I was wrong and why it didn’t cost me any money

Free After-Hours Analysis: 

The S&P 500 shed another 1.5% Friday following a stronger-than-expected employment report.

This continues the “good is bad” theme as investors remain fixated on interest rates and continue rooting against the economy.

As I wrote Thursday evening, I actually expected the selling to capitulate and bounce Friday after the employment report:

“Sell the rumor and buy the news” happens often enough that people have given it a name. All of this week’s bloodletting actually improved the odds of a bounce on Friday. Once a nervous owner sells all of his stocks, his opinion no longer matters. So for every nervous owner that bailed out on Thursday, they lost their ability to vote on what comes next.

And more than just taking away weak owners’ votes, these worrywarts have been replaced by confident dip-buyers. If these buyers were afraid of Friday’s employment report, they wouldn’t have been jumping in Thursday afternoon. Out with the weak and in with the strong. That doesn’t sound like a bad thing to me.

Lucky for me, I don’t trade my opinion and was instead on the sidelines Friday morning, waiting for the market to tell me what it wanted to do:

Rather than guess about the employment numbers and then guess about the market’s reaction, I’ll wait for the market to tell me what it wants to do. This is one of those situations where I’d rather be a little late than a lot early.

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As it turned out, there were a lot more people waiting to sell stocks on Friday. As much as I liked Thursday’s setup, it didn’t work. That happens. If this game was easy, everyone would be rich and we know that’s not the case.

This continues to be a half-full market and no doubt dip-buyers will be scarce next week as we wait for the latest round of inflation data.

But just because stocks didn’t bounce on Friday doesn’t mean waiting for a bounce is a bad trading thesis.

Obviously, I was early, and in the stock market, early is the same thing as wrong. But at the same time, this trade could start working later next week or the week after that.

The market has a nasty habit of convincing us we are wrong moments before proving us right. I was clearly wrong on Friday, but since I was waiting for the market to make its move first, I was lucky to be wrong from the sidelines.

But if the market bounces following next week’s inflation data, I will be one of the first to jump aboard that bandwagon. Start small, get in early, keep a nearby stop, and only add to a trade that’s working.

If the selling resumes and I get dumped out again for a small loss again, it happens. For every bounce that works, there will be two or three that don’t. But as long as my losses are on partial positions and my wins are with full positions, I will come out ahead in the end.

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