Always Respect the Stock Market

There are days where you look at the market in disbelief. Today would be one of those days!

If someone would have told me this morning that the DOW was going to go up 200 points on a day where MBIA and Ambac lost their AAA ratings and oil rose $5, I would have asked them what drug they are on because I want to try some.

Its days like today where you have to respect the power of the market. The market beats to its own drum and sometimes it plays out of tune.

When it comes to investing, the minute you believe you are 100% right is the time where you must sit down and think in a rational manner.

How many investors bought houses in 2005 "knowing" that they were going to make huge returns by flipping them a year later? They realize today that they were wrong. Investing when you just know you are right is usually when you take your biggest losses.

Why do you think Goldman Sachs, the best trading desk on the street, has a risk management department that hedges against the trades that the firm has made?

Now have my views changed on the economy? Hell no. In fact I am more confident today than I was yesterday that this economy is going to blow up. Does that mean the stock market is going to go down tomorrow? No.

I have aways had long positions and short positions to hedge each other in crazy times like today. I do this because I am smart enough to realize that a highly volatile market will always be a step ahead of me. I am mainly in cash right now because the amount of speculation and desperation that I see out there are at levels I have never seen before.

This market frankly scares the hell out of me. I go to fixed income when I think the rug could get pulled out from under us at any second.

Consider the news today. Here are the links:

- MBIA and Ambac lose their AAA ratings

- Europe announced it may raise interest rates in July further pressuring the dollar.

- The Fed's Lacker came out today with this warning on Ben Bernanke's recent actions:

"June 5 (Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker, challenging Chairman Ben S. Bernanke's unprecedented actions to stem a financial panic, warned that lending to securities firms raises the risk of future tumult."


Does this look bullish to you?

It doesn't to me either. What scares me most is the Fed seems to be in "warning" mode versus saying everything is OK. Its very rare to see a Fed chairman talk so hawkish about inflation like Ben Bernanke did yesterday.

When they look nervous I get nervous.

Bottom Line:

The bottom line here is you should always have an investing thesis, but you should also diversify your risk because you might be wrong. There have been a lot of smart people that have been on the wrong side of a trade before.

Many millionaires on Wall St. go BK more than once because they are willing to take huge risks to make millions. That's the culture of the street. Most of the guys that do go broke end up being millionaires again down the road. I know a few personally.

This is a very dangerous market right now. Even the pros are having difficulty navigating it. The best thing for the average investor to do is go to some fixed income and ride out this storm.

Days like today always remind me to be rational with my investing. I think we are in deep trouble but the market looks like it doesn't feel this way. When you see the market trading irrationally remember that Cash is King!!

I will take my 5% return from bonds and jump into the market mayhem when I believe its trading more realistically.