When to “trade the market”

I had to run out for an errand immediately following that last post about trading stocks vs. the market but after reflection upon my suggestion that one might be better off trading or investing in stocks with the best looking individual chart patterns, I realized that it may have come across a bit contradictory or hypocritical as I do occasionally add broad market etf's such as the SPY & QQQ as trade ideas on the site, even trading these personally at times.

There are several reasons for this such as the previous stated reasoning that many traders & investors use these etf's as proxies for trading the broad market due to the relative safety they provide through diversification, not to mention the fact that most broad market indices have somewhat rigid screening criteria that the individual components must meet to qualify for inclusion in the index as well as criteria maintain to remain the index (which takes away some of the due diligence normally required by an investor).  For example, click here to view the screening criteria for the S&P 500.

More importantly, these broad market tracking etf's will be included as trade ideas at times because many investors simply don't have access to trade or invest into individual securities.  For example, tax deferred retirement accounts such as IRA's and 401(k)'s do not allow short-selling.  Therefore, unless one has an options agreement on file (and the experience needed to successfully trade put options), shorting within retirement accounts is usually limited to purchasing inverse (short) etf's or mutual funds.  A viable and cost effective option to either a pure play short on the market or even to help hedge portfolio of longs against a market drop would be some of the numerous short etf's, such as SH or SDS, for example.

On a related note, I'd imagine there are quite a few visitors who frequent the site who have most, if not all of their long-term savings (investments) in their retirement plan and even if they only have a typical 401(k) that only allows their contributions to be placed amongst a limited pool mutual funds which were previously selected by their employer and plan administrator (e.g. XYZ Large-Cap Growth Fund, ABC Gov't Bond Fund, ACME Small Cap Fund, etc..), they might benefit from the broad market analysis or trade ideas posted on by deciding to position in a related fund.  For example, the SPY tracks the S&P 500 which is a broadly diversified index of US large cap stocks.  Almost any 401(k) plan would most likely have a fund tracking the S&P 500 Index or some similar type Large Cap Fund.  Ditto for IWM (Small Cap), EEM (Emerging Markets), TLT (Long-Term Gov't Bonds), etc...  Therefore, a 401(k) investor might consider adding to (or transferring out of) their S&P 500 Index or Large Cap Growth fund if they agree with a case made here to go long (or short) the SPY.


Jan 28, 2013 4:08pm|Categories: Trading Tips, Using RSOTC|Comments Off on When to “trade the market”