CMU: When to buy and when to wait

By Jani Ziedins | Free CMU

Apr 27

Cracked.Market University

The S&P 500 continues trading incredibly well and is hovering near recent highs. As much as people don’t trust this record-setting rebound, it keeps defying the odds and it deserves our respect.

As I’ve written previously, there are two “safer” ways to trade this rebound. Long-term investors with a holding period measured in years should be happy to buy this dip, the next dip, and the dip after that. What happens between here and three, four, or five years isn’t important. The most important thing is we get in. For example, during the last stock market crash, the S&P 500 bottomed at 666. Do you think anyone minds having bought the dip at 800? 900? Or even 1,200? More important than how close we get to the bottom is the simple fact we get in. Years from now, the Coronavirus will be long behind us and stocks will be much higher. (If for no other reason than runaway inflation!) Maybe prices go lower first, or maybe they don’t. Either way, it doesn’t really matter as long as we buy attractive discounts and hold for better times.

On the other end of the spectrum is our short-term trades. While I’m confident stocks will be higher in three, four, or five years. I’m far less confident about where they will be next week. Stocks are holding up amazingly well and I could easily see this strength persist into next week as governments continue scaling back restrictions. On the other hand, it wouldn’t surprise me to see infection rates edge higher after this relaxation. If our leaders get cold feet and pull the drawbridge again, that will send stocks into another tail-spin.

Which outcome will we see next week or the week after? I have no idea and I don’t even pretend to speculate. Lucky for me, I’m a nimble independent investor and I don’t need to commit to a position weeks ahead of time. I can buy and sell with a few mouse clicks and rather than fall for this bull versus bear argument, I’m simply standing by, waiting to see who wins before I put any money at risk.

Making money is 80% waiting for the right trade and 20% making the right trade. Right now we are in the waiting phase. Stay patient and wait for the trade to come to you. Making money is easy, the hard part is not giving back all of those profits by following it up with a bad trade. Maybe that next great trading opportunity is coming next week. Maybe the week after. And even if it doesn’t come until June, it’s not a big deal. We made a killing last month and there is no reason to follow that success with an unnecessary trade here.

As for the next good trade, an aggressive trader should wait for this strength to breakdown before shorting. For the less courageous, wait for the next wave of weakness to bottom before buying the dip.

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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.