The Rising Stock Market

I've discovered how difficult it is to maintain a blog when driving around the country.  It's much easier when I'm comfortably ensconced in my home office.

Enjoyed the car trip to North Carolina, but happy to be home.


Strategy of choice

Trading iron condors was especially successful as recently as a few months ago when the markets calmly traded within a range.  More recently, a rising market has made this strategy less effective.  This is as it should be.  No single strategy works all the time and a trader must have more than one strategy in his/her trade arsenal.

While iron condor traders (along with sellers of call credit spreads) may be having a difficult time, covered call writers, sellers of naked puts and put credit spreads should be enjoying the rising market.

One of the personality traits that makes for a successful trader is understanding that varying market conditions require different appproaches.  The bottom line is understanding that stubbornness is not the trait of a winning trader.

The future

The problem is that we trade for the future, and for most traders, the future is unknowable. [I do understand that technical analysts claim the ability to forsee the future of the stock market – often enough to wager on their expectations]

For example:  I don't know why the market is advancing so strongly.  Perhaps solid earnings gains – when compared with last year – are all that matters.  Perhaps the banks will eventually lend money and businesses will once again hire workers.

From my perspective, all I see is the gloom of high unemployment, coupled with companies being satisfied with higher productivity, and thus, no plans to hire. Maybe yesterday's election will have some positive or negative influence on the market.  What I know is that I don't know.

I see falling housing prices.  I'm concerned about the inevitable class-action lawsuits over home foreclosures that were not processed according to law. 

I see money being concentrated into the hands of fewer and fewer people and don't know how the consumer can spend money to support the economy, even if he/she wants to do so.  This is not a political statement.  It's merely me, wondering who is going to provide revenue to all these companies whose stock prices continue to rise.


However the market has been rising and I am not going to fight it.   That translates into not opening new iron condor positions blindly.  I may not  understand the rally, but I also know that it's foolish to fight market trends.  Th whole idea behind market neutral trading is to avoid trading with a bias.

I've learned that 'the market' is much smarter than I am.  I'm doing what I can to stay ahead of the market rise, adjusting sooner than usual, and refusing to open bearish positions. I also kept cash in reserve if adjustments were necessary.  And they have become necessary for my specific positions. For now that's my plan.

It's not necessary to aggressively seek profits when the market is telling you that your preferred approach (strategy) is not working.  I can wait patiently, holding less aggressive positions.  That translates into reduced profit expectations with less risk than my 'normal' portfolio.  This is just one more aspect of successful risk management.


The Obvious?

I don't want to wager on this thought, but it occurs to me that if I am refusing to consider taking bearish plays (when I am bearish) and was seriously considering (for a short time) taking bullish positions to profit from a further rally, then perhaps that's a sign of capitulation.  In other words, if this non-believer in the current bull market wants to get long, then maybe it's a signal that others may be capitulating.

In other words: I should go short for the sole reason that I don't want to go short.  That's not viable in my world.  Is it in yours?

A note on the ad below (not visible to RSS subscribers): Several ads appear on a rotating basis and I never know which one is visible.



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2 Responses to The Rising Stock Market

  1. rick forno 11/03/2010 at 7:50 AM #

    Your concluding comments echo mine, Mark. I’ve since given up “looking” for a top (which is suicide anyway, as I learned from my early futures trading days) but rather am waiting for the rollover to occur and will do the same on the downside that I did on the upside — namely, build short positions in the market incrementally and over time, not going all-in, and thus taking advantage of volatility.
    I am firmly and frustratingly neutral right now – I don’t believe the market can rise forever on the goosed-up free money pumping into it by the Fed, and with employment so horrible, folks won’t be spending much anyway. But while I can’t get bullish because of my views on the market, I can’t get bearish because of these artificial factors that keep propping them up — and I won’t try to “pick a top.”
    What have I been doing recently? Not much, other than quietly protecting my long-term retirement portfolio via options.
    Otherwise, I’ve got plenty of cash (unfortunately) sitting idle that I plan to use in being opportunistic and build/add to positions in my long-term portfolio once the next leg down occurs and folks wake up from this macroeconomic delusion. 🙁 But I’m in no rush to do anything right now, even for “a trade.”
    Through my trading of futures, I’ve learned that patience is paramount; ergo in terms of the equity markets in terms of new positions, I am flat, frustrated, and waiting — but it’s a position I’m okay with.

  2. Mark Wolfinger 11/03/2010 at 8:07 AM #

    ‘Frustratingly neutral’
    Thanks for offering a solid picture of how a directional trader manages a portfolio in times of uncertainty.