The difference between being right and being smart

Free After-Hours Analysis:

The S&P 500 popped Wednesday morning after word spread Trump was willing to sign Congress’s budget compromise. Avoiding another government shutdown eliminated a major risk in front of us and put traders into a buying mood. Unfortunately, that excitement didn’t carry into the close and prices finished near the intraday lows.

A 0.3% gain is still a 0.3% gain and it allowed us to reclaim the 50dma for the first time in more than two months. But if we wanted to be critical and look at the half-empty side, closing near the intraday lows on a good news day is most definitely noteworthy. One day doesn’t make a trend, but it is something to keep an eye on going forward. Almost every day since the Christmas bottom finished near the intraday highs and this late-day buying frenzy propelled us to these highs. But if that buying is waning, it could be an early indication the rebound is shifting into the next phase of the cycle.

The other reason to be cautious is things didn’t end well the previous three times the market retook the 50dma. While there is no comparison between now and where sentiment was last fall, widely followed technical levels have a tendency to turn into self-fulfilling prophecies. Technical traders expect prices to stall at overhead resistance, so they start taking profits proactively, launching the wave of selling that eventually leads to the dip in prices.

I’ve been warning traders to tread likely after the market rebounded nearly 20% from the December lows. And some people criticize me because prices have continued creeping higher. But I’m okay with that. People also criticized me for saying in December people should be buying those discounts, not selling them. By now hopefully everyone appreciates how that one turned out.

After doing this for so many years, I’ve long since gotten used to going against the crowd and actually find reassurance in the criticism because it means I’m on the right track. Nothing makes me more nervous than when everyone agrees with me.

And just because the market has been creeping higher the last few days and weeks doesn’t mean buying up here was the smart thing to do. Allow me to use a blackjack analogy. If a person hits on 18 and he gets a 3 card. That was a great call and he won the hand. But was that really the smart thing to do? While it worked great this time, how often will hitting on 18 backfire? Traders who last a long time in this business understand the monumental difference between being right on a an individual trade and trading smart. Unless you learn to trade to smart, you won’t last very long.

The market continues to act well and momentum is definitely higher, but anyone buying up here is being just as foolish as the guy hitting on 18. Unfortunately, that is the way most people trade. Those that were selling last December’s dip are now chasing 2019’s rebound. Sell low and buy high rarely works out.

Those with long-term investments should stick with their favorite positions. But those with trading profits should be shifting to a defensive mindset and thinking about taking profits if they haven’t already. This rebound priced in a lot of good news. That means there is far less upside left ahead of us and a lot of air underneath us if things don’t go according to plan.

What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours

Follow Jani on Twitter @crackedmarket

Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM