Keeping Your Balance on a ” SPY ” Surfboard

April 20,2013

For every $1 million you have in the market, a 1% down day means a loss of $10,000 – for the day.

Even with confidence in the performance statistics of your timing mechanism, to see a loss of 2.32% in one day, such as occured on April 15 means you are looking at  a loss for the day  of $23,200-per million invested.   That’s OK if you believe its a blip and you have accumulated some profits as a cushion.  But when it is followed on Tuesday by a gain of  $14, 800  and then a loss of $14,600 on Wednesday, you feel like texting the pilot to gain altitude and fly over the turbulence.    Then you remember,  you are the pilot.

It makes you begin to wonder whether ” play till May then go away ” is still appropriate.  Is April 15, the new May 1. ?

And,  somehow,  I must confess,  I feel more stress giving back hard won profits at the rate of $23,000 per day than any stress I feel  anticipating the possibility of losing core capital at the time I open a position.  Somehow, to me,  losing money on an  investment  decision ( with an exit strategy ) is  acceptable,  but giving back money already won is somehow negligent. Yet,  I do see some timers accept letting their  unrealized profits be dragged underwater, only to then emerge from the curl of the wave to continue to build.

Somehow, when the trip turns turbulent, I begin to become much more susceptible  to background market noise.  What about breadth divergences in worldwide equity indexes and within US equity markets ? . Why has the relationship between corporate bonds and stocks diverged ?  What about the relationship between payrolls and the S&P ?  Why isn’t technology leading this market higher ?  Will housing prices begin to weaken ?  Is gold really signaling deflation ? You get it.  None of this stiffens my resolve.  What I want is a smooth non-eventful ride.

During the past two years, the market took back 15% to 20% starting each May and that  also plays into it.

My conclusion is that market investment  capitalism isn’t just passive return on money invested over the long term, ( especially if you don’t have a long term ).  Market  timing is  work  and worry invested for  what  better be more  than a  passive buy and hold return.   If you are the ” capitalist ” you had better develop  good emotional balance because that is what is required to successfully ride the ” SPY ” ( ETF ) surfboard through turbulence.

My model says don’t do anything till the close April 30.  I just hope I have the fortitude to stick it out because every time  I’ve bailed  out of a wave with a small profit,  telling  myself  “you don’t go to the poorhouse taking a smaller profit”, its been the wrong decision and I should have waited for the final technical trigger signal, even if it meant risking a loss for the ride.  Back testing my model, I see losses happening, but not with anywhere near the frequency of successful trades nor the degree of loss.  The only specific risk I see is my nerves !

Richard Maurice Gore



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