Thursday 10 May 2012

The bulls are holding on

You will know that I are strongly on the bear side of this market, that I entered my bear positions far too early and got stopped out. You will know too that I am holding short positions again. Net result is that I am very marginally down on those trades since the beginning of my financial year which starts on the 6th April (just like the British financial year.) So to answer the question that I used to entitle my last post: No we're not there yet.

I have always found it extremely hard to trade the market on the short side, the more so at present because I no longer see any relationship between the market and the reality of economic life. I would agree that there is an argument that says that we are in the economic doldrums so some people think the only way is up. They believe the prospects for those companies that have a grip on their debts are good. In addition with continuing low interest rates companies with good cash generation offer better returns than bank deposits so there is a good reason for strong share prices. 

However, a massive shadow hangs over the market. Banks only survived because their huge portfolio of toxic debts has been taken over by governments. They were already almost overwhelmed by their own debts. The solution which has, most effectively, kept this creaking show on the road has been the printing of money. I cannot see how this can go on without some of the wheels coming off. We already have commodity inflation and the prospect of this seeping into inflationary pressures is ever present.

As you know, there was a time when I saw safety in precious metals, but I have had little to say about those for some months as I have stayed away from a collapse in their prices. Their time may come again but not yet.

My favoured territory has always been stock picking among undervalued companies, and this has kept me fed and watered for many years now. But I fear buying into companies which, by their nature, are illiquid and would be impossible to sell if the s**t hit the fan.

So what do I do? For the moment my strategy is this: 
  • I will take my profits on my open short trades and see what happens next
  • I will keep my eye open for rallies on the market and try to take quick profits out of beaten down shares
  • I have just decided to spend money on learning how to trade foreign currencies properly
I hope this will be enough to keep my head above water.

1 comment:

David said...

Hi Paul,
I empathise with your sentiments.
However, I believe that it is an important part of any strategy that it includes trading to the short side. After all, a bear market can go on for months and a trader would be sidelined if he was not trading to the short side. Trading any rallies to the upside in a bear market would be counter trend and in my opinion the risk of losses increases greatly.
Good luck in your endeavours
David