The end of the year is a good time to re-examine and reassess things. All kinds of things, really. Personal things, life decisions… Okay, yes, our diet, thanks for bringing that up. This is also a very good time to reassess all things financial. At this point many, many individuals have put off opening those account statements because, given the fact that there isn’t much one can do about money that has already been lost, the thinking goes, “why inflict more pain on myself?”  And that is understandable given human nature. Still, at some point the need to simply be responsible for making one’s way in the world enters the picture. And there too lies a bit of the problem these days.

Somewhere along the way in the past quarter century, too many individuals developed the idea that increasing wealth was something of a birthright, and in the process convinced themselves that “the stock market always goes up.”  Now a simple study of history might have disabused any reasonable thinking person of this notion (note the lack of any stock market gains from 1929 to 1954, 1966 to 1982 and 1998 to the present). But you know when the punch is flowing and everyone is having a good time, it’s hard not to “go with the flow.”  And so it has been for quite a while now.

When something “goes wrong” nowadays, the near automatic reaction is not to “roll up one’s sleeves” and to use ingenuity to solve the problem, but rather to determine “whom to blame” and to intone somewhat indignantly that “someone should do something.”  And somewhere along the way it became okay for that “someone” to be the United States Federal government and for that “something” to be to throw taxpayer money at, well, whatever the problem de jour may be. And this trend appears highly unikely to end anytime soon. But eventually - like all trends - it will reverse. The only questions then are how far will things go in that direction in the meantime and how much damage will be done in the process.

The Pendulum 

Many things that we encounter in life seem to swing on a pendulum. Some times things swing one one, sometimes the other. Sometimes the pendulum swings much further in one direction than anyone expects. And all too often when that pendulum does pick up momentum and moves decisively in a particular direction, we forget that most things move only so far in one direction and that eventually things will swing back in the other direction. And often when it does, the results are swift and severe. This is why crude oil advances from $45 a barrel to $148 a barrel, and just when “everyone is certain” that $200 a barrel is the next stop, crude oil collapses all the way back down to $45 a barrel. And while most people hailed this particular ultimate turn of events, those holding energy stocks – or any stocks for that matter - most certainly did not. The shock to the system of the initial upswing caused a great deal of upheaval. This phenomenon is also what makes people buy at the top and sell at the bottom in stocks, bonds, real estate, commodities, etc. It is simply human nature to extrapolate the current trend and to assume that it will carry on ad infinitum. Ultimately the inevitable swinging of the pendulum often creates chaos and fear for most. And yet at the same time, it creates great opportunity for a few.

The Season of the Trader

The truth is that there has never been a better time to be a trader. And when I say “trader,” that is different than an “investor,” at least as I define it. In my book, an investor is someone who puts money into something and then exhibits a little bit of patience in terms of allowing the idea to work out. A trader, on the other hand, is someone who exhibits very little patience in waiting for something to work out. If the trade goes the right way the trader will either take his or her profit, or at least attempt to lock in a portion of the open profits. And if the trade goes the wrong way then the trader will quickly and ruthlessly cut his or her loss and move on to the next trade. And like I said, there has never been a better time for good traders. Markets are moving like never before and for the most part are trending fairly nicely, lending a strong bullish or bearish bias to one's trading activity.   

This raises an interesting question for many would-be active market participants. If one has never before been a trader, is now a good time to start? The answer to that question depends on what you mean by “start.”  If by “start” you mean dive in head long and start jumping in and out of trading vehicles that you have never traded before in a manner in which you have never traded before, then the answer is a resounding “no.”  If, however, by “start” you mean begin to investigate and learn about opportunities for making money that go beyond simply buying a mutual fund and holding “forever,” then the answer is “yes.”  And yes, I am talking here about things like options and exchange-traded funds [ETFs] and closed-end funds trading at discounts to net asset value of 30% or more and gold stocks and FOREX markets and futures contracts and so on and so forth.

Wither Stocks?

Don’t get me wrong. When one surveys the wreckage among the stock market it seems safe to say that there are likely many bargains out there at the moment. But which of those that have “crashed and burned” will actually survive and ultimately thrive?  It beats me. In all candor, one thing I have never been is a good “stock picker.”  I have, however, observed others whom I consider to be good stock pickers. And to be equally candid, one thing that I have noticed above all else is that most of them are way better stock pickers when the stock market is going up than they are when it is going down. As the saying goes, never confuse genius with a bull market. On the other hand, the list of other possible trading vehicles that I mentioned a moment ago, do not require a bull market in stocks in order for a trader to make money.

Option strategies can allow you to make money in up markets, down markets and even neutral markets (“Fly Your Way to Profits”). Exchange-traded funds offer the opportunity to make money in the stock market, the bond market, currencies, metals and other commodities - from either the long or the short side. Many closed-end funds have been “kicked to the curb” and presently offer near historically large discounts to net asset value (i.e., the opportunity to buy $1 worth of stocks and/or bonds for $0.70 or less). And the FOREX and commodity futures markets are worlds of opportunity unto themselves.   

What “Not to Do”

If you have never traded or even thought about trading in any of these unique areas, there are two things you should not do at this exact moment:

• You should not rush out and start trading in any of these markets tomorrow;
• You should also not turn away and so “no, no, no, I refuse to even consider these markets.”

Let’s face it: non-traditional investment vehicles scare a lot of people. We are a generation raised on and ingrained in the notion of the superiority of stock ownership - even if only through an intermediary such as a mutul fund. The message that individuals should learn from the stock market results of 2008 is not that “the stock market is a disaster” and that you should from here forward eschew stocks. The lesson one should learn is twofold:

• Stocks do not always go up, and;
• There is a world of opportunity beyond the stock market out there if one is willing to do the work necessary to take advantage of those opportunities.

Our forefathers could buy stock, buy bonds, hold cash, or (for the really daring) sell short individual stocks. They never had the opportunity to create low-risk positions with options, or to play the short side of the overall market with inverse ETFs or to buy gold or silver just like buying a stock with commodity linked ETFs, and so on and so forth.   

Pause to Consider the Possibilities

Please remember that no one can or is going to try to force you to trade options or ETFs or FOREX markets. So the question at the moment is “what’s to lose” from at least examining the possiblities? No one knows what the future holds. Right now one can make the case that much of the bad news going forward has already been discounted, that stocks are cheap and that now is the time to be loading up once again in the stock market. On the other hand, one can also make a fairly compelling case that things are still in the early stages of unraveling.

As a result, “uncertainty” remains the watchword. What will happen to the economy?  What will happen with unemployment?  What about the stock market?  And most importantly, how will you personally be affected by all of this?  Your guess is as good as mine. The bottom line, however, is that the markets will continue to fluctuate, thus ever offering opportunity. As a result - and as far-fetched as it may sound at first blush - the job of “trader” might just be the safest, most recession-proof job there is.

And as I said, there has never been a better time. Something to think about during this season of reflection.

To search for previous articles written by Jay Kaeppel, please click here.

Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site