So we are having a great rally. It doesn’t seem like it wants to pause. If Dow is up this week, it will be up 8 out of the last 9 weeks. Wow, what a complete reversal of a downward trend that we had been observing since last year. What an extended overbought period. The bears, including me, have been waiting for a pause or correction which seems not to take place. The stock markets are currently behaving like a shock absorber and nothing seem to discourage bulls. All well, till it is not.
A lot of my personal holdings are up sharply over the past few weeks. There is a big margin of safety in those holding but those have risen just too fast that now I am scared of these gains and starting to book profits and probably reenter after a few weeks.
If you are looking for what some of the prominent thinkers think, here is a good piece of advice from good experienced Richard Russell-
What to do? I’ve done a lot of thinking on this question, and my conclusion is as follows — hold a fairly large quantity of physical gold (coins), hold cash, hang on to your house, and you might even buy a bargain-priced foreclosed home if you wish — but above all, cut back on unneeded expenses (cut back on coffee, vacations, movies, fast food, and other non-essentials). Cash is for deflation if it continues, gold is insurance against future inflation, a bargain-priced foreclosed home is good value and it’s also a tangible asset.
That advice is coming from a market veteran who has been observing markets for almost 5 decades and have first hand experienced The Great Depression. Below is what John Hussman thinks? He is one of the value investing fund managers whose market insights I read quite often-
Are stocks in a bull market or is this still a bear market? Frankly, I don’t put much energy into that question. The S&P 500 has now corrected about one-quarter of its prior losses. Bear market corrections of about one-third are not unusual, but I wouldn’t bank on that. Having failed to do anything effective to mitigate the second wave of foreclosures that is set to begin later this year, and seeing very little sponsorship in trading volume (despite good breadth), my impression is that we most likely are in a strong correcting rally in the context of an ongoing bear market. At the same time, cash-equivalents are yielding next to nothing, so it’s unclear to what extent investors will decide that stocks are their only real alternative, which might allow a continuation of this advance.
I am not including the bullish perspectives as I am bearishly biased. The internet, every business website, analysts sites and almost all the stock newsletters, are filled with bullish calls from tons of market analysts. Oh btw, do remember, a lot of them never saw the meltdown coming. There are stock upgrades left, right and center. An enthusiasm is on and it seems retail investors are on shopping spree aka bottom fishing.
What do I think-
My desire to get into this rally is getting stronger and stronger, at the same time, “hindsight bias” of missing rally, by not investing in bigger way, is also making it irritating, at times. If it is forcing even myself to think my view again. I take this as a sign of retail public entering into the market (no co-relation and there is no statistical data to prove this). I am being requested by many if I would be willing to manage their money, including those who can’t even spell “stocks” properly (don’t worry they know English well), which I interpret as “trouble ahead”. I think of it as on-going correction in a primary bear market trend that has not run its course yet.
I have different investment strategies in place. Separate for stocks, another one for Yield and last one for options & futures. These fall into “Stocks and Options” asset classes. Gold etc constitutes other classes.
I am beginning to book my profits on the stock holdings and collect cash. I wanted a market turn-around but I didn’t want such a quick and violent rally. The returns are generated in such short span vs. a few years time i would expect. The rally is now overextended and I am not going to be opened to Mr. Market’s mood. All indicators say time for a turn, but guess what “Markets can remain irrational longer than I can remain solvent”.
For Options & Futures, large portion is based on OPNewsletter strategies and I am fully invested there, as per OPN’s objective of about 60-70% investments. This was after a long time and I shall continue to remain invested using OPN strategies. However, depending upon indications of deterioration or accelerations, we might choose to add straight calls and puts. The overall strategy is bearish bias. (Sign-up for the OPN Waitlist here)
So ladies and gentlemen, all I can say is that it is time to “stay very cautious”, the optimism is running very high, and these are times when everyone else but Buffet and a rare few more is positive, and often that is the time to off-load garbage.
Choose the strategy that works for you. Don’t give your hard earned money to any “managers” unless they can show you that they deserve it. Ask them for their performance record of past 18months and judge yourself.
Trade carefully, Trade Profitably
Trade specifics – Buying to open Jun/Jul 70/75 Put diagonal spread ($0.20 debit) and Jun/Jul 85/90 calls for $0.56 i.e. Sell Jun 75 PUT and 85 Call, Buy Jul 70 Put and 90 Call.
A week in which Dow moved between +2.5% to -1.75%, S&P500 from +3.25% to -1.5% and RUT from +4.75% to -1.50%, and all closing in negative territory,