Not a market for the stubborn

• Buy to cover all short positions except Lodgian (LGN, news, msgs) and Riviera Holdings (RIV, news, msgs) at today's market open, with a 2% trailing stop loss from Tuesday's close.
• Split the proceeds equally into the Vanguard Mid-Cap (VO) and SPDR S&P 500 (SPY) exchange-traded funds.

Strategy Lab is MSN Money's stock-picking challenge. To learn more about the game and the contenders, click here.

"Just because everything is different doesn't mean anything has changed" -- Irene Peter

If someone has read most of my previous posts, one thing should have become obvious: I am not afraid to sell my positions quickly if something changes my view about a particular stock or sector.

In rarer cases, when I believe market is grossly overreacting, I sometimes stick with a losing position and even "double down" several times if necessary.

No one out there is always right or wrong, so there is little reason to be stubborn either way.

The wild behavior of most of my short sells Tuesday could have been expected, because nothing goes up or down forever. But did the fundamentals of any of the stocks that rallied in double digits suddenly change?

Certainly not, but the investor psychology could have. For the long haul, I still think most of my positions are a perfectly good shorts at today's prices. But I must also acknowledge that since momentum in the form of commodities and basic materials seemed to hit a short-term wall Tuesday, it is prudent to take some hard-earned short profits off the table before they evaporate in a short-covering rally.

Yes, I hate to make so many trades in such a short period, but since my Strategy Lab portfolio is 12%-plus ahead of the market, taking profits now is prudent. I will park my cash into the index exchange-traded funds for now and will look to deploy it into individual positions next week, depending on how General Electric's (GE, news, msgs) earnings turn out Friday. Given how much economic information a conglomerate like GE with exposure to pretty much every possible area of the economy could provide in one release, I will try to analyze the results and evaluate whether the "bounce" rally is for real or is just another dead-cat bounce.

The U.S. economy is still very fragile, and thus more declines could be in store over the medium haul. But if oil prices drop for a while longer, stocks could easily jump more in the next few days.

It's easy to get caught short

It is normal to see shorts rebound by 20%-plus in the short term and then resume a long-term decline. That is why I try to keep short positions smaller. Though any investor who shorts stocks should expect this volatility, he or she should also consider taking short profits regularly. In the long run, stock prices go up, period, and that's why being net short the market is rarely a smart thing to do.

Even if I turn out to be wrong and over the next several days stocks slowly come back onto the declining path, I won't hesitate to jump back in with a new group of candidates next week. Reinvesting into an index fund instead of individual stocks when market is this unstable should also protect the downside somewhat, because even if oil prices head back up, heavy energy exposure should mitigate the short-term pain somewhat.

As I've said in my previous articles, "rational" passive investors cannot expect double-digit returns over the long haul. Stock prices and earnings move in sync with nominal gross-domestic-product growth, and thus, without making adjustments, your upside is likely to be limited to a 7% to 9% annual return for the next 20 years.

To sum up: If your investing decisions are driven by pure emotions, your reactions to short-term market fluctuations could easily cost you a lot of money. However, being an active investor who takes profits and losses off the table more frequently than once a quarter is the only way to go.

Stay safe out there, and e-mail me your questions at skepticalcapitalist@gmail.com.