Making Money In This Crazy Market

Are you motion sick? Well, you're not alone. We have recently experienced unparalleled market volatility (markets going up and down). Buckle up. I see absolutely no evidence that this trend will reverse itself in the near future. Everyone and their mother have a reason as to why these crazy swings have become common place. The plain truth is that there isn't one reason for the volatility. Markets move up and down on rumors, errors, lawsuits, activism, anger, greed, speculation, and nearly every other possible human influence. However, I would echo the sentiment that it indeed is different this time. The swings are more violent and sudden than ever. So, when tackling the cause for most anomalies, I find that it is most helpful to start with one very simple question: What has changed? The answer for this is simple and predictable. The government has injected itself, via capital infusions and new regulations, into the marketplace like never before. As predicted in this blog some time ago, it has not been effective. Despite the impotence of the stimulus and new regulation, the market has become absolutely enthralled and dependent on the infusion of free money. Without fail, the biggest market swings have occurred within hours of Fed meetings and presidential speeches. The market rallies huge on the speculation of new stimulus and collapses when government and fed officials elude to the monstrous debt being a limit as to what action they can take. This is illustrated simply by looking at the conclusion of QE 2 (quantitative easing 2; the fed pumping money into the market). Markets rallied violently when the program was announced and pushed up to 3 year highs. QE 2 ended on June 30th of this year and our markets have dipped 20% (give or take 5% depending on the day). In stark contrast to what many experts and pundits argue, the government can boost the economy and the markets. The problem is that it does not last and is fiscally unsustainable simply due to the fact that the amount of tax revenue generated by increased business activity that is a result of the stimulus doesn't even cover a quarter of the amount of the cost of said stimulus. As Winston Churchill stated so eloquently, "It's like standing in a five gallon bucket and attempting to pick yourself up by the handle."

Recently, I have been reminded of a lesson I learned sometime ago. The lesson is simple, and yet, I still find myself violating it from time to time. I might add, violating this lesson has NEVER failed to lose me money. At the behest of a client, I recently tried to trade in a few stocks that I believed could benefit from current events. I was simply trying to grab some short-term gains on stocks that I didn't necessarily believe in over the long term. As you may have guessed, we got hammered. Luckily, I insisted on modest bets so my actions didn't damage the long-term viability of our strategy. Regardless, it still stung. What made it so much worse is that I knew better. Now, in no way am I discouraging trading. Over the past few years, I have made quite a bit of dough for my clients through short-term trades. The difference is simply that the profitable trades were when we were opportunists and capitalized on what we saw as an imbalance in the market. A trade should be a short-term excercise with a pre-determined exit strategy that has been developed through months of observation. Simply buying a stock that has gone down in the hope of it having a Phoenix-like resurrection is nothing more than betting. With that being said, trading will be an integral part of generating returns in this crazy market. The age old "buy and hold" will not begin to work again until global economic growth gets back on track. Who knows how long that will take? So, I would advise using a "Tactical" and aggressive mutual fund to accomplish this as most individual investors, despite their ardent beliefs, are not conducting enough active research to trade competently on their own. I would also suggest talking with a professional trader and perhaps hiring them to handle that portion of your portfolio (Warning: most financial advisors are mutual fund salesmen. Despite their rhetoric, most do not know anymore than you do).

Buckle up and prepare for this madness to continue for some time to come. When the markets go up, don't get caught getting complacent. No one ever went broke taking a profit. Also, DON'T EVER be afraid to carry large portions of cash in your portfolio. A good cash reserve will help you take advantage of trading opportunities and will protect you when markets plunge. Good luck, and don't ever to hesitate email questions. Also, as a reminder, feel free to email me directly at zkabraham1@gmail.com if you would like to talk off the record.