So Long Double Top; So Long Head & Shoulders; Hello New Highs

Sometimes, you buy insurance for your car and you don’t get in a wreck.  Sometimes, you buy flood insurance and it doesn’t rain for months.  Sometimes, you buy insurance on your portfolio, and the market goes up.  Everyone that has bought put options in the past few months has lost money.  Everyone that has tried to buy insurance through hedging using inverse ETFs has lost money.  In fact, I bought some inverse ETFs as a hedge a couple of weeks ago and I was stopped out.  The bias is still to the upside.  Betting against the market hasn’t been real productive as of late.  That doesn’t mean you shouldn’t have insurance every once in a while.  I feel healthy, but I still have health & life insurance.  If you do have portfolio insurance though, make sure you keep stops underneath.  The market is breaking out to new highs and you don’t want to be left behind.

The reason I bought the insurance in the first place was because we had some red flags.  First, I noted a possible head and shoulders (a negative sign) a few days ago.  That didn’t develop and that pattern went away rather rapidly.  Secondly, we’ve been hearing about a double top.  So, much for that.  We broke through the 2nd top today.  Lastly, indicators like the RSI were showing a negative divergence but it still in the buy zone.  Red flags don’t mean sell, they mean you better not go play golf.  You have to pay attention more closely until the risk subsides.

There’s an old adage on Wall Street that says “Wall Street climbs a wall of worry.”  Folks, this is it.  This is exactly what it looks like.  There are so many “experts” out there saying we’ve peaked, the economy recovery is over, there isn’t even a recovery going on, etc.  The more chatter there is like this, the more money we know is on the sidelines.  You don’t say stuff like that unless you’re out.  I’ve said it before, that cash is fuel for further gains.  The more the stock market goes up, the more people want a piece of the action. 

I’m continuing to spread out after a brief hiatus of building cash.  The insurance didn’t pay off (my hedges) and I’m once again buying different companies in different industries and different countries.  I think this is a rally where you shouldn’t get too cute.  If you’re still sitting on the sidelines, average in. 

Let the “experts” worry.  You & I will keep making money.

(By the way, remember when politicians used to come on television and the market would go down?)

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3 Responses to “So Long Double Top; So Long Head & Shoulders; Hello New Highs”

  1. 1 HedgeFundOfOne September 10, 2009 at 4:27 pm

    I agree- this is a difficult market to trade or invest–but then, all markets are somewhat difficult psychologically. I hedge just about everything, because I find auto-stops to be losing propositions, especially when the stock gaps against you overnight. Market trips the auto-stop, then rockets in the diretion you wanted in the first place. Getting the ratio right so that the hedge itself does not lose more than the instrument being hedged is the first challenge, then removing the hedge at the right time to let your profits run the other way is also important. Investing/trading is work!

  2. 2 tom September 11, 2009 at 8:47 am

    Karl, with your article this morning about interest rates and the ECRI data contining to come in stronger. How long can interest rates continue to stay low?

    • 3 keggerss September 13, 2009 at 5:06 pm

      Rates can stay low for a while because even though the economy is improving and the government has created a lot of dollars, they aren’t moving fast enough. Remember that it takes the velocity of money to pick up before there’s inflation (the transfer of money from you to me to the store, etc.).

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