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Trading During This Crisis

by: Larry MacDonald October 08, 2008    
Larry MacDonald

Larry MacDonald

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The current credit crisis has “This time it’s different” written all over it. Financial Armageddon hasn’t looked as likely in almost a century. But then the fear gauges are screaming “BUY STOCKS!” So too the example of astute investors….

The CBOE Volatility Index [VIX] hit an all-time high of 58 on Oct. 6 (in the past, a jump into the 30 to 40 range was a reliable buy signal). Mutual fund outflows in September soared far above the previous monthly high (established in the last bear market earlier this decade). And our era’s investing demigod, Warren Buffett, is on a buying spree.

Still, I lost my nerve today and dumped the double-long ETFs (e.g. Horizons BetaPro S&P/TSX 60 Bull Plus), at breakeven as the higher open retreated within the first hour of trading. After a taking a break from the market (running some errands etc.), the nerves steadied and I plunged back in near the close of trading with an even larger position (and at discount of about 8%, to boot).

Yesterday, the Financial Times of London ran a piece “Markets and cannons.” The gist was that while we may not be sure if an “unstoppable deflationary bust” is unfolding, “what is certain is that there will soon be a tremendous rally – just as there was during the Great Depression. The 1930s saw nine of the 10 best days for US stocks ever recorded.”

And as noted in a previous post to this blog, “the two greatest rallies in U.S. stock markets occurred in the midst of the Great Depression …. Over the three months to September of 1932, the S&P 500 rocketed upward by 150%.” The second rally came after the market had fallen 25%: it gained over 120% during the first half of 1933.

It sure would be nice to see some of that upside action for the double-long ETFs. Maybe the Federal Reserve will soon follow the lead of the Australian central bank and slash discount rates by a large amount.

Lest my friends in the buy-and-hold and passive investing camps shake their heads at this wanton display of market timing and short-term trading, let it be known that the double-long ETF trades are just a part of the explore part of a core-and-explore portfolio.

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This article has 5 comments:

  •  
    Oct 08 08:24 AM
    re: "...part of a core-and-explore portfolio." - nicely put

    Reply
  •  
    Oct 08 01:36 PM
    While holding a nice assortment of tech longs such as GOOG, BIDU, FSLR, CRM, SBAC (profitable on each of them over the past few weeks, so who needs to bother with crying about not being able to short the financials) I took a couple of shots at picking a bottom with SSO and QLD this morning.

    My head is lying across the room in the basket, having been handed to me several times. I'm retreating to neutral for the balance of the day and keeping my finger off the button. Hopefully, we limp in with only four digit losses. Right now, its not looking too promising.
    Reply
  •  
    Oct 08 02:04 PM
    "Double long" sounds a little bit "double dumb" to me, but, hey, whatever turns you on.
    Reply
  •  
    Oct 08 03:56 PM
    your assessment is spot on..it takes real brass to buy when everyone else is selling. But the key to making $ in this game is doing just that, with good companies and sectors.I too have been handed my head in the last month ut by remaining as calm as possible and staying as unemotional as possible we can come ouy on top. Good luck all
    Reply
  •  
    Oct 08 08:49 PM
    i had a great day of trading today... i watched all my proceeds from my brokerage account swim happily in the clear calm waters of my FDIC insured bank account... cash has been the big trade this past month for me, I've been 100% in it... capital preservation will keep me fully loaded when the inevitable countertrend rally starts... any day now
    Reply
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