To all friends and fellow MarketSmiths,


While I still maintain my skepticism regarding the overall trend of the market, I began testing the waters over the last two weeks to see whether a profitable trend was emerging. I wanted to see if some of the better stock set-ups could gain traction. Below are the steps I took in this exercise as well as what I learned.


·         Tuesday 10/11– I began buying lightly due to the strength on the Nasdaq.


·         Friday 10/14 – During the broadcasted market strategy session, I mentioned I was wading in on the long side, but was staying small since the rally appeared fragile.


·         Friday 10/14 – By the close I was 37% invested and as a whole the portfolio gained 1%.


·         Monday 10/17 – It appeared the rally might be stalling so I began to pare back some of the longs. To hedge the risk of holding on to some of the gains in those positions, I also started to short the market indices. I felt the long positions were established well, and I didn’t want to give them up in the face of “short-term” weakness.  


Note: It is mentally difficult to straddle long and short positions. The uncertainty in this rally forced me to get creative so I could hang in there, but I would not recommend this approach for most investors.


·         Tuesday 10/18 – Weakness at the open had me trimming the long positions further. The short positions were working well.


·         Tuesday 10/18 – After the morning reversal, I was forced to cover my short positions as the market appeared to be firming. 


·         Wednesday 10/19 – Closed last remaining long positions and went to 100% cash again!


Through this two-week exercise, I made a 1% gain in the portfolio and then immediately gave back that exact amount. What this again reminds me (along with my fundamental and technical analysis) is that the market is lacking clear direction. That doesn’t mean this rally can’t work, especially if you are sitting on a decent-sized cushion. In fact, if given the opportunity, I would not hesitate to probe the long side again. But if you, too, are thinking about “testing the waters” here, now is not the time for big bets. My advice is to stay small, flexible, and disciplined. Inexperienced investors would be better off sitting out until we get more clarity. If you have to give it a shot, go back and listen to the recorded market strategy session from last week. It’s not only a good summary of the current environment, but it also gives guidance on how to survive and possibly squeeze profits from this difficult rally. The short version: Stay small, be nimble, and lower your expectations.



Best Returns,


Scott O'Neil

President, MarketSmith Incorporated

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