Monthly Archives: February 2020

Feb 28

CMU: The biggest way people screw up market meltdowns (besides freaking out)

By Jani Ziedins | Free CMU

Cracked.Market University

CMU: The single biggest way people screwup market meltdowns (besides freaking out)

Generally speaking, there are two main groups of people in the market, long-term investors and short-term traders. One person buys stocks at attractive prices, holds for multiple years, and profits when the rest of the world finally figures out what they knew a long time ago. The other person takes advantage of daily price swings and will hop in and out of the market countless times a year. The one thing they have in common? They both screwup market meltdowns (but in the opposite way).

First, the long-term investor. He plans to hold for long periods of time and ride through these periodic gyrations. He doesn’t care what the market is doing now, only where it is years from now when he sells. Or at least that is what he is supposed to do. Unfortunately, it doesn’t always work out that way.

All too often, these long-term investors follow the news a little too closely. They read headlines screaming Coronavirus, bank defaults, rate-hikes, socialists, or any of the countless other reasons investors fret. Once prices start crumbling, their confidence cracks and they start wondering if they should be worried. Prices fall a little further and that wonder turns to fear. A little lower and panic sets is. Long gone are thoughts of holding for the long-term and now all they can think about is watching even more of their net worth evaporate. If they don’t act now, things will only get worse. There is no greater fear than the fear of regret and finally, the confident long-term investor turns into a fearful seller.

Of course, by the time the long-term investors reaches his breaking point, stocks have fallen a long, long way. In fact, they have fallen so far that often they are not far from the ultimate capitulation bottom and rebound. But he doesn’t know that. All he knows is he wants to get out and he won’t be able to sleep until he does.

Now for the short-term trader. He darts in and out of the market with the greatest of ease. Things like market meltdowns don’t bother him. In fact, he roots for them because he thinks they are a great way to make big profits. Unfortunately, it doesn’t work out so well for many of them. It starts out well enough. The market dips like it has a thousand times before. Buy the dip, sell the bounce, repeat until wealthy. But this time, the dip doesn’t bounce when it is supposed to. Well, that’s okay, he got in a little early and all that means is he needs to wait a little longer before the bounce. But the next day, price falls even further. Now things are definitely not looking good. But he tells himself he can manage this, he doesn’t want to be that guy who loses his nerve and sells moments before the inevitable bounce, so he keeps holding. But rather than bounce, the market tumbles again the next day. Now his losses are so big he has no choice but to keep holding. Everyone knows it would be foolish to sell at these levels. He should be buying this dip, not selling like all the other emotional cowards. And yet, prices keep falling and he keeps holding.

Long and short-term investors get killed in market meltdowns because they change their plan in the middle of the trade. The long-term investor loses because he sells too quickly, the short-term trader fails because he holds too long. As the old cowboy saying goes, never change horses midstream. Your trading plan should always account for the inevitable market meltdowns. If your plan is to ride through them, ride through them. If your plan is to get out and go short, get out and go short. Don’t be that guy who reacts emotionally, changes his plan halfway through the trade, and does the exact wrong thing at the exact wrong time.

It’s a market cliche and it sounds corny saying it, but “plan your trade and trade your plan.” There is no more valuable piece of advice a trader can receive than that.

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

Feb 27

CMU: Where’s the bottom?

By Jani Ziedins | Free CMU

Free After-Hours Update

As bad as the S&P 500 looks right now, should we be even more afraid of what’s to come? The market attempted its fourth consecutive intraday rebound and unfortunately, that’s also the exact number of failed bounces we’ve seen. Not an encouraging sign.

But here’s the thing about the market, the worse things look, the better they actually are. Prices crashed more than 10% from last week’s all-time highs. But instead of getting riskier, the market is actually 400-points LESS risky. Anyone who buys today is 400-points ahead of the person who bought last week. While no one can predict where this selloff ends, I do know I would much rather buy stocks at 3,000 than 3,400.

Today’s crash was triggered by headlines California is monitoring 1,000 patients for the Coronavirus. That’s well beyond the dozen confirmed cases we’ve been told about. The market loves to get ahead of itself and this week’s selloff is largely driven by fear of what could happen. Traders have a wild imagination and it doesn’t take much to start spinning a picturing of just how bad things could get. But the thing about the market’s imagination, reality almost always turns out far less bad than feared. And even if things get bad, buying here is still getting a 10% discount from where we were last week.

While I would love to be able to consistently pick bottoms, everyone knows that is impossible. If we cannot bottom-tick the market, that means either we get in too early or we get in too late. What a person does largely depends on their time-frame and risk tolerance. Patient, long-term investors should be wading into the mess and buying more of their favorite stocks a little bit at a time. When the market is at 3,500 or even 4,000 next year, will anyone really care if they bought at 3,050 or 2,950? That’s like kicking yourself for buying AMZN at $880 when you could have gotten in at $830. When the stock is near $2,000, who cares? The only thing that matters is you bought.

For short-term traders, these things are a little more nuanced. Emotional selloffs always go too far in one direction before snapping back and going too far in the other direction. Has this selloff gone too far? Probably. Has it gone far enough? Maybe not. But after four days of brutal selling, the next bounce is right around the corner. Obviously it didn’t happen today. But all that means is it will happen Friday. And if not Friday, then Monday.

The best way to swing-trade this stuff is to buy the bounce early, start small, keep a nearby stop, and only add more money after the trade starts working. If you bought too early, like yesterday or today, the late fizzle squeezes you out and you try again during the next bounce. Buying right (ie early) means the losses from these whipsaws is small and trivial compared to the profit potential of catching the next big wave. The most aggressive traders can even short the violations of the prior lows. Keep buying the bounce and selling the violations. Who cares if we make our money on the way up or the way down as long as we are making money. But no matter what you do, don’t get greedy. In markets this volatile, one day’s profit can quickly turn into the next day’s loss. That’s why we take profits early and often. But rather than give up after taking profits, we repeat this whole process again the next day.

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

Feb 26

CMU: How to Trade Emotional Markets

By Jani Ziedins | Free CMU

Cracked.Market University

CMU: How to Trade Emotional Markets

Traders finally decided the Coronavirus matters and the S&P 500 tumbled 8% from last week’s record close. So much for the calm and complacency that ruled since the October lows. While bears finally get to gloat over being “right”, stocks are still at levels that were all-time highs only a handful of weeks ago. Sure, prices are a lot lower than they were last week, but they are still well above levels when most bears started claiming they were too high.

I don’t mean to single out Bears because Bulls are equally prone to the same ridiculousness. Both sides get hung up on their outlook and spend far too much time justifying why they are right instead of trying to understand why they are wrong. The key to trading successfully is moving past that useless dogma and just be an opportunist. I don’t care if the market is going up or down. It makes no difference to me as long as I’m making money.

During emotion-filled periods like this, my views are definitely in the minority as people spend way too much time explaining why this selloff is either unjustified or just getting started. I have no idea what comes next and no one else does either. Emotional selloffs are the hardest things to predict because they always go “too far” and there is no way to know how far is “too far”. And just when it seems like the sky is about to fall and all hope is lost, the selling capitulates and prices snapback from oversold levels with a vengeance.

I have no idea what this market will do next, but I do know it will go “too far” in one direction and then it will go “too far” in the other direction. Armed with nothing more than that most basic outlook, we can create a fairly sensible trading plan.

If we know a big move is coming, all we need to do is jump on the next move that comes along and see where it takes us. Prices bounced this morning. Great, buy the dip, start small, get in there early, keep a stop near your entry, and only add more money after the trade starts working. If we’re wrong, prices slip under our stop, we take a small loss, and we try again next time. Maybe that is another rebound attempt. Maybe stocks tumble under the lows and we flip to shorting the weakness using the same sensible approach.

It makes no difference to me what the market does next as long as it does something. If you leave your bullish or bearish biases at the door, you can make money too.

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

Feb 25

Bulls or Bears, who’s right?

By Jani Ziedins | Free CMU

Cracked.Market University

Q: Bulls or Bears, who’s right?

A: Neither

By definition, bulls and bears are married to their positions and will justify them no matter what the market does. When they are right, they gloat. When they are wrong, they argue even harder. Neither approach results in successful trading and if your goal is to make money, you should never fall into this trap.

Successful traders are pragmatic. Three weeks ago, I liked the way the market was setting up and I bought the first Coronavirus dip. That trade turned out brilliantly, rallying nearly 200-points over a couple of weeks. But rather than gloat over my defeated rivals, I recognized good enough when I saw it, collected my worthwhile profits, and started looking for the next trade. That led to my next trade, which, unfortunately, didn’t work out so well. But since I was smart about my initial position size, entry, and stops, Monday’s dip didn’t hurt as much as it could have if I was stubbornly attached to my outlook.

What happens next is where it pays to be pragmatic. Rather than dig in my heels and argue this selloff was unjustified, I recognized the market’s emotional state and knew a great trade was going to explode in one direction or the other. Sometimes these things bounce hard and fast. Other times they keep going. As an opportunist, it made no difference to me which way the market went as long as I was making money.

Yesterday afternoon, I bought the dip when the selling stalled. I started with a small position and a tight stop. Everything was progressing nicely this morning when the market opened modestly higher. But rather than keep going, the rebound stalled and selling resumed. Rather than fight it, I flipped sides. When my stop was triggered, I got out. When the market fell under Monday’s lows, I went short. Bull or bear, it makes no difference to me as long as I’m on the right side of the trade.

And now that we find ourselves on the other end of the spectrum, down 7% from recent highs. Should shorts be gloating? Of course not! There are too many profits at risk to get caught up in this battle over who is right and wrong. Rather than brag about our success, we should be looking for opportunities to lock-in profits. Counter-trend trades bounce hard and fast, meaning anyone waiting for more will soon be left with none. Shorts should recognize their good fortune, look for opportunities to lock-in profits over the next couple of days, and start looking for the next trade. Once this thing gets oversold, it will snap back with a vengeance. Either we profit from the next bounce or we watch all of our profits disappear. You decide.

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

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