Why both bulls and bears insist on losing a lot of money

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The S&P 500 surged more than 9% today, putting up one of the market’s strongest performances in 100 years. While nothing concrete happened, stocks rallied in anticipation of Congress’s comprehensive stimulus bill that is inching closer to becoming law.

Who could have possibly seen today’s huge rebound coming? Easy, anyone who’s been paying attention. (Or at least reading this blog.) The strong, unidirectional moves are long behind us. This market entered the choppy, basing period a couple of weeks ago, typified by extreme volatility in BOTH directions. While it feels like the market’s done nothing but go down over the last two-and-a-half weeks, that’s hardly been the case. Over this period, we’ve seen up-days of +5%, +9%, +6%, and now today’s +9%. In fact, nearly every day over the last 12 sessions alternated between huge gains and towering losses.

As much as bulls and bears want to believe the next move will be a huge, multi-day rally or collapse, we are most definitely in the choppy phase of this correction and that means a lot of back and forth. One day’s dip is followed by the next day’s pop. These are great swing trading opportunities for the bold and nimble, but it is chewing up anyone coming to the market with a strong bias. Savvy traders are buying these dips and selling these pops, not gloating on social media that the other side is dumb, only to be left looking like the fool 24-hours later while holding a pile of losses.

Chances are good we haven’t seen the lowest lows of this bear market yet, but rather than crash lower, further losses will be nibbling at the edges, like yesterday’s dip, only to see prices bounce back into the consolidation a day or two later. As we transition into the basing phase, almost all of these daily breakdowns/rebounds are false alarms that should be traded against, not jumped on.

Avoid the temptation to fall into the bull or bear argument. No matter what we believe long-term, if we want to trade this chop successfully, we need to be pragmatic. Even if we’re bullish, that means shorting an unsustainable move higher. Or if we’re bearish, buying the next oversold plunge.

There is a ton of money to be made in this chop. But that also means we can lose a lot of money if we go at this the wrong way. Keep your biases in check and you will be miles ahead of everyone else getting ground up by these swings.

As for what comes next? Look for today’s huge rebound to fizzle and retreat back to the lows. Maybe this reversal starts tomorrow at the open. Or maybe we rally into midday before running out of buyers. Either way, be ready to short the next stumble. There is a good chance the next leg lower will follow the stimulus bill’s announcement in a classic buy the rumor, sell the news reversal.

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