As we approach the final month of the year, I've got to say that 2011 is wrapping up to be quite exasperating. I've been contemplating the source of this exasperation for quite some time, and a pair of related graphs summed it up for me nicely yesterday.
First, I looked at the percentage graph of the Russell 2000 for the year, which is down about 15%.
So that should be really cool, right? Now glance over at the UltraShort on the Russell and you'll see its net change for the year is…..-30%, right? Nope. Unchanged. Hasn't budged.
The excruciating thing about this year is that, in retrospect, we can see that simply shorting stocks and not even putting stops on them would have been the best approach. In other words – "set it and forget it". Through all the nonsensical drama we've been through – – and, let's face it, there have been dozens of "key" events this year – the cold fact of the matter is that the market is simply obeying the gravitation pull to the target of < 6,000 on the Dow by early 2013.
For someone like me, who trades actively, this is a painful reality. I want my active management to add value, but in an up/down/up/down/up/down/up/down/up/down/up market like this one, it's enough to drive one to the brink of insanity. The fact that the 2x inverse ETF on the Russell is unchanged in the face of a 15% drop of the underlying index screams volumes.
The difficult part, of course, is the second part of "set it and forget it". Can you imagine being completely short the market through the huge up-moves we've seen this year? October alone was enough to convince everyone that the bull market was back. But, cruel ironies are what the market constantly provides, and we got one with the fact that shorting everything with a ticker symbol was the right strategy when the Big European Salvation was announced near October's end.
The amount of cash in my portfolio – nearly 90% – pretty much tells you where I'm at right now. I'm too nervous about a relief rally to stay short, and I'm too convinced of the strength of the bear market to get aggressively long (I have but three long positions – IYR, OIH, TBT – that collectively account for not even 12% of my entire portfolio). For the sake of my own mental health, I can only hope we don't see the market collapse this week.
My expectation – – or, dare I say, hope – – is that we get a few days of strength to shake off some of the oversold nature of the market. Excellent price patterns still abound, but to my way of thinking, the risk of a snapback rally is too great right now to stick around for the potential party.