Shorts Slaughtered!

OMG! If there's any proof that it pays to be a long-term, buy-and-hold investor, today's action on the Street is it. It was a broad market rally, not just a Dow wow wow. The volume of stocks traded was also higher than usual, which gave today's surge some credibility and suggested there may be follow-up mini-rallies in the coming days.

Had you panicked and got out of the market on Tuesday when the indices tanked, then you are probably licking your wounds right now. And if you sold short Tuesday, thinking it's just going to be a summer of discontent as usual, then you are probably not going to have a good weekend.

Yes, the market often goes south in the summer but that doesn't mean it will always go down each summer. Besides, the manager's never really understood the whole "sell in May and go away" mantra. Okay, so maybe in the summer investors take more money off the table to get away from it all but I think it's a self-fulfilling prophecy that often accentuates normal market gyrations during the summer.

It works something like this: The summer is coming. Oil prices start to rise because summer is the peak driving season. Investors panic because they fear higher oil prices will hurt consumer pocketbooks. So investors start to take money off and hedgies and traders start to sell short big time. Corporate executives start to exercise options as their stocks bleed from all the selling. Investors get more panicky as executive sales could mean bad Q2 results and/or depressing forward guidance. So this induces more bloodletting. And so it goes.

However, as today's rally indicates, the market often defies gravity, which sends the shorts into a buying frenzy - and the market soaring - as they rush to cover their positions. So just like the manager never gets depressed about down days on the Street, the manager doesn't get euphoric about days like today. It all evens out in the long-term as the folio grows.

That said, if you must play the market short-term, the manager believes options - calls, puts, and their variants - offer a saner way to do this than short-selling, whether naked or not. It's even better when you play options on the stocks you hold long-term. That way, you don't have to borrow stocks to sell short. The bottom line, though, is that it pays to stay in the market long-term. Otherwise, when the proverbial tide goes out, you will be found out swimming naked.