I think everyone agrees that the last 3 months have been very difficult to navigate for any investor, be that a long term or short term swing trader...... In that vein, I have been giving thought on how to achieve a good return in these types of conditions without risking the house..... Dusting off my portfolio theory textbooks and a bit of investigations, one idea I have come up with that I have been testing lately is what I refer to as a zero beta portfolio. Beta of course is the correlation that your portfolio has to the underlying market and I think we all agree that you don't want that correlation to the market at the moment. Being short on the index of course results in a -1 beta, but has a negative expected return in the long run. So here are the simple rules:
1. The portfolio must consist of at least 10, preferably 20 stocks. Why - simple, diversification to remove stock specific risk.
2. The portfolio must have equal long and short positions.
3. The initial portfolio must have $0 exposure to any GICS industry - i.e. a short and long exposure in each industry
The rest would really be up to the investor. You could set stop levels on each short and long pair (i.e. stop loss at say 10%, gain above 20%?). If you wanted to get really technical, as the portfolio moved you can approximate the beta of each stock and hedge any positive or negative beta by selling index options. But the best thing is that this can suit both a fundamental or technical investor - perfect for all occasions.... like your own little pocket hedge fund.....