Whatever Happened to That Sucker's Rally?

What a market! One day everyone's calling it the next Great Depression, saying the world as we know it is coming to an end. The next, stocks skyrocket off their lows into a 60%-plus rally.

Blue chips like Citigroup (NYSE: C  ) , Ford (NYSE: F  ) , and Motorola (NYSE: MOT  ) -- which had dropped below $5 a share -- shot up more than 100% off their lows. Some small-cap companies -- like Human Genome Sciences (Nasdaq: HGSI  ) -- jumped more than 5,000% off their lows! All while volatility dropped from all-time highs to "normal" levels.

But most investors got caught up listening to the "market authorities" who called the skyrocketing indexes a "sucker's rally."

But as it turns out ...

The rally wasn't for suckers!
I'm not surprised that even the best market authorities didn't know that; short-term movements are notoriously difficult to predict. Just listen to these three well-respected and well-educated market authorities:

Authority

Quote

John Mauldin, former CEO of the American Bureau of Economic Research

"If you have a 10-year time horizon you probably can buy here and do OK. But I wouldn't. I think this market is going to have more problems." (Clusterstock -- March 14, 2009)

Nouriel Roubini, professor of economics at the Stern School of Business

"The latest rally is just a dead cat bounce." (Roubini Global Economics -- March 14, 2009)

David Rosenberg, former Merrill Lynch chief North American economist

"We remain convinced this is still a bear market rally ... this is all it is." (Tech Ticker -- March 19, 2009)

The market went up 50% and 43% from those points, respectively. And these three guys weren't alone. I have a stack of papers on my desk more than an inch thick with identical quotes.

Even after the rally took hold, some of the best and brightest were still beating the same drum:

Authority

Quote

Andy Kessler, former hedge fund manager

"This sure smells to me like a sucker's rally ... [and] I won't buy into a rising stock market based on this." (The Wall Street Journal -- May 12, 2009)

Mohamed El-Erian, CEO and co-CIO of PIMCO

"Asked if U.S. Stocks have hit a wall, 'I think we have.' " (Reuters – Aug. 18, 2009)

And you know what happened after that.

Which means that it'd be silly to believe anyone can know whether the market is now headed further up, or back down.

And if these smart guys got it wrong
It's clear that the short-term movements of the market are tricky, if not completely impossible, to understand.

And investing in a market like this -- where even the smartest folks on Wall Street aren't sure whether an up day signals the beginning of a 60% rally, or whether the market will drop the next day -- requires a strategy that helps you profit from the market's upside, and protects you from the downside.

In the midst of this difficult market, that's the strategy one group of investors followed, and their performance has impressed the hell out of me. They've used a unique strategy to get through virtually unscathed. And they could probably do the same for you in the coming year. I'll share their names with you in just a second.

But first, let's look at how they did so.

Both long and short
This group of investors realized that the best way to make money in up, down, flat, or uncertain markets must combine elements of being both long and short. Because the market's short-term movements can't be predicted, a strategy like this helps you make money regardless of whether stocks rise or fall.

These investors have used everything from a covered call (which generates income and helps you if a stock in your portfolio drops in price) to a synthetic long (which allows you to profit on stocks with short-term catalysts). They have even used a strategy called a covered strangle, which is a way to profit on a stock you own and would be willing to buy more of or sell off at the right price.

And of course they've also bought normal long positions in well-known companies like Oracle (Nasdaq: ORCL  ) and Procter & Gamble (NYSE: PG  ) and popular exchange-traded funds like the iShares Silver Trust (NYSE: SLV  ) .

And with this strategy, the group of investors -- which I will now tell you are led by Motley Fool co-founder David Gardner and Jeff Fischer -- achieved nearly 25% returns. And with nearly 40% of their portfolio still in cash!

The best part is that this freed-up cash allows them to take advantage of weekly dips in the market; which is exactly what they're focusing on right now.

If you're interested in finding out more about exactly how they implement these tactics, you're in luck. Because right now, the doors to Motley Fool Pro are open for the first time since June 2009. To receive an email inviting you into this exclusive group of investors, drop your email address in the box below.

Adam J. Wiederman owns no shares of the stocks mentioned above. Ford is a Motley Fool Stock Advisor recommendation. Procter & Gamble is an Income Investor pick. The Fool owns shares of Oracle and Procter & Gamble. The Fool's disclosure policy is here.


Read/Post Comments (32) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2010, at 10:49 AM, pondee619 wrote:

    I signed up to get Pro info several days ago. Thought i'd get an E-Mail with the info. Didn't happen. This is the attention to detail that I look for ion an investment service. not

  • Report this Comment On January 21, 2010, at 10:54 AM, jmt587 wrote:

    Nearly 25% returns over what time period? How did the S&P do over the same period?

  • Report this Comment On January 21, 2010, at 10:57 AM, TMFDonauschwaben wrote:

    pondee619,

    If you signed up, you will be receiving an invitation. It hasn't been sent yet.

    It's a controlled opening, with a limited number of spots due to the high demand.

    But it should be coming shortly.

    Sorry for the delay,

    Adam

  • Report this Comment On January 21, 2010, at 10:59 AM, TMFDonauschwaben wrote:

    jmt587,

    Those returns are as of 10/16/2008, when the real-money portfolio was funded.

    But as I pointed out in the article, the portfolio was built up over time, and still has about 40% of the initial amount in cash -- so the return on invested capital is significantly more than the total return of 25% that I wrote about in the article.

    Thanks for your comment,

    Adam

  • Report this Comment On January 21, 2010, at 11:26 AM, Adam1226 wrote:

    Give me a break. Just b/c the rally has continued doesn't mean it's not a sucker's rally. All of the problems that caused the correction to begin with still exisit. People who ride this rally may get lucky, depending on how long the Fed can juggle all of its problems, but eventually, something has to change fundamentally, and when it does, the market will correct (or "crash" ) again.

  • Report this Comment On January 21, 2010, at 11:37 AM, henryking54 wrote:

    <<still has about 40% of the initial amount in cash -- so the return on invested capital is significantly more than the total return of 25% that I wrote about in the article.>>

    This statement is misleading. Much if not all of that 40% in cash was used as necessary margin to fund the cash-secured short put positions. In other words, that cash is part of invested capital.

    To claim ROIC is much higher than the portfolio's total return is a lie.

  • Report this Comment On January 21, 2010, at 11:40 AM, alexxlea wrote:

    No offense but articles like this

    1. Shouldn't be writ in the first place.

    2. Are made more hilarious when contrasted against the equities/debt market moves of today's date of posting. 1/21/2010.

  • Report this Comment On January 21, 2010, at 11:51 AM, TMFDonauschwaben wrote:

    Adam1226,

    My point is that if you sat out this rally -- sucker's or not -- you look like a sucker because you missed 60% + gains...

    My secondary point is that no one knows for sure whether the market is going to go up or down in any short-term duration...

    Which is why being BOTH long and short makes sense.

    Hope that clears it up some,

    Adam

  • Report this Comment On January 21, 2010, at 11:54 AM, TMFDonauschwaben wrote:

    alexxlea,

    Thanks for commenting...

    Obviously I disagree with point 1.

    But point #2 doesn't disprove what I wrote about. If you read the article to the end, you'll see that I said no one knows whether the market is going up or down in the short-term. And that being BOTH long and short helps eliminate volatility, and helps you focus on real positive returns, whether the market goes up or down in a given day.

    But again, thanks for commenting.

    Adam

  • Report this Comment On January 21, 2010, at 11:57 AM, henryking54 wrote:

    <<My secondary point is that no one knows for sure whether the market is going to go up or down in any short-term duration...

    Which is why being BOTH long and short makes sense.>>

    Makes sense for who? Short-term traders?

    Since when did the Motley Fool advocate short-term trading?

    Oh yeah, since they decided to sell out their principles to make extra cash (from subscriptions, not from trading) in the options market.

  • Report this Comment On January 21, 2010, at 12:00 PM, TMFDonauschwaben wrote:

    henryking54,

    You raise a valid point... thanks for pointing that out.

    However, the put-writing in the PRO portfolio has tied down a minimal amount of the cash over the life of the portfolio -- not the full 40% -- and even less so when based on buying power.

    But again, thanks for pointing that out. I appreciate it!

    Adam

  • Report this Comment On January 21, 2010, at 12:34 PM, BMFPitt wrote:

    In late March, I called this a sucker's rally. Today, I call it a giant sucker's rally.

    Nothing about the fundamentals has changed in the last 10 months, other than they've gotten good at using debt-fueled taxpayer-funded giveaways to kick the can slightly down the road.

    But the can isn't going away, it's just getting bigger and heavier..

  • Report this Comment On January 21, 2010, at 12:49 PM, TMFDonauschwaben wrote:

    BMFPitt,

    So were you fully short during this 60% rally? Are you still short today?

    Adam

  • Report this Comment On January 21, 2010, at 12:49 PM, pondee619 wrote:

    TMFDonauschwaben:

    On January 21, 2010, at 10:57 AM you said:

    "If you signed up, you will be receiving an invitation. It hasn't been sent yet.

    It's a controlled opening, with a limited number of spots due to the high demand.

    But it should be coming shortly."

    According to the Pro site:

    "On January 19, 2010, Motley Fool PRO will begin accepting a small number of new members."

    So, two days ago Pro started accepting a small number of new members. I stuff to consider in making a decision on whether to join has yet to be sent as of Jan. 21.

    Am I to have no time in making a decision?

    Has the fool already made their decision to cut me out, by not sending an "invation" in a timely fashion? Is "small number of new members" just BS to hype interest?

  • Report this Comment On January 21, 2010, at 12:55 PM, BMFPitt wrote:

    TMFDonauschwaben -

    Almost fully in cash equivalents until recently, when I put a chunk into internationals to cover myself in case inflation spikes and/or the dollar crashes before the market turns back down.

    I have also made a few small short plays since the DOW went over 9000, but nothing huge.

  • Report this Comment On January 21, 2010, at 12:57 PM, TMFDonauschwaben wrote:

    pondee619,

    I'm checking into the invite for ya. I'll let ya know what I find out, if you don't hear from someone else first.

    Adam

  • Report this Comment On January 21, 2010, at 1:00 PM, TMFDonauschwaben wrote:

    BMFPitt,

    Thanks for the reply.

    Even though that cash position definitely hurt your returns on the 60% upside, at least it means you put your money where your mouth is -- more than most people who called it a "sucker's rally" can probably say.

    But again, I think being part short and part long could probably be a strategy you might benefit from. I encourage ya to check PRO out.

    Thanks again,

    Adam

  • Report this Comment On January 21, 2010, at 1:03 PM, djkumquat wrote:

    not so fast!

    funny to see this article today.

    go long!

  • Report this Comment On January 21, 2010, at 1:03 PM, TMFDonauschwaben wrote:

    pondee619,

    Someone from customer service should be contacting you via email shortly.

    Thanks for your patience,

    Adam

  • Report this Comment On January 21, 2010, at 1:18 PM, TMFDonauschwaben wrote:

    djkumquat,

    Actually, as this chart shows, the long term trend still remains with today's drop:

    http://www.ritholtz.com/blog/wp-content/uploads/2010/01/1-ye...

    Adam

  • Report this Comment On January 21, 2010, at 1:19 PM, readthecharts wrote:

    Who are you people??? You still think this is a sugar high??? Look at the charts...it's a bull market. I'm soo sick of hearing about fundamentals and we can't sustain this rally. Sounds like you've been short since March and are still listening to Meredith Whitney and Mohamed El-Erian. Time to get a new trade.

  • Report this Comment On January 21, 2010, at 1:42 PM, TMFDonauschwaben wrote:

    readthecharts,

    Check out that chart I just posted. I think you'll like it.

    Adam

  • Report this Comment On January 21, 2010, at 3:23 PM, roguesisland wrote:

    I am impressed with the 'real time' responses to posts pertaining to the article and subscriber concerns.

  • Report this Comment On January 21, 2010, at 3:50 PM, TMFDonauschwaben wrote:

    rogueisland,

    Thanks for that compliment -- I like to troll through the responses on my articles to see what insight others can add to my ideas.

    Adam

  • Report this Comment On January 21, 2010, at 3:56 PM, pondee619 wrote:

    "I am impressed with the 'real time' responses to posts pertaining to the article and subscriber concerns"

    Me too

    "I like to troll through the responses on my articles to see what insight others can add to my ideas"

    Makes you a rare breed in fooldom.

  • Report this Comment On January 21, 2010, at 3:57 PM, TMFDonauschwaben wrote:

    pondee619,

    Thanks again for that second compliment. I'll try and pass that sentiment along to my fellow writers!

    Adam

  • Report this Comment On January 22, 2010, at 7:45 AM, TMFDonauschwaben wrote:

    truthisntstupid,

    <<It's a lot of fun to go back and look at some of the comment sections following articles from around this time last year.>>

    You're completely right. One thing I left out of my article is that there's also a lot of Fool writers who did the same thing as the gentlemen I pointed out in my article. That is, they called it a sucker's rally and then now they're saying valuations are lofty and it's time to be "overweight" in cash.

    I won't name names, but if you read our site often enough, there are probably a few names that immediately come to mind.

    Thanks for your comment,

    Adam

  • Report this Comment On January 22, 2010, at 10:34 AM, MotleyPicker wrote:

    The cat's not dead. The bounce was real.

    Today, however, he's coughing up a hairball. HehHeh..

    Might take a few days for this "bank regulation" stuff to be overshadowed by brighter news, and the cat will bounce again.

    (Hmmm...overshadowed by brighter news"...is that what they call a mixed metaphor? Well, I think we're getting mixed signals today, so it's appropriate.

    I'll pass on the Pro subscription, thanks. I'm not one given to hedging, and the cost isn't something I can easily swallow anyhow. I'll drop it into this down-tick instead, and see where it goes when the cat is done coughing. LOL

  • Report this Comment On January 23, 2010, at 4:39 PM, sept2749 wrote:

    I give up trying to time the market. I try to get the best price I can -, buy only top compnies that pay a solid dividend,- reinvest those dividends and kick back and let the market do it's thing - whatever the heck that'll mean on any given day. I hope that in a few years my plan will pay off. Maybe not in a big way but I think it's a safe bet that my portfoilo will be worth substantially more.

  • Report this Comment On January 24, 2010, at 9:22 PM, cruiser9806 wrote:

    Whether it's a sucker's rally or not, i do not know. I bailed out at 1350 and went into treasuries so i do not care about the 60% move up. I care about consistency not wild swings. For now i'll stick with my security blancket. Whether it crashes or not, i still make 4% on the full amount I DID NOT LOSE FOOLISHLY!!! 2001 fooled me, 2008 did'nt. jeje

  • Report this Comment On January 28, 2010, at 10:37 AM, desertjedi wrote:

    <<Which is why being BOTH long and short makes sense.>>

    "Makes sense for who? Short-term traders?

    Since when did the Motley Fool advocate short-term trading?

    Oh yeah, since they decided to sell out their principles to make extra cash (from subscriptions, not from trading) in the options market."

    Why not understand his point before bitching? He's advocating being long and short which has nothing to do with short-term trading. And he's right about it.

  • Report this Comment On February 01, 2010, at 9:04 PM, barryflashallen wrote:

    Please advise about stocks like Sony, SquareEnix, AolTimeWarner! Thanks

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