As I have repeated in many posts over the past few months it is near impossible to have intermediate term positions (by that I mean things that can be held 2-6 months).  Instead it's just become a rapid fire trader's market.... we had an incredible period that ended about 3 weeks ago where the market moved up, then down, then up again (each iteration about 8-9%, and each move came within 2 week periods), all within a 6-7 week span.  The market has no memory from day to day, almost every data point is treated as an inflection point between 'good times' and 'end of days', and combined with the low volume (which traditionally meant moves are not be trusted) along with historically high correlation  [Jun 29, 2010: Correlations Among Asset Classes Reach Ever Higher Extremes as HAL9000 Algos Dominate Life]  it is no surprise many techniques that traditionally work are suffering.  

With computertized trading potentially up to 70% of all volume - and HFT much of that (HFT going to 100% cash at the end of every session), along with a class of trader in their 20s/30s who apparently was fed Ritalin along with their corn flakes as children, I've had to adjust significantly myself.  I don't like this type of market, but as Rumsfeld would say, you trade the market you have, not the one you want.  It is no surprise to see in many stories in major financial publications you hear about hedge fund after hedge fund ratcheting down exposure and staying 'smaller' than usual. [July 8, 2010: Hedge Funds Frozen in Headlights as BiPolar Market with 1:1 Correlation in All Things Not Named U.S. Treasuries Causes Confusion]  Who can blame them when 8-10 weeks ago all was great in Cramerica, and inflation was the fear - and 2 months later, economic data is sagging and the hot money has moved to deflation.

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Some good discussion on this topic via Yahoo Tech Ticker... in the latter video some discussion about how investors are trying to adjust to the potential of deflation, something American investors have not had to deal with for some 70 years.

2010 has been filled with uncertainty and volatility; after some peaks and valleys, stocks are just about where they started in January. Even after a 10% gain in the last month, the Dow is only up about 2% year to date.

That’s making it difficult for individuals and the pros to make money. “It’s a tough summer,” says Wall Street Journal senior writer Gregory Zuckerman. The lack of direction on the economy is wrecking havoc on hedge fund strategies, he tells Henry in this clip.

Through the first half of the year, hedge funds are only up about 1%. “They can’t figure out right now a really good trade,” says the author of The Greatest Trade Ever..  Hedge fund manager Philip Falcone is a prime example.  After a 46% gain last year and a 116% return in 2007, his Harbinger Funds are suffering as of late.  “As of July 15, Falcone's Harbinger Capital Partners Offshore Fund I was down 10.7%, ranking the New York-based fund manager one of the industry's 20 worst performers, according to HSBC,” Reuters reports.

It’s times like these that have many investors waiting it out on the sidelines.

Ironically, one of the most bullish managers around is John Paulson, the man made famous for making billions by betting on the housing collapse. He owns large stakes in banks such as Bank of America and Citigroup, and has told investors he expects the real estate market to bounce back 3-5% in 2010 and 8-12% in 2011. (Update: Recent market volatility has prompted Paulson to rein in his horns a bit. The $3 billion Paulson & Co. Recovery fund, launched in 2008, has decreased its net exposure from 140% to 107% in recent weeks, The FT reports, citing a letter from Paulson to clients.)

Meanwhile, as mentioned in a previous segment, other hedge fund giants are betting on deflation. David Tepper, who raked in $4 billion in 2009 by getting bullish at the bottom of the market, is not as sanguine about stocks. He has a large position in high-yield debt.

As discussed here, the talk on Wall Street has shifted from the threat of inflation to fears of deflation. Gregory Zuckerman, senior writer for The Wall Street Journal says many of the top hedge fund managers, a.k.a the ‘smart money’, are, “preparing for potential deflation.

Zuckerman says the mindset has changed as the economy has lost steam while rising deficits make it less likely lawmakers will add stimulus or the Fed will drop money out of helicopters.

Even if those in the deflation camp are right, profiting on the trend is not easy. “Frankly, a lot of investors don’t know how to prepare for it,” says Zuckerman. “Even the top guys are flummoxed right now.”

Bill Gross, the founder of PIMCO, is playing the trend by buying Treasuries. David Tepper, the founder of Appaloosa Management, who made $4 billion in 2009 after buying bank stocks near the lows, likes junk bonds. Tepper has about 50% of his money in high-yield corporate bonds. Another popular trade is to own stable, dividend-yielding stocks.

A better than expected economic turn and we may be kissing the deflation theory good-bye, Zuckerman tells Henry in the accompanying clip. Even the 'smart money' investors preparing for deflation are concerned that it may not happen, he says.