The market has been on a tear lately and it looks like my Nasdaq options will expire worthless.  From this outcome, I have learned a few things.

  1. It is idiotic to “time” the market based on your gut.  Yes, the case for bearishness remains (see below), however, Getting a Piece of the Action (GAPOTA) is a moronic way to trade.
  2. Respect the chart.  Charts show us trends, consolidation, breakouts and the majority opinion.  It is foolhardy to go against the crowd.  I need to exercise discipline and wait for the top to form and develop before trying to rush things.  Let the chart tell me when the market is tired out and has exhausted its supply of buyers.
  3. Trying to score big is foolish. Investing is a marathon, not a track meet.  Invest with the long-term fundamentals in your favor and have some patience.  It will greatly improve my “win” rate.

As a result of these revelations, I am taking a slightly different, longer-term approach.

I have added significantly to my CEF holdings in my IRA and I’m going to be accumulating a larger position in one or more reverse ETFs.  A reverse ETF will allow me to hold my short position in the market indefinitely, rather than being forced to time a drop in the market, like I would have to do with an option.

I lose the upside of leverage that an option provides, however, it is far too difficult for me to time the market perfectly.  As you can see from this Nasdaq chart, markets can go parabolic (like they did in 1999) and throw reason right out the window.  The market went from 2,500 to 4,700 in a few months!  That’s an 88% move in five months on horrible fundamentals!

If the market keeps rising now due to irrationality, I will be more than happy to keep buying inverse ETFs each month since they would be getting cheaper and cheaper (more and more valuable).

From a fundamental perspective I am not buying the bullish argument for a second.  There are plenty of events which have not fully manifested:

  • GM Bankruptcy – The ripple effect has now begun.  Suppliers/Creditors will get haircuts and pass those losses down the line.  Visteon and Metaldyne, two large auto suppliers, have already declared bankruptcy and other large suppliers will eventually have to realign with decreased demand.
  • Municipal bankruptcies/insane pension obligations are still looming.
  • Credit cards are tapped – The consumer has limited purchasing power.
  • Geopolitics – Chinese students LAUGH at Geithner when he says purchasing power of the dollar is solid.

“Chinese assets are very safe,” Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

  • Jobs are still being lost – Job losses ultimately lead to declines in the housing market as well as consumer spending, the engine of our “growth”.
  • Insane P/E ratios – S&P has the Q12009 PE ratio at 60!  60!!  Historic bear market bottoms typically occur with single-digit P/E’s.  Obviously this isn’t a perfect indicator, but it shows how far removed we are from stocks being cheap.

I remember the bubble of 1999 and how exciting it was to see stocks soaring and thinking how easy it was to buy tech stocks and sell them for huge profits.  I remember buying five shares of Yahoo in a fake portfolio for $205 a share (before a 2:1 split) and learning the lesson that bubbles can crash painfully and never come back.

There is no shame in “missing out” on returns in the stock market.  There is great shame in not learning from your mistakes.

Takeaway:  I lost on the Nasdaq options trade, but I realize that it is foolish to ignore the charts and risk capital when there is no need to do so.  I am coming around to the fact that I should be happy to not hit a home run with a juicy options trade, but rather accumulate quality positions at good prices.  I plan on adding more CEF and RWM in the days ahead.

Thanks for reading.

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