Trading Stocks – The Ultimate Puzzle

It didn’t take long for the outcome of my last post to become obvious. Can you spell HEAD FAKE? At the time I posted it I couldn’t bring myself to go short the NAS by going long ProShares Ultrashort QQQ (Ticker: QID), even though a long term trend-following indicator gave a buy signal. For one thing, I have a bias to being long. Usually if I don’t have buy signal I’m comfortable with I’ll just be out of the market. Another thing was, I just had a gut feeling that that NAS wasn’t going down. There were too many people saying it was going down. One guy on CNBC was so “matter of fact” about the direction of the NAS, it reminded me of a friend I coined this fraise about, “Often Wrong, Never in Doubt”. My buddy can talk so assured about things, even when he doesn’t have a clue what he’s talking about. Not that the NAS isn’t going down at some point, I just don’t think anyone can say with any amount of assuredness exactly when and to what extent that will be. I know other people who are being very conservative right now too. One guy with a rather large account is 60% in bonds right now because Bob Brinker’s Marketimer newsletter says where due for a correction or something. Brinker (http://www.bobbrinker.com/) supposedly had his subscribers safely out of the market when the internet bubble burst. Then I heard about a broker that took all his clients out of stocks in December because the big one is coming. Being the contrarian I am, I figure that if all that money is on the sidelines, the next move for the markets will be up. That’s the way I’ve been playing it. For the last week I’ve been running scans that sift through my universe of stocks, and list stocks that are in general up-trends, but have pulled back to near their 50 day moving average. So far, it seems to be working beautifully. My accounts are growing for the first time in weeks. Of course this all fits into my latest strategy of adding shorter term trading to my trend-following mechanical trading systems. Those longer term indicators are giving a lot of false signals lately. Eventually every system has a drawdown. They work until they don’t. Which means it is time to scale back trade size, not stop taking the trade.