Surprising Bullishness

I expected the markets to be lower by now. Luckily, I haven’t backed completely out of my Ultra Semiconductor position yet, allowing me to benefit from the fund’s 3.5% gain on Friday. The remaining position is up 13% overall.

While the upsurge is surprising, it’s not without precedent this time of year. Last year, my Double The Dow portfolio gained 9% from its May low to its July high, then lost 10% from its July high to its August low. It then recovered 24% to its March 2005 high. So far, this year is following a similar pattern. We saw high prices early in the year, then a drop, then a recovery to now. I still think we’re poised for a pullback.

When that pullback comes, individual target stocks should present an even better bargain than the indexes. Last year, Sun Microsystems lost 45% from its February high to its August low, then recovered 72% to its December high. From that high to now, the stock is down 36% at $3.63. I think we’ll be able to buy it below $3.50 in the next month.

I wrote on June 19:

I’m toying with the idea of buying puts or shorting something ahead of the sell-off that I expect. I’m very careful about such moves, though, and am quite content to let the urge pass more often than not.

That turns out to have been the right instinct. With bullishness knee-deep, the expected lower prices ahead have gone higher. The options I was considering are now down 74% and 86% respectively. If we finally enter the lowering phase, I might consider buying the options at these extreme discounts, but overall I’m happy having nothing to do with them. Watching them spiral downward has been like standing on the roof of my home watching a tornado rip from its foundation a different home I’d considered buying. Sure, I might have a chance to buy that home at a super discount now, but my primary emotion is relief. Look what didn’t happen to us, honey.

There’s a lot to that, folks. Professional money managers spend almost all of their time crowing about upside performance. What about downside? You’ve heard the adage, “It’s not what you make, it’s what you keep”. It’s true. In the past three years, this website has made money on 87% of its trades. You can see the record here. Some opportunities get away because I tend to be overly cautious and patient, but that pays off. It’s still a time for patience.

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