Enjoying the market slide...

I know that is a bit of a strange title for the post, but recall that I have always said that I don't care is the market goes up or down, as long as it picks a direction and sticks with it for a while.  Since I trade on momemtum (using the 40-day moving average), I stand to gain as long as the market (or a particular security) continues to move in the same direction.

In late April and early May, the moving averages told me to get out of stocks and the positive ETF's and then to get into the negative ETF's a few days later.  Now, I had been burned on this type of signal before, as the market just lingered and reversed course a few days later back to the positive.  In this scenario, an investor who doesn't touch their holdings tends to break even but an investor who follows moving average signals (like me) tend to lose as stocks reverse course (twice, in this case) quickly.

This time, I was happy to get out of stocks (at first) and preserve capital.  After a couple of days, though, when it looked like the market would continue to drop, I bought into HBD (to bet against gold bullion), and HSD (to bet against the US S&P index).  Both bets have worked well for me so far, and I got out of the HBD a couple of days ago when the price of gold started to rebound.

One commodity, natural gas, has done well over the last little while, and I have enjoyed some gains in HNU (leveraged, so be careful) as the price of natural gas went up.  Even though it has a lot more room to recover, I think the time of year is wrong for a full recovery so I got stopped out of HNU late this week.

A new way to profit from a market downtown, the US VIX, or volatility index, is also of interest to me.  HVU (an ETF that returns roughly double what the VIX percentage gain / loss is) went into buy territory recently (under $5), so I picked some up.  With the HVU price now at $6.51), the percentage gains have been good.  While I will continue to play HVU, history indicates that the highest volatility is usually later in the summer (July / August), so the market may bounce positively a bit before then.  Either way, my gains in HVU are good enough that I can endure a bit of a slide and still have a profit.

The goal in markets like this is not necessarily to profit (by holding the inverse ETF's), it is to preserve capital by NOT holding the securities that are going down.  North American markets were down 3 - 5% this week alone, so by not holding any of these securities, I have saved myself this money.  That is not counting the 1.4% I actually MADE this week on the securities above, so my effective return is more like 4.4 to 6.4% for this week alone.

By following moving averages, I will never sell at the top of the market or get in exactly at the bottom.  I will, however, benefit from downward moves in the market like we are in now, as share prices (and their moving averages) drop to lower levels.  As stocks recover and pass up through their 40-day moving averages, I will get signals to buy them back, at levels much lower than where I sold them.  This is why my method is much better than the 'buy and hold' method that most (lazy) advisors employ and try to convince investors is the best way to go.  Those that advocate holding dividend-paying stocks through thick and thin should look at this week - overall, investors lost all of the dividend interest return for the ENTIRE YEAR in only this SINGLE week. 

So far this year, I am up 4.4% overall.  This compares to the TSX at -5.64%.  (yes, I am currently beating the TSX return by just over 10%).  This compares to the US S&P 500 at 3.86% YTD.

I am not sure if I will get into the inverse ETF's more or not (the HED, HFD, HQD, HOD, and HXD have also done very well lately) but I will remain mostly in cash and wait for things to turn positive again and jump back into stocks and the positive ETF's.  For now, I am happy to preserve capital and profit slightly from my investments discussed above.