My YTD stock returns, all pain, no gain

Well, bullish investors are loving life right now. The market has rallied over 40% since its March lows and now sits near its October 2008 level.

Of course, I sat this rally out.

I am starting to think I’m what they call a “Permabear,” someone that always believes that stocks are overpriced and will decline. It’s true. I tend to see all of the reasons why stocks should go down. But they don’t. And because I was sidelined (took my money out of the market) for much of this year, I missed out on this sweet snap-back rally.

Even worse, recently, I bought a large amount of SH, an inverse Exchange-Traded Fund (ETF) that rises when the S&P declines because I believe that the U.S. stock market is in the midst of a long-term bear market.

Well, today I got “stopped out” of this investment for a loss of $900 or 10% (I invested $9,000).

“Sell stops” are orders you place with your broker to sell an investment if it declines to a certain price or by a certain percentage relative to the price on the day you buy it.

This has happened to me a number of times this year. And do you know what invariably happens when my sell orders are executed? The stock prices bounces back the next day and I miss the rebound! Man, do I suck at investing!

That is why stop-loss orders are a double-edged sword. They are handy if the stock falls well below your order price and thus protect your profits and/or capital. But more often than not, the stock hits your price and then rebounds but you don’t get to participate in the revaluation.

What will I do now? Will I get back into an inverse ETF on the Dow or S&P? That depends on what I believe will happen in the economy and how that will play out in the market. I still think the market is in a long-term decline and can only be propped up by inflationary government spending.

At the moment, I am still betting that deflation will win out over the medium-term in spite of the high government spending. Banks are hoarding the government rescue packages instead of lending the dollars out since they have nobody to lend to. Also, there are important crises brewing that need to be resolved before I can give this market an all clear signal. A lot of exotic mortgages will be reset over the next two years leading to more home foreclosures, the jobless rate looks likely to hit 11% also negatively affecting the housing market, California could default on its debt, possibly causing a loss of confidence in the U.S. dollar, and the list goes on.

I might change my mind depending on how things go over the next few months. In particular, if the Federal Reserve continutes to commit to buying US government bonds to finance new fiscal stimulus packages, that would be a very inflationary signal.

At that point it would make sense to invest in commodities and stocks to protect against the loss of purchasing power even though commodity markets have already rallied significantly.

At the moment, I am sticking to my guns and will likely get back into an inverse position on the S&P. I hate being so negative but I am not buying this rally..

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