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Is anyone here market neutral at least some of the time?

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May 12, 2009 – Comments (3) | RELATED TICKERS: NEU , TRA.DL , L

Presently, this is my strategy for the various types of market cycles:

1. Cheap market: Almost 100% long.  This is the easy kind of market in which to make money.  I'm confident in this type of market.

2. Average/normal market: Still mostly long.  I believe there are still bargains to be had in an average market, although they are not nearly as juicy as they used to be in the cheap market.

3. Expensive market: This is where I run into trouble.  My current strategy is to pull out mostly into bonds when the market gets way too inflated.  However, it would piss me off greatly to watch stocks as a whole going way up to incredibly irrational levels while sitting on the sidelines.  I've been pondering the use of a market neutral strategy for this type of expensive market.

I want to focus mostly on the expensive market.  I am generally a long-only investor.  I believe that carefully chosen value stocks can beat the market on the way up AND down.  If a stock's price is beaten down more than it should be, then it only makes sense that it'll go up more than the regular market when the market goes up.  Also, when the regular market goes down, an already beaten up stock has less room to go down.  

I know a normal market neutral strategy might include handpicked pairs of undervalued and overvalued stocks so that long/short exposure stays equal and to achieve a beta of 0.  Since I'm better as a long-only investor, I've been contemplating having 50% handpicked longs and 50% short exposure through an inverse S&P 500 ETF.  If it's true that I can outgain the market in good times and lose less in bad times, then having the inverse S&P 500 ETF makes sense, since I only have to concentrate on the long side of my portfolio, the part where I actually know what I'm doing.  

I realize that I should handpick undervalued longs and overvalued shorts, but I thought it might be comforting not to have to worry about the short side.  I'm a bit of a pansy when it comes to shorting in general, so I'd feel more comfortable handpicking my longs and using an inverse ETF for the short side.  

Are there any more experienced investors who have employed a market neutral strategy that can comment or add pointers?? I'm looking for insight as to whether this will work and if I should change how I intend to go about it.  

3 Comments – Post Your Own

#1) On May 12, 2009 at 2:51 PM, mustbepatient (29.41) wrote:

If you are more comfortable long, you should focus on being long.  Note that it's difficult to determine when a market is cheap or expensive.  I do have two suggestions for you if you want to profit from the spikes:

1) Sell covered calls.

 

2) Short leveraged long ETFs.

 

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#2) On May 12, 2009 at 3:01 PM, Rehydrogenated (32.41) wrote:

Personally, I find it best to treat the market as a single, always irrational market. The times it can be seen as "rational" is merely the point at which it passes from irrationally overvalued to irrationally undervalued. Why would you pull your money out when your holding might soon become irrationally overvalued?

Having a mathematical understanding of how much risk you are taking and how much return you can expect really helps me make decisions, but honestly math only helps as much as TA does in making me accurate...

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#3) On May 13, 2009 at 4:15 PM, alexxlea (59.19) wrote:

Since 2007 I've been bearish, careful of not overstaying my welcome in select stocks, but that doesn't mean I'm not long come 201X. I tend to avoid being market weight neutral because I find that the majority of the time I'm right about the general market direction, and being even long and short only hurts my returns.

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