In my view, the S&P 500 is only one market amongst many. If this particular market is trading sideways, then I will trade something else. In my January 22 post, I mentioned that I was long gold and short natural gas. The reason I decided to put on such a trade is because gold was proving to be the strongest commodity, and natural gas was proving to be one of the weakest.
The chart below shows GLD (an ETF that tracks gold) divided by UNG (an ETF that tracks natural gas):
As the chart above rises, it shows that gold is outperforming natural gas. If you are long GLD and short UNG, you want this chart to be rising. This type of hedge has been quite profitable in the last couple of weeks; much more so than trading sideways in the S&P.
If you use your imagination, you can find many different profitable combinations. The chart below shows that you could have made a significant profit if you had bought oil shares, and shorted oil itself:
In addition, within the S&P 500, there will usually be sectors that are performing more strongly. I want to own the strongest sectors and short sell the weakest sectors. The next chart shows that biotech stocks are doing better than the market:
And, of course, there are opportunities always abound in the currency market. For example, the chart below shows that the Japanese Yen has dominated the British Pound in the last few months.
I don't know how much longer any of these trends will last, but I try to stay on as long as the trend persists, and exit only when I get my signal.
There are probably over 10,000 stocks, as well as dozens of commodities, currencies, and bonds to trade, which means that I really do not see the rationale for holding a significant portion of my portfolio in cash. There are always opportunities.
