Sunday, November 23, 2008

Increasing Trading in a Choppy Market

While diversified stock index investing and "buy and hold" are superior strategies for rising market time periods like 1980 to 2000, trading strategies may have better results for flat markets like 1965 to 1980.

For now, I believe there are too many negative factors, both known and unknown, for the market to reverse to an upward trend. I expect the market will be in a trading range channel or downward trend at least for the next couple years. It may even be a long term downward market similar to what occurred in Japan from 1990 to 2003.

Here's some of the different investment strategies I currently use in the part of our portfolio I manage:
  • Diversified stock index - This investment style will reflect the overall market. If the market is in a trading range channel or downward trend, so will the index. Matching the market is no consolation when the returns are zero or negative.

    I only have one index ETF, the S&P 500 (SPY). It's down 49% since I bought it in October, 2007. I hopefully will sell this ETF during a future strong market rally. (Unfortunately, I think the Geithner rally will fizzle relatively quickly.)

  • Buy and hold - Works well if the right stocks, or right industries are picked. There is a bit of luck involved in this strategy. Last year, I wrote about Google (GOOG), Amazon (AMZN) and General Electric (GE) being part of my core long term holdings. Even though all the stocks are down significantly, I still believe that Google and Amazon have the potential to be big winners. I've lost faith in General Electric, due to their large exposure in financials, e.g. GE Capital.

    I have not added to these positions recently. If the market declines another 50%, I will be buying more Amazon and Google.

  • Trade the channel - In uncertain times like now, the market often has many ups and downs as it did from 1965 to 1980. In the past, the primary opportunity was with the upward movements, by buying either a stock or index low and selling it high. Shorting was risky since the stock or index could continue to rise. However, there are now short index ETFs that cap the possible losses on shorting.

    Initially, I plan to use a combination of selling uncovered out of the money puts and out of the money covered calls on Energy Conversion Devices (ENER), Ultrashort Financial Proshares ETF (SKF) and Ultrashort Oil & Gas Proshares ETF (DUG). I will add new stocks or ETFs as the market situation allows.

  • I plan to increase the amount of funds used to trade the channel. Of course, someone will remind me that traders generally under perform the a diversified stock index and the market. I agree the analysis is true for a rising market, for which the time period of 1986 to 2005 was. I suspect, but have no actual data, that traders have a much better chance to beat the market that is either flat or declining. However, in case I'm wrong or a poor trader, we will continue to have significant funds invested with our financial advisor in a diversified stock portfolio.

    I will call this my Trader's Portfolio and have already being trading put options in Energy Conversion Devices (ENER), and Ultrashort Oil & Gas Proshares ETF (DUG). I was assigned the Ultrashort Oil & Gas Proshares ETF last Friday will sell a covered in the future. Beginning next week, I will track the results of the Trader's Portfolio versus the S&P 500.

    Disclosure: At time of publication, I own shares of Amazon, Google, General Electric, and the Ultrashort Oil & Gas Proshares ETF.

    For more on New Beginnings, check back every Sunday for a new segment.

    This is not financial or investment advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

    No comments: