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I have been thinking about this in general terms for the last four months, but seriously in the last one, as I now will again have time to trade at a normal pace. When my brother died in 2007, I had to shift focus on our mutual dealings and basically put a lot of plans I had on hold that I had for 2008. Then 2008 happened!  Many of my long held strategies crapped out amid the cascading waterfall of selling, and because I was ill prepared to be on the short-side other than via ETFs (and only in two reasonably good periods when my long models liked them), I did a whole lot of sitting on the sidelines this year. That was NOT a bad thing, as I did make money in energies in the first half of 2008. Volatility began to wreak havoc on sold 10-year long (and 8-years-tested) models. When volatility forced stops outside of the 1/1 risk reward area, my rules prevented trading.

You have heard this time and time again, we are trading in relatively uncharted waters as we enter 2009 (particularly in equities and maybe in equity futures also). I think there have been comparable times of volatility just not the violent peaks we saw this year. This article represents a sort of stream of consciousness approach to trading ideas for the coming year. I should never have been allowed to read William Faulkner. He warped my ability to write business prose.  At any rate, here are some general concepts that should bode well (with proper planning) in 2009.

1)      There will only be two types of investing that will work with equities going forward: The intraday environment and the very long-term investment horizon. Because our banking and credit system is in such disrepair, it will be difficult to forecast cash needs and sales for many businesses. As such, earnings, the net result of funding, manufacturing, product development creation, and product sales will be difficult at best to forecast. Old metrics for valuation, for that reason, may temporarily be obsolete. Buying stocks for extended holding periods will become increasingly risky. Trading intraday can be done using precise trading models with discrete and well defined entry and exit strategies that have been tested for aggregate win/loss ratio, percentage of wins, and average win/loss ratios.

If you are holding positions for the long-run, then you need to be investing with a discrete theme in mind and a view of perhaps 10 years or more. By the way, that strategy could also be used with other vehicles like real estate. If one believes there is a hyperinflation end game to the Federal Reserve and Treasury Departments printing of money to "bail out" financial institutions, then one must have an idea of where all that money is going to end up. I have actually made decisions in the last week with regard to real estate that are of that same kind of long-term perspective. That perspective has also forced me to make decisions to reduce tax liability while I wait for the investment to pay off.

2)      Tax implications need to be considered BEFORE investing is done, particularly for long-term investments. It's not going to be easy to discuss this one as depending on the vehicle, the tax implications vary, but my point is this. You need to have a tax strategy that matches the investment strategy you use during the ENTIRE COURSE of the investment, or your returns will be compromised. The main reason that this will happen is that you will likely be holding long-term investments for at least two Presidential administrations. While I know that it is impossible to know exactly what any administration might do, one must understand how an investment vehicle is being taxed and be prepared to make adjustments (including EXITING the investment) if the conditions under which it is being taxed changes dramatically. One big example of that will be the inheritance tax law reversions after 2010 which might affect business succession planning. There are far too many others to enumerate here, but you better see your CPA or tax attorney if you have concerns over taxation BEFORE you invest.

3)      Understanding market conditions via technical analysis will become more important.  If you have a basic understanding of a trend, then you will be able to respond in time to news that may adversely affect your investments as time moves forward. I have literally, since the late 70s, believed that one should not even INVEST in a stock unless one can read or understand basic stock trend analysis and can basically read a stock chart and a stock trend.  In my opinion, news flow will have a greater effect on stocks going forward Regulation FD, passed in late 2000, and Sarbanes-Oxley legislation have made it very difficult for companies to release earnings except under the most stringent of one-time circumstances. In some cases, companies now refuse to provide guidance in fear that some nuance of news interpretation might ultimately lead to a shareholder class-action lawsuit. These circumstances and world economic stress will make the one-time surprises even more violent when they happen. Now that the uptick rule is gone, the bear raids are likely to be more violent also. For that reason, one needs to be able to read stock charts to anticipate what damage could be done to price if negative news gets out. That also means that knowing when earnings releases occur for individual stocks is even more critical than ever.

4)      Unless you truly understand their underpinnings, I would only trade the ultra-short or any leveraged ETFs intra-day.  Anyone who has held these as a longer-term portfolio hedging products has lost money. Jim Cramer (imagine me quoting Cramer) explains why. The funds are rebalanced daily. Any volatility (and in particular, extreme volatility) destroys any long-term performance these funds have. These things are truly TRADING VEHICLES and NOT INVESTING VEHICLES. Read that again a few hundred times to beat that into your head. After you've done that, tell that to at least 10 of your investing friends. If an investment adviser advises you to hold them you better ask about his or her strategy for doing so. If you don't understand the strategy then you better AVOID THAT STRATEGY. Unless you are in and out of the market by day's end or performing an exotic short-term hedge, forget about using leveraged ETFs and particularly the ultra-short ETFs as investment vehicles.

5)      If you are new to trading and you are going to trade, do it in such a way that it will hurt you the least from a taxation perspective. The new American administration is, when all is said and done, going to increase taxation at some point and will likely do it in the area of income taxes and capital gains taxes. Under current tax laws, futures traders do have an advantage in that they will be paying 60% of gains as long-term capital gains and 40% as short-term capital gains. Unless you personally have establish a trading corporation or LLC with which you take profits to pay yourself a salary, I personally think that the best way to start (and HEAR ME OUT COMPLETELY), is that you take a small segment of an IRA or other approved tax-deferred investment vehicle to trade with. The reason for that is simple. One does not have to pay taxes on the net gains of that account until (if it is a non-Roth IRA) withdrawal, and in the case of the Roth IRA, one does not have to pay any taxes at all (though one pays taxes on the contribution when it goes in).Before doing attempting to segment an IRA, please read what I have to say in a coming segment.

6)      Consider your "options":  Instead of taking exotic risk with ETF hedging, why not purchase put or call option spreads or use LEAPs? Long-term equity anticipation securities allow one to participate in long-term strategies which could be used as a hedge (in particular with stock indexes) market index ETFs. This kind of hedge can protect gains when markets begin to slide. I am in the process of learning these strategies, and I think you should consider them also. Option spreads on stocks may also provide opportunities as options approach expiration to collect premium. These strategies have specific rules. One needs to study such strategies carefully before attempting them. Still, it is one way to obtain income when markets are volatile.

7)      Consider other markets:  2008 was supposed to be my year to expand into foreign exchange currency trading (Forex) and to begin trading currency futures again. Because my brother died late in 2007, I did not do that, but I intend to do so again. Why diversify? I think one reason to diversify into Forex is liquidity. The other is that the markets (despite the nuttiness at times this year) tends to trend nicely also. There is also not the problem with shortable inventory (which is why I hate shorting stocks). Being long and short is no problem in the Forex markets as is, for the most part, the stock index futures markets. The point is this. If one market is difficult, find other markets to trade while those markets settle down.

8)      Keep cash flexible and short-term until we see the Treasury Bubble Burst: I am not a bond expert, but I am indeed concerned that at some point we will see interest rates begin to reverse higher, and if so, long-term Treasuries (10 year and 30-year) are going to be hammered badly. For that reason, any cash that you hold (and right now, I hold quite a bit of it) should be kept short-term to be ready to take advantage of equity opportunities as they arise (wherever they arise) and to protect the value of the cash. I am still very suspicious of corporate bonds, regardless of quality, so I am staying conservative with cash. If I can find one-month CDs I will use them, but I am in the 90-day universe with most of my cash, and ready to strike at equity investments when the time is right. The long end of the bond market, at least for the next few months, is the wrong end of the bond market. If you are conservative with cash as I am, there are ways to find FDIC-insured CDs that will yield decently over two to three year periods. It is indeed a difficult time to get cash returns, but for now, as Will Rogers said, to worry about the "return of capital" as much as it is the return on capital.

9)      Whether you invest or trade, you need to do so like a carpenter. That means, measure twice (or perhaps three times) and cut ONCE. Indecision last year blew up many people's retirements and life savings. This year, world events, the circus called the Federal Reserve and the United States Treasury, a rookie administration that may (sadly) be trying to mimic the last three administrations, could really cause huge problems for investing or trading. You need specific sets of rules to determine when you are wrong, and when you are wrong, you MUST EXIT the investment no questions asked. With most stocks in which I take a multi-day or multi-month position, I typically will not let a position go against me by more than 8% before I dump it, but the reason my stops are that tight are that I already have already evaluated both market and sector trend before taking the position. I do my best to determine value also prior to buying (though realize my caveats above with regard to current stock valuation).

10)   This again is my personal opinion, but the differentiated manager-based mutual fund as we once knew it is DEAD. I think index oriented ETFs are more liquid and flexible than end-of-day valued mutual funds sold by gate keepers who have little invested in the whole process than to collect an unnecessary commission. With the collapse of hedge funds and with the rise of electronic trading, why would anyone want to be handcuffed to a mutual fund? I think broad diversification combined with good technical and quantitative analysis is by far less risky than buy and hold. If one followed buy and hold over the last couple of years, once has witnessed the new phenomenon of "buy and fold". As they say in South Carolina, it ain't been pretty.

In coming segments I am going to discuss some nuances about trading accounts and how to segment them away from other taxable and tax-deferred investments. Most traders (particularly beginning traders) need to learn to protect their assets first when trading and then limit the degree to which assets are devoted to trading. If one is smart and uses money management strategies to increase trading capital, then one can actually FUND other longer-term investments over the long run with the trading account. But first one must develop a confident and professional trading stature in order to do that. That means treating trading as a business and not as a position near the slot machine with a bag of quarters.