[lewman]

There’s already a thread discussing why the stockmarket continued to defy gravity. Most seems to agree that it’s a sucker’s rally. Just wanted to revive this thread to continue our discussion on the best way to profit from stock market decline IF you do believe the recent run-up’s indeed a sucker’s rally and the market will go back down due to whatever reasons. Then it simply means we now have a better entry point than a few months ago for shorts, PUT options etc.

vrudny, sorry to go silent on you. For some reason your last post completely escaped me. I do a similar analysis on options but then i just rely on gut feel and I tell myself if the BEP% is a low single digit then it’s a pretty good deal. It is unscientific though.

[lewman]

wow some of us need to chill … now is that considered personal attack … lucky I didn’t mention any name …

[lewman]

I’m with Zeal and agree that I can start accumulate for the long term. But take a look at the gold chart. Since mid July, Gold’s in a well defined down channel with top of the channel currently at around $630ish. Until it breaks, it’s probably not going to go very far. But the drop is quite gradual. Marking the tops since mid-july you have gold going from $660 in mid-july to $640 in early september, and if gold does rally this time back to $630 you’re still talking about just a $30 drop or approx 5% in 3 months.

With overall weakness in commodities in general, there’s a good possibility that gold could be trapped in a range for months before a breakout on the upside could take it to the next level.

So I think there are both long and short term opportunities here. I intend to play the range for the short term. And when it hit the bottom of the channel I’d also accumulate for the long term.

Let see if it works out.

And note to Chris:
You may recall previously on your blog we had a discussion about your $574 warning. As I mentioned, similar pattern existed in 1973 which turned out to be an excellent buy opportunity. So I’m wondering what objective measures do you use to determine that a decisive break has indeed occurred ? I read somewhere that some traders would for example require price to stay below the target level for X trading days but would you be kind enough to share yours ?

[lewman]

I’m not rich and chances are, unfortunately, I’ll probably never reach this staus in this life. But I don’t think there’s anything wrong with showing it off. Afterall that’s what capitalism is all about. Work hard, get rich, then play hard. Of course there’re those lucky ones that inherit it but chances are they did something really good in their past lives !!!!

So my strategy is to be borne rich in my next life by doing good in this one ha ha ha …

[lewman]

ctlmdjb, very interesting comments as my personal experience is completely opposite yours.
I’m a chinese american educated in america then moved back to HK to work for a british firm after spending about 10 years in california (5 of which I was working). I had trouble at first because I was always giving my honest opinion and ended up offending people. Then I was told that the british tend to be more courteous and agreeable at least on the surface, always carrying a gentlemenly smile on thier faces even though they don’t agree, whereas the americans generally shoot from the hip.

Now that I’ve been in Asia for the past 10 years I’ve learned to raise objections and disagreements in a more diplomatic manner, probably due to british influences during the 7 years that I worked there. Very interesting indeed.

And I’m in my late 30s now and I also found myself having fewer and fewer friends and friends I meet nowadays are also more suferficial … mind you I admit I’m perhaps the superficial one as I think I’m getting lazier by the year to “develop and cultivate” freindship. Whne I was in my 20s and early 30s I was known to be the guy to organize things like ski trips, a nite at the football game, or just dinner. I moved to beijing about a year ago and started doing that with a bunch of expats in beijing … unfortunately while the group started out with a few dozen people as time goes by the number of people who’d show up seemed to decline. Perhaps I’m just not that great of an organizer, and gradually I’m also losing interest as others lose interest as well. Is it all due to age ? I have no idea; perhaps someone with a sociology background or a pyshcology degree can enlighten us here …

cheers
lewis

[lewman]

Did Zeal have any bets on gold going down since it hit $720 in May or did they just tell subscribers to wait ?

[lewman]

Lu,

Chris and I had a discussion on this $570 call on his blog. You may want to check it out. http://www.blogger.com/comment.g?blogID=27784316&postID=115832815320072481

I tend to think that it’s closer to a mid 1970s type correction as I believe it is a correction in a secular bull market, rather than a end-of-the-game (like 1980) or a bounce during a secular bear (like 86 and 2000). Whether it’ll turn into a 1975-type 50%+ correction depends largely on inflation. So if you think Ben has at least temporarily tamed the inflation beast then brace yourself for a larger correction. This is one fundamental call that for every person who believes so you can find one that doesn’t, and chances are they both make sense.

[lewman]

If you fear the volatility of gold, one way to do it is to buy options on gold stocks. This way you can invest with a set amount (a small portion of the amount you are willing to lose), then go away and not have to worry about the ups and downs in between.

[lewman]

I suggest you take a look at the gold chart. Gold went from around $420 in 2005Q3 to nearly $730 by May 2006 with little correction. A correction is thus not unexpected and is considered healthy.

Re: inflation. Take a look at CPI numbers and compare them to gold prices in the 1970s’ gold bull market (bottom chart on http://www.zealllc.com/2006/rgold2.htm). A cyclical bear within a secular bull was seen in 1975 thru 1976, corresponding to a period of time when inflation went down.

If you believe that inflation is already under control, then there are strong arguments to exit the market. But if you believe it’s just taking a breather, then be prepare to jump back into the market.

[lewman]

Thanks Chris.
Short interest’s at 5 year high now; may be we’ll get a drop into october for the mid-term trade.

[lewman]

Zeal post their yearly performance and have a fairly good breakdown by various categories like number of profitable trades vs non-profitable ones, average gain, average loss etc. http://www.emergingstocks.ca does as well. By constrast Chris’ performance page seems skimpy. And there’s Adenforecast that doesn’t even bother to post yearly results as they just have a one liner that says they produced double digit returns X out of the past Y years.

But I don’t think Zeal and EMS’s numbers are audited; or at least they didn’t say so on the site. I guess since subscribers can request previous issues of the newsletters, one can trace back 12 issues of recommended picks and check the performance and cry foul if they don’t match the published performance. And that perhaps is a big enough business risk to make sure they are more often honest about it than not.

I haven’t visited enough newsletter sites to know whether audited performance is a convention or whether they’re more likely to disclose more details like Zeal or less details like Chris. Anyone here seen enough newsletters to know what the convention is ?

I suspect it’s probably a wide range … sort of a if you don’t like what you see you don’t have to subscribe kinda deal … how “friendly” the newsletter writer is then depends on how much he wants your business.

[lewman]

Chris, you mentioned the mid-election fall rally trade is intended for your long term investment account. The trades that you mostly speak about are measured in days if not hours. So by long term what do you mean ?

[lewman]

FormerSanDiego you’re absolutely right; thanks for pointing that out. I’m tempted to test the mid-election rally theory with real money and it’s giving me more faith to go thru with it.

[lewman]

I suspect there’s a possibility that the mid-election year rise might have already started in July. If you look at the S&P500, mid-election year rallies didn’t always start in the fall. What has been “abnormal” is that previous mid election year rallies were all (at least the ones since 1962) preceded by a rather sizable decline. So far we haven’t seen that sizable decline.

As the likes of Best Buys are showing, consumers are very resilient and in my opinion that’s due to still relatively low rates and loose credits. Savings rates have gone negative and there’s no telling how negative it could get before it turns around, especially since countries from china to japan continue to be willing and able to supply us with cheap money.

[lewman]

I think the zero sum game in options extends to writers of options; i.e. the 90% lost by option buyers went to the counterparts that wrote the options.

Re: long term investing vs short term investment. I think it is possible to do both or at least that’s what I’m trying to do. I’m a long term believer in China and I’ve initiated a dollar cost averaging campaign using mutual funds and I plan to (and hope that I have the stomach to) hold thru market downturns for the next decade. At the same time I trade other asset classes. For me, it’s just part of my effort to diversify.

[Author]

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