How To Play This Thing

After watching the way the market’s acting (as if it were a person) over the past few days and weeks, it’s extremely difficult to play the daily moves.  I had mentioned a couple of weeks ago that the whipsaw risk was high.  In other words, if you thought we were rallying and you jumped on, you got burned when it fell.  And vice versa.  Don’t make too many big bets in anything right now, even shorts.

I look at the world from a helicopter and here’s what I see.  Global growth is slowing including the U.S.  Stocks around the world aren’t expensive on a valuation basis as opposed to 2000.  Interest rates are still very low from a historical perspective and probably not going up to extremely high levels in the medium term.  Two billion people are industrializing in the next 15-20 years and nothing will stop them from having the life that you and I enjoy on a daily basis.  The U.S. financial system bent but didn’t break.  Commodity prices have come down 15-20% which is good.  People are living longer due to advances in medicine.  Technology is cheaper than ever and it’s a great time to be a consumer.  The housing market has crashed and now we’re getting back to realistic levels.  Oh, and don’t forget some emerging markets have fallen 50-60% from their highs.  We’re not out of the woods yet.  This financial crisis won’t get fixed overnight but day by day we’re getting there.

So, what do we do?  Think like a long-term investor but use extremes to trade.  That’s where fundamentals and technicals come together.  As commodities fall, I’m hedged to some degree with a short.  But, I still own steel, agribusiness, drillers, etc.  I hate seeing them go down every day for several days in a row.  But, I have to remember those two billion people.  I’m also still short the overall market using SDS & TWM and I think in the short-term the market weakens (maybe the next 2-4 weeks).  Then, perhaps we get to a point where we can really rally for a while.  But, right now, the path of least resistance is down.  It’s hard to say that on a day where the indices go up 3%.  But, that’s happened before and the rallies have failed.  I do think some of the emerging markets look really good for a trade and I think the healthcare stocks are getting extended.

Just stay in the game.  That’s the way to play this.  Don’t be afraid to take some losses and don’t be scared of a little volatility, especially on a daily basis.  Remember, the long-term areas to focus on are technology, healthcare/biotech, global growth, aerospace/defense, & financials (at the right time).

That’s enough of this rant for tonight.


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August 2008
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