Why we should have seen this selloff coming and how to profit from it going forward

By Jani Ziedins | End of Day Analysis

Mar 19

The Coronavirus continues dominating financial headlines as “social distancing” takes a heavy toll on economic activity. What seemed like the worst-case scenario only a few weeks ago is now our reality. While the actual effect of the virus itself has yet to be felt by most people, preventative measures are definitely impacting everyday life.

I will be the first to admit I have a bullish bias and that’s because over the long-term, markets also have a bullish bias. But over the short-term, anything can happen and that’s why it pays to be pragmatic. Back in late February, when this crash first started, I told readers:

Whether the market is right or wrong about the Coronavirus, it doesn’t matter, we trade the market we are given. As it stands, this 3% kneejerk reaction could go either way. We bounce sharply off the lows and never look back as confident owners continue ignoring every bearish headline. Or this massive strawbale shatters the camel’s back and turns formerly confident owners into a herd of panicked sellers.

The next day I wrote

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.

And the following day I shared an educational post about the best way to trade these volatile markets. This simple approach produced four weeks of outstanding trades.

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.

As for what comes next? We should be thankful for this buying opportunity the Coronavirus just gave us. Back during 2018’s late meltdown, I wrote a post about Bad Luck Brian who was unlucky enough to start investing at the dizzying height of the dot-com bubble. But as bad as his timing sounds, consistently buying the biggest market collapses in stock market history proved to be incredibly profitable for Brian.

And lucky for Brian, he kept buying those discounted Nasdaq shares for more than a decade. Accumulating 20 and 30 shares per month started paying off handsomely when the index finally climbed out of its hole. By the time the Nasdaq recovered to the old highs in 2015, Brian had been able to buy so many shares at a discount that his $93,000 of invested principle was worth $204,000! The index was flat, but amazingly Brian was up 120%!

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


About the Author

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 has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees 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.