What goes up must come down. Unless you are the stock market these days. I can count on my two ring fingers the number of down days we have had in the last month. What goes up will eventually come down. It just may take a while. Especially when the Fed keeps filling the market with $45b worth of helium each month.
My phone and email box has been rather busy these days with traders and students wondering how we deal with this market. Market neutral strategies are based on a statistical expectation of markets staying within a range within a given time. However on occasion markets do get stretched and momentum and other factors can push them outside of expected ranges. While we can analyze and try to figure out why it is happening and why it should move back in the other direction, our priority is to manage risk and make sure we preserve capital.
There is an old saying, the markets can remain irrational (and I’m not saying that is where we are now) longer than a trader can remain solvent. I have seen many traders stay true to their market convictions and stay in positions until they were margined out by their clearing firm and put out of business. The type of market we’re in is no fun for the market neutral trader. Stay with your risk management and don’t be afraid to take a loss. Implement a sound strategy and discipline and over time you will weather these times and be profitable.