The Market Moves to Make It Most Painful for Most Participants

Another day, another positive gain for the markets (as of 11am Chicago time).

It is getting to an almost comical point listening to all the market pundits and expert traders say the "market is overdue for a correction." They've been saying that since early May. Yet, the market clearly has a sense of humor and likes to inflict the most pain against most "prevailing wisdom." It just keeps chugging higher and higher.

The shorts keep providing fuel to push the market higher as they continue to throw their hands up and cover their positions.

If the experts can't pick the direction of the market, what makes me think I can do any better? This is all further validation to me that I have no business predicting which way the market will go. Glad I gave that up to focus on income strategies in the options market that are market neutral. Sure, when the market has a large one-way trend it requires more work on my part to adjust my positions to stay as close to neutral as possible. But there is a liberating feeling in being able to "react" to the market as opposed to attempting to "predict" it. And with the strategies that I practice, I don't have to be right.... I can still be wrong and make money. There is a nice margin for error. See this post for info on my strategy. I've made some minor adjustments to it, but the basic principles are the same.

I have no doubt (but of course I can be wrong) that this market will end its rally with a final blast to the upside which will exhaust all the shorts, and trick the remaining public holdouts into believing its safe to plow their 401(k) back into stocks. And the final insult will be the cautious speculators who have been waiting for a pullback in which to load the boat, but now fear they've missed the ride and scream "let me board!!" and throw all their cash at the high-flying stocks that have already bounced 50% or more off their lows. God help them.

History repeats itself. We've seen this before. If you have been fully invested for a while now, I hope you're being prudent and selling into strength.

Meanwhile, I'll just stay market neutral and adjust when necessary, and not stress too much whichever direction the stock market decides to head.

Now off on a bike ride to Northwestern University. Its a beautiful fall day here in Chicago. I'm gonna go read a book by the water on campus and try to obtain the knowledge of Kellogg MBA students via osmosis.

Is the stock market a dead asset class?

It should be no surprise to anyone that I do not consider myself a genius market prognosticator. Many people could have made small fortunes taking the opposite bet against my market predictions in the past - which makes me think: Why make predictions? Why take a bullish or bearish stance?

The real truth of the matter is, the majority of the time, markets are just going sideways. And in fact the stock market is only up or down a single-digit percentage (as measured by the S&P 500) for this entire decade!

Say what you will about the current statists, er politicians, in charge in congress and in the oval office... the way gov't is forcing itself further and further into our everyday lives and stifling business with new regulation upon new regulation and choking its citizens and businesses with inevitably more taxes and higher inflation...the future looks pretty bleak for American business and the stock market to make any more significant advances than it already has off of the March 2009 lows.

As such, it would appear to me that investing directly in the stock market right now would be a suckers' bet. The only strategies that would seem to make any sense are ones that trade for small swings within a range.

This is a major reason why I've adopted my latest approach to trading the markets. My options strategies are designed to be market-neutral. As long as the market doesn't move either up or down a significant percentage from month to month, my positions will achieve maximum profit. If, however, the market makes a significant move in either direction (it inevitably will from time to time), my positions can still profit with proper timely adjustments.

Think of me as an insurance company. I'm taking in premiums from others who are protecting themselves against the risk that the market will have violent swings in either direction. As long as I manage my risk appropriately and take in the proper premiums - in the long-run I should net a nice positive return.

There will still be innovation in America, and the next Google or Intel or Microsoft will most certainly hit the market soon and make fantastic gains for its early investors. But this money will go to the stock pickers - not to the indexers and mutual fund investors. There will always be money to be made for smart hard working stock pickers. As long as there is a market, there is opportunity. It's the buy-and-hold mutual fundies and index investors that will be frustrated by permanently lower rates of return.

Have I given up on America? Emphatically no! However, the reality is we are headed to a permanently slower GDP growth rate and we are at serious risk - long term - of losing our world leadership position as the home of innovation and freedom due to over-regulation and over-taxation.

Until America realizes it IS NOT infallible, this situation will not change. Many of the socialism-inspired ideas being bandied about in Washington have been tried in countries all around the world throughout history. And EVERY TIME it has failed. This is no accident. The mistake I fear America is making is that we think that because we are America - we will not fail. People believe we are the greatest country in the world with the greatest freedoms afforded to its citizens - therefore it is impossible for us to fail. Well, people seem to forget this isn't something we are entitled to. And it isn't something we should take for granted. It is hard work to maintain what made America great. We are slowing chipping away from its greatness.

The people of ancient Rome thought they had the greatest, most enlightened civilization in history. Then they took that for granted and destroyed themselves.

History repeats itself.