Appearance is important to many. With that in mind here’s one secret on profiting from market turns and maintaining an appearance that you can actually spot them.

Flexibility in the Market

That’s the secret, you may know it already. Just as yoga is great for keeping your body flexible and strong, averaging in and out of markets is the way to maintain a flexible and strong portfolio.

I use 50%-150% equity market exposure, with the majority of the time spent in the 80-120% area.

Since around the March market low I’ve sold 11 options in the US, a put in late February and then 10 calls, four of which are for November. The positions are listed below. I almost feel sorry for my broker. Two years ago I was making that many trades most months.

I only now noticed the shoes on the model. It appears she is not practicing yoga as I assumed, still full marks for flexibility.

It still smarts thinking about that LUK call, despite being a profitable round-trip, Leucadia was unfairly sacrificed near the market lows on little more than a last in first out basis.

How to spot probable market turns: I use probabilities based on fundamentals, historic distributions and TA 101 as TraderMark put it. Looking at the option trades you’ll see how as the market became more stretched I sold more calls, with 40% of my calls sold in the last month.

While I wasn’t positive we’d see a short term peak in October, at over 4800 on XJO, S&P/ASX 200 (^AXJO), it was probable. Hence, why just over a week ago I said the All Ords was set for a nasty snapback and back in Mid October as the XJO jumped above 4800 and the S&P 500 closed in on 1,100, I said the following in my correction they say we must have post. “I’ve spent sometime this morning running various future price scenarios for the S&P and my conclusion is that it is very unlikely that waiting to see the momentum change will result in better sale prices. Hence I’ll continue to stick to my averaging out plan. “

To card players this will seem simplistic. I basically increase my bet when the odds are in my favour, the better the odds the higher the wager. Hence in October the odds appeared strongly in my favour so I increased my conservative bets. I use the same odds philosophy as part of my position sizing algorithm; I wonder if I can keep a straight face when calling a hodgepodge of factors an algorithm.

An added benefit of averaging in and out of the market is it should enforce rotating out of fully valued companies into undervalued companies.

No, I don’t always get it right and yes I still have a lot to learn, but my results are encouraging and it’s rather pleasant to celebrate good calls. Even if a tad prematurely, as good news could arrive tomorrow sending the market into a new up leg or for strong Reflexivitists the market could head higher tomorrow and thus turn the news flow positive.

I can’t reliably time the turns. If I could then the drinks would always be on me. However, on infrequent occasions when the elastic band is pulled as tight as it was my timing is more accurate, though never certain. The market could have continued sideways to the end of year and might even still do so.

Getting back to my opening comments, people can give the appearance of market timing by consistently posting about the next market turn and can gain the appearance of timing by increasing those predictions as the probability of a turn increases. I may be ‘people’.

If I could reasonably time the market I would buy more options. If I could embrace momentum I would buy more options. I can’t yet, so I mainly sell options. In real life I sell more options as the elastic band gets pulled tighter, as fear or greed move to extremes.  As I said yesterday “I predominately sell calls on fully valued companies increasing the number sold when the overall market hits my fundamental historical and TA targets then buy puts, enter bull spreads and buy LEAP calls when fear strikes.“

Looking Forward

To paraphrase a useless cricket commentator, the market could go down, up or sideways from here. The following quick chart shows one possible path. I’ve said before how I like to read the leaves of at least three scenarios with weighted probabilities. Over the next two months I give 4900, 4500 and 4000 on XJO almost equal billing, with a skew towards the downside. [Update I wrote this on Monday, with the 50DMA now decisively broken the downside is in control. It will take some very good news for the uptrend to regain traction.]

Looking forward in Dinoland. As I learn more, increase my tools and confidence I can see evolving from my 50:150 to -50%:150%.

There’s one thing I been meaning to discuss with you. SAP Project System software is on my short list of  things I’d consider myself an authority on. As an authority on project systems I may be biased, but people appear to under utilise project management in their lives. Project management and probabilities are cornerstones of my world.

1. Name and describe the objective.
2. Break it down into small achievable tasks.
3. Do it and refine as you go.

Be the squirrel, break down your insurmountable objectives into discrete easily achieved tasks, do it one nut at a time.

To get to to -50%:150% I’ll have milestones of 0-150% and 25-150%. Actually, it’s coming up on two years since I was at 50%, so that can be my first target. Now I better get busy with the tasks required to meet my objective.

Percent invested is just one tool in a entire toolkit that I have yet to master. I look forward to that mastery.

Five ways to maintain flexibility.

1. I’ve covered percent invested, it deserves a place at the top of the list.
2. Sector.
3. Market cap. Is big the next black?
4. Volatility. Embrace it, use it.
5. Embed yoga within your life. Going to a yoga class is better than nothing, but embedding yoga in your life is easy to do and it’s free. Think posture!

In summary. Stay flexible by altering your percent invested. Use probabilities based on fundamental historical data and technical analysis to determine your market exposure. Use project management to help you achieve more in life and business.

Related posts:

1. Random Ramblings on Margin, Market Timing and Investing Secrets
2. Buying at market bottoms and GE