400,000 jobs a week. It was a relative improvement of 20%, far less than the improvement we’ve seen as job losses fell from 650,000 at the beginning of last year to about 450,000 18 months later. Should the fact that job losses haven’t returned to their normal 300,000 a week (it’s called turnover on 140M jobs) be considered an abject failure of this economy?

What’s going to happen next?

That’s the main question I get from people. I find it interesting that so many people want to believe that I can see the future, but I suppose that’s been the same for thousands of years - people want to know what’s going to happen and they are willing to put their faith in someone who’s just a little more insightful than they are. This isn’t unique to stocks, my old consulting company was called Delphi Consulting - also taking advantage of my reputation as a business prognosticator.

While I do pride myself on my ability to spot trends early AND to figure out how to make a buck playing them (you can see how I did last year in our 2009 Review) - I don’t like it when that part of my reputation distracts from my general message, which is that NO ONE, not me, not Cramer, not anyone, can tell you what is going to happen next in the markets, and the best strategy you can follow is one of maintaining a balanced, sensibly hedged portfolio that can make money in ANY market direction.

There is an excellent presentation by James Montier, now of GMO, who listed "Ten Lessons (Not?) Learnt," which is a must read, as it lists and expands on 10 themes that echo what we discuss every day at PSW - things every investor needs to hear and understand before he or she goes chasing off after the next guru who promises to give a peek at the future (emphasis on my 5 favorites):

Markets Aren’t Efficient

  • Relative Performance is a Dangerous Game
  • This Time is Never Different
  • Valuation Matters (in the Long Run)
  • Wait for the “Fat” Pitch
  • Sentiment Matters
  • Leverage Can’t Turn a Bad Investment Good
  • Beware of Over Quantification
  • There is No Substitute for Skepticism
  • The Benefits of Cheap Insurance

In short (since this is not supposed to be a philosophical article) neither James Montier or I can predict the future. I can’t speak for the thousand other bozos who tell you they can, but we’re telling you, for a fact, that we cannot. Our job is just to keep an eye out for good opportunities, be they bullish or bearish, that have a good chance of making a little bit of money…

When the media is extremely bearish, you will find me often defending the bullish side, and when the media is extremely bullish, I will tend to poke holes in the bullish outlook. Why? Because our goal is to be BALANCED so I will always nudge you towards the middle. If you are looking for extreme bullish or bearish sentiment, then I’m sure there’s an App for that but you won’t be getting it from me. I think people who think we are heading back to 666 on the S&P are idiots and I think people who see a V-shaped recovery back to 1,566 are idiots too. About halfway between the two, at about 1,100 on the S&P - like Goldilocks, I think the markets are priced just right.

When things are in balance, they are very easy to push one way or the other, and the Gang of 12 take advantage of that and unleash their TradeBots in either direction because there is A LOT of money to be made stampeding the beautiful sheeple in and out of their positions as they leave a trail of losses and fees in their wake.

While things can get pushed too far in either direction, it is more likely that they go too far to the downside, which is why we ALWAYS advocate our Mattress Plays as well as some disaster hedges, no matter how bullish our current outlook may be. Anyone who had money in the markets on 9/11/01, or even in 2007, 2008, 2009 or 2010, can tell you how nice it is to have 5% of your portfolio in a play that makes 500% when the market dips 10% very quickly.

Continue to Part 2: Wild Weekly Wrap-Up >>

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