As expected, the S&P 500 finally pushed up to and then broke through 3,200 resistance. Today’s gains mark the seventh positive finish out of the last eight trading sessions. While the crowd is busy congratulating themselves for holding through this easy run, those of us that have been doing this a while are starting to get nervous.
Everyone knows the market move in waves, unfortunately, most people forget this simple idea when we are experiencing one. It doesn’t matter if it is on the way up or the way down, people naturally take the recent past and extrapolate that trend from now to forever. After the year we’ve had, why would anyone worry about stocks? Making money in this market is so easy! Or so the popular consensus goes.
Now don’t get me wrong. I am not a bear or anything even close. The market is acting well and I will continue trading with the bullish trend until given a compelling reason to change my outlook. But I also know that if we are in this to make money, the only way we do that is by selling our favorite winners.
It’s been a nice run, but that also tells us it is time to start locking in some profits. A person can do that by either selling proactively into this strength or by following the market higher with a trailing stop. Both strategies work well and it is largely up to personal preference. Pick one and stick to it. Or better yet, do a little of both.
But the other thing to remember is as soon as we get out, we need to start looking for that next trade. Maybe this rally stalls at current levels and drifts sideways into next year. If that’s the case, we stay out and wait for a trade in January. Maybe stocks pause for a few days before continuing higher. Just because we got out doesn’t mean we cannot get back in when conditions warrant it. And maybe the bubble bursts in January and that turns out to be a great time to short the market. No matter what happens, by taking profits now, we will have the cash ready to jump on the next opportunity.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.