Keeping in mind that I full-well know that my approach is antithetical to just about (actually, "all") major and 99% of all smaller money management firms, it might seem just a tad egotistical to entitle today's blog with above title. I wish it was simply a case of my ego trying to trash all the other egos out there with totally different opinions as to "The Best Way to Play this Current Market."
But, it is not my goal or objective to trash anyone's ego-based investment strategy. I may happen to believe that ego is just another word for emotion and emotion is a horrible investment strategy, but I digress.
It is not an opinion or my ego that determines the best way to play this current market. No... what you and I and every investor in the world 'should' agree with is this: If there is a mathematical model that can determine the best way to play this (or any) market... and we know math is not opinion-based... math is... simply... math... then, it would behoove all of us to solve this puzzle (problem) with the appropriate number of unknowns and an equation for each. All it takes to solving any mathematical problem in the world is having the same number of equations as there are unknowns in the problem (equation).
Now, before your eyes roll back into your head and you quickly turn to that talking head who is telling you that the market is in a melt-up or melt-down or on the verge of a collapse or getting ready for the biggest boom since the dot-com bubble, let's solve our equation for "The Best Way to Play this Current Market"... instead of the using the tried and rarely true way that all the other financial advisors use... buy-and-hold with a big ladle of guessing on top.
The problem: What is the best way to play this current market.
How much longer will this current bullish trend last? Answer: It will last until it ends.
How much higher will this market go before the bubble bursts and it falls into a world-class bear market? Answer: We don't care (more on this in a moment).
How much risk should I be taking in this current market? Answer: Totally up to you (more on this in a moment).
How can I protect myself from a huge loss if the market moves into a 30% to 70% bear market? Answer: This one is really, really easy (more on this in a moment).
Which stocks and/or ETFs should I own in this current market? Answer: The ones that have an upward trending price trend, strong volume, good company fundamentals.
Which investment guru should I listen to the most? Answer: None of them; they are all guessing.
How much studying should I do to make sure I am buying the right equity at the right time? Answer: Very little.
How much studying should I do to make sure I am selling the right equity at the right time? Answer: A lot more than you are right now.
How do I get a handle on this market since I can't seem to figure it out? Answer: No handle is needed. No one has a handle on the market; but the math does (more on this in a bit).
What make you so *^((&% smart? Answer: I'm not... it's just math.
There... I think we have enough equations to solve the problem...
It is a mathematical fact that:
The current trend in the market will last exactly until it doesn't... therefore... what matters is knowing when the current trend will end and since on one knows that, we let math tell us when the current trend HAS ended. So, there is absolutely no reason to worry about when the current trend will end if we constantly monitor the current market to know, mathematically, when the upward trend moves into a downward trend. Pretty easy to do that math... if you can tell when a positive trend turns into a negative trend.
We don't care how much higher this current trend will go because a) we know when to get out (stop loss settings), and b) we know how to make money in a bear trend with inverse ETFs. Our financial success does not depend only on bull markets... not by a long-shot.
As for risk... This has a lot to do with #2 (no... not THAT #2... the #2 in this list, above). Since we don't care how much higher the current market will go and, by extension, we don't care how much higher any holding will move in share price, we decide exactly how much a position (or the market, for that matter) can move against us and still be in an up-trend. If you believe in IBD, maybe that's 8%. Of course that makes the assumption that 8% is the right stop loss for any stock regardless of that stock's normal volatility range. For a small number of stocks, 8% is perfect; but, for the vast majority of stocks, 8% is simply the wrong number. I calculate what a standard deviation of normal volatility is for every holding in my client portfolios. I know, mathematically, how much a holding can move against me and still be in an up-trend. If that percentage, for a given holding in your portfolio is higher than you are comfortable with, then find another holding with a lower standard deviation percentage. Bottom-Line: Your stop loss strategy dictates the amount of risk you are willing to take on. The larger the stop loss (meaning the amount the holding's share price can move against you), the more risk you are willing to take. So, risk is no longer a guess or a hope... it is simply a math equation based on each holding's normal volatility.
Your stop loss strategy, as defined in #3, above will keep you from losing a lot of money in the next major bear market. Set your stops right and the fear of a major market correction becomes moot.
Now, armed with the above equations for all the unknowns regarding "The Best Way to Play this Current Market", the answer should be self-evident. It is to me... but, just on the oft chance that math was never your strong suit... no worries.
Here is the best way to play this current market:
Be bullish as long as the current trend remains bullish.
Find equities that have as much volume as possible, good strong fundamentals, standard deviations of volatility that are within your risk tolerance, and are trending higher.
Set your stops at 1 to 0.5 standard deviations of normal volatility below daily closing prices of your holdings and never lower your stops... only raise them over time.
Invest as much as you are comfortable investing on the long side.
Now is not the time to play the short side; at least not according to the trend data that I watch.
Don't get caught waiting on the sidelines as this market booms higher, but always assume your best trade is dead wrong and will completely reverse trend at any moment. That's why you must have intelligent, volatility-based stops in place on every holding.
Now... get out there and take on the investing world and quit listening to the doom-and-gloomers or the nothing-but-clear-sailing-ahead fantasy promoters. Do your math and put your money to work.
And... if you are not a client of mine... ask yourself one more question... Why not?