Why I Continue to Sit Out

  • Posted by
  • on September 11th, 2011

On July 26th, I wrote a blog post about the warning signs I saw in the stock market. I went into 100% cash and thankfully avoided the carnage over the past 6 weeks. Not only have I protected my capital (as my account sits near its highs for the year), but I have also protected my confidence by not getting tossed around in this crazy, volatile market.

I have received many questions over the past 6 weeks such as: Why don’t you short? What do you do for money? Why don’t you daytrade? My answer to all these questions is simple: DO WHAT WORKS FOR YOU! I swear, life would be so much easier if people didn’t try to impose their beliefs on other people. I think this applies to trading philosophies, political views, and sports teams. For example, if one person is a day-trading, Democratic, Yankee fan, why should he care about the long-term investing, Republican, Red Sox fan? In other words, focus on your own life and stop worrying about controlling other people’s lives and beliefs.

Personally, I acknowledge my strengths and my weaknesses. I have been trading for 16 years. For the first 12 years, I used to do very well during market uptrends…only to give back a good deal of profits during downtrends. I made one simple adjustment over the last 4 years: I now go to cash and SIT OUT when I see potential warning signs. If I’m wrong, I could care less because I am confident I can make the proper adjustments and get back in the market, even if it’s at higher prices. I stopped worrying about “the fear of missing out” (which is the downfall of most traders) and I got more concerned with respecting risk and playing defense.

I believe shorting is very difficult. In his Market Wizards interview, William O’Neil said: “I have only made significant profits on the short side of two of the last nine bear markets.” In other words, if one of the best traders of all-time finds the short side challenging, then who am I to try and re-invent the wheel. Again, DO WHAT WORKS FOR YOU!

Another reason I sit out is to take a mental break. I consider myself such an intense and aggressive trader during market uptrends, that I prefer to relax during corrective periods, especially because these are the times when most traders get “chopped up.” Keep in mind that no one on their deathbed ever wished they worked more in life. They wish they spent more time with their families, spent more time traveling, etc. I have no problem with working hard, but I prefer to “work smart.” That’s also why I don’t have a subscription based service where I am required to give daily stock ideas. I refuse to deal with narrow minded, junkie traders who get mad when you don’t have stock picks to give them, rather than appreciate that you are keeping them out of the market and protecting their capital!

Right now, I am torn between the possibility of another leg down in this correction and the potential of the Fed intervening to “support” this market. My answer to this conflict is simple: WHO CARES! PREDICTIONS ARE USELESS! When conditions improve and quality setups begin to emerge, I will get back in. For now, I remain defensive and continue to sit out.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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