King Cash?

With the Dow Jones breaking below its March lows, it seems like Robert Prechter’s predictions are finally coming true, the bear market is in full force. The S&P 500 and the Nasdaq are not much better off, as they are all below the 200dMA.






So does this mean that we are supposed to hold our assets in cash and wait out until the markets hit rock bottom or Prechter changes his views?

This would not be advisable either. As the Federal Reserve does not make any effort to strengthen the dollar, cash is a depreciating asset. Sure, you could buy Euros, or Pounds or Yens, but then, aren’t you back to the chart reading, or guessing game you wanted to avoid by staying in cash?

I have been aware of Prechter predictions for year, in fact, I started trading options and the Elliott wave after his book “At the Crest of the Tidal Wave” back in 1995. I was so fascinated by the book that I begun to read about Elliot’s theory and found a book with the insights to take advantage of the Elliott wave in my trading. The title was “Elliott Wave Explained” by Robert C. Beckman. My early experience with Beckman’s techniques was so great, I sought more leverage and begun to trade options. It became clear to me that bearish forecasts were a lot harder than bullish forecasts. As the end of the bull market approached, a parabolic growth in the Nasdaq developed. I was lucky in that I decided to stick to options and sell stock positions, simply because the options, at least, had a limited risk.

From that early experience with the Elliott wave and options trading, I learned some valuable lessons, specially not to buy stocks and to limit my risk trading options. Instinctively, I knew that there had to be a way to use the two main features of options: limited risk and leverage, to take advantage of the markets, no matter what direction they took. I searched for years, first avoiding the markets, then taking seminars, as though the answers were in the knowledge of others. This search from the answers elsewhere was a long journey, but eventually lead me to a few pages in Lawrence McMillan’s book “Options as a Strategic Investment”, and what I now call the PCCRC: Put Call Calendar Ratio Combination.

My discovery, testing actual trading of this approach has lead me to believe that I don’t have to be in cash, barely surviving inflation, and having my assets depreciating in comparison to other currencies. I am moderating my risk trading the PCCRC, and I could actually profit from a collapse in the stock market, if this is to happen rather quickly, as it usually does (see the 2000-2003 decline).

I am not investing in Real Estate, I am not buying stock, and no, I am not trading more than 10% of my assets in the stock market. I have my assets in CD’s, which barely keep me above water when I factor inflation. Yes, I am losing compared to the Euro dollar, but I figure, I will spend my money where I live. If I ever decide to move to Europe, then I worry about that. In the meantime, I am growing my portfolio with the PCCRC, regardless of the market direction. You see, one of the most remarkable features of the PCCRC is that the rollovers, profit taking and exit moves, usually result in the freeing of large amount of cash, so I am always looking for the next candidate. This is really foreign to stock trading. When the markets are down, investors are in shock, with little cash, and unable to exit the losers to enter new winners. At market bottoms, investors are absolutely not in the mood to reenter the markets. In fact, very often they refuse to sell their beaten down positions, hoping that they would eventually go back up. Imagine those that were “fully invested” at the top of the market, and refused to accept the truth as their assets decline.

I don’t want to make light of the misfortune of others. In fact, I want to illustrate how I was in the same boat years back in Sept 2000, when I held AAPL as it fell about 50%, wiping out 17 months of gains. Perhaps this very loss was what kept me motivated to find a form of trading that could not only protect me against this catastrophic loss, but actually profit from it. After all, Prechter is projecting the DOW to go to 500 (currently at 11,600). Ironically, from 2003 to 2005, I had to see the markets perform well, without my making a dime. I wanted very badly to be in the markets, but I found I had lost my touch. Whenever I entered a bullish position, the markets would reverse, whenever I was bearish, the markets bounced back. Still my sentiment remained bearish overall.




By 2006, I was back. I made 30% trading the PCCRC, and last year I made 70-75% trading almost exclusively the PCCRC. The beauty of this form of trading is that I lost my fear of market gyrations. In fact, I found myself ignoring the markets, CNBC, and everyone’s opinions, including Prechter’s. I no longer need to be in the gloom and doom camp. I have found my way.