CMU: Where’s the bottom?

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