Wednesday, March 16, 2011

You Don't Need to Catch the Bottom

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Unless you are a daytrader or 1-2 day flipper you don't need to get all hyped up about trying to catch the bottom.  It is fun for bloggers or those in the financial media so they can beat their chest but most of the serial bottom callers have tons of losses to account for before their moment of glory.  (i.e. they are wrong most of the time)   I said some 3 weeks ago the market character had changed.  I said it was no longer the "unshortable market", and it was instead time to reign in risk and be cautious.  At that point one should be raising cash, culling positions, and putting some hedges on - I've been using VIX calls above the 50 day moving average.  Once we broke below the 50 day moving average I said this market is now shortable on the index level and you can use a break back above the 50 day (have to give it a few points of leeway) as a stop out level.   And we're not even discussing a lot of individual stocks that had weak charts that one could have shorted as hedges versus long positions.  As I said a bit earlier today, "easier said than done" during this wacky selloff but at minimum above average cash positions once the 'caution' call went out, should help a portfolio in times like this. 

If you did all these things you would be mitigating losses and protecting capital.  The main goal always is to keep capital near maximum levels - making up a 5% loss is much easier than a 15% loss.  Hence anyone who has protected their behind, would not really need to make some great call about timing the bottom.   The uptrends in this market usually last for months on end so missing the first few days is no biggie.   Yes the 'bottom' turn day is often a big reversal and it feels good to catch it, but most people trying have a lot of missing fingers from their hand as they have tried to catch the falling knife unsuccessfully a few times before the 'real turn'.    When you don't have big losses to deal with, you don't need to take the risks of trying to catch bottoms.  Frankly catching the bottom in advance is a very difficult thing - everyone is just throwing guesses out there now like it's a NCAA tournament pool.  About 2% of those guesses will be correct in hindsight ... do you like those odds?  Hence, I leave that to those who beat their chests and have clairvoyant powers.  I'll just get back on the horse once the uptrend returns - hopefully with most of my capital intact and keep chugging along.  Tortoise over hare style.

If you are looking for that 'bottom' moment, sometimes we get fortunate and it is very obvious - i.e. a big selloff during the day (hopefully panic induced) followed by a reversal and a close at the high of the day.  When I see one of those days my ears will perk up.  Barring a miracle in the last 40 minutes, today is not that day.

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