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Profiting from the New 'Normal'
Intermediate market trends that last anywhere from a few weeks to several months are predictable and profitable. They allow for the investor to capture the bulk of the value from a longer-term trend while lessening overall market exposure and capital commitment.
The intermediate trend also allows the investor to hang on through the crazy day-to-day swings without being whipsawed out of every hard-earned dollar.
It is our belief that the intensity of this current crisis will subside and market volatility will "normalize" at some new, higher level. With more-normalized patterns in place, our options indicators will once again regain their predictive force.
Options have been, and are likely going to once again be, excellent predictors of intermediate-term trends. On a stock-by-stock level, they track many of the most sophisticated, leveraged market participants. On a broader-market level, they capture current market sentiment in real time.
With the intermediate market trend identified, we seek to take the extra step of finding the most lucrative, low-risk options plays available. By going long an option versus the underlying equity, we effectively implement a stop-loss trade. Capital is protected in the event the underlying stock moves in the wrong direction by a large amount (an everyday occurrence, lately) and the upside is captured in a levered trade.
Keep Your Swing Under Control
One of life's great little pleasures is watching a golf ball fly long and straight after having hit it in the middle of the sweet spot with a nice, easy swing. The same is true with options.
If you try to "kill it," you will likely lose money. When trading options, you should invest a comfortable amount where, even if the trade goes badly, no sweat. With too much money on the table, fear may make you lock in losses as the volatility of the trade moves through its normal course.
Don't worry about missing the big one. When option trades go well, they usually go very well.
OK, Market – Make Your Move
The United States and world stock markets crashed in October. The government has responded with almost every conceivable rescue action. The question is: Now what?
In the big picture, the worldwide leverage bubble was the largest bubble in the past 150,000 years, which covers the time period of modern man. It would be a fair assumption, then, to believe that the bursting of this bubble will have more than a one-year impact on our market and economy. Hence, the October crash may have been the sharpest angle of descent but may not have marked the final bottom.
Remember that we are experiencing a crisis of credit. The credit market is leading equities, and currently it is indicating that the S&P 500 has 20% to 30% downside. We fully expect to hear horrible economic news through the rest of the year and be surprised by negative announcements from companies that we had previously thought were well-protected from the financial storm.
But the markets are moving fast. Given how oversold they currently are and how stretched the measures of oversold are, it is very possible we have a tremendous bear market rally that lasts for weeks, if not months.
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