CMU: Why everyone is right about this market but they are still losing money

Cracked.Market University

The S&P 500 continues whipping around violently. It’s been two weeks filled with 4% intraday price swings and a lot of people are losing a lot of money. But that’s stating the obvious. What readers really want to know is how to turn those losses into profits.

It is impossible to come to the market without some kind of bias. We spend most of our time searching for proof that supports our predisposed outlook. Bulls see the positive in every event and bears see the opposite. While some people claim they “don’t have a bias”, unless they are a robot, they’re lying to themselves and few things are more expensive than fooling yourself.

Rather than deny what we can’t control, successful traders learn to control it. (Exceptional traders even know how to harness that power, but I’ll save that topic for another post.)

What makes this idea so important right now is because it is impossible to come to this selloff without thinking either A) it is totally overblown and unreasonable or B) this is just getting started and we are going so much lower.

The paradox of those opposing statements is both been very true over the last several weeks. And not just once, but multiple times.

Last month the market rallied decisively in the face of Cornovirus fears. But all of that ended last week when prices crashed hard and the bears were finally able to beat their chest triumphantly. But two day later bulls were strutting around again because the market rebounded in spectacular fashion. Then came Tuesday’s second-guessing and not long after, the Biden Bounce. And finally today, the market closed near the weekly lows.

In perfectly alternating fashion, the bulls went from holding all the cards to falling on their face. Then it was the bears’ turn. As soon as one side was feeling pretty good, the next smackdown came. And honestly, I don’t see these alternating reversals of fortune changing anytime soon.

If we tally the score, bulls have been right three times and the bears matched that tally with their own three wins. But if the score is even, how can so many people be losing money? Easy, rather than collect profits confidently, most people wait until they are wrong and they cannot bear the pain of loss before liquidating their positions. Bulls sell the crash and bears buy the bounce (ie cover their shorts). One day’s profits become the next day’s losses. Rather than strut around and taunt the opposing side, smart money is taking profits.

My personal bias is this tumble is a gross overreaction and prices will bounce back soon enough. But rather than argue with the market crash, I’ve been too busy making money following its lead. When it wants to go down, I short it. When it wants to go up, I buy the bounce. And rather than pat myself on the back for a good trade, I’m locking-in worthwhile profits as soon as I have them. As long as I’m making money, I don’t care if anyone knows what I think.

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