What smart money is doing now

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The S&P 500 popped to multi-week highs Monday morning as bears continued getting blown out of their short positions.

As has been the case for a while, this recent price action is not being driven by meaningful changes in the fundamentals. Instead, this is a sentiment trade and the latest wave of overwhelming bearishness made a bounce inevitable.

I wrote about this golden opportunity in last week’s post titled “Why savvy traders are getting greedy“:

[A]s far as contrarian trading signals go, the market’s pessimism suggests this is the time to be looking for buying opportunities. The last time the AAII sentiment survey had this few bulls was back in early January, which as it turned out, was a great time to buy stocks…

By now, everyone knows what happened next.

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Unfortunately, Monday’s early strength fizzled and prices retreated back to Friday’s close. But that shouldn’t surprise readers either, as I warned them Friday evening:

[W]e need to keep expectations in check. Just as there wasn’t a real reason to be crashing, there isn’t a real reason to be rallying. That means we shouldn’t expect a big rally and this rebound is simply a normal and routine gyration higher following a bit of down.

Rather than get cocky and complacent with my newfound success, I recognize this is still a choppy market and I don’t want to let this pile of profits escape, so I’m already lifting my trailing stops and getting ready to lock in worthwhile profits if the selling returns next week.

That outlook proved to be especially helpful Monday morning as all of those easy and early gains evaporated.

Stocks spend more time going sideways than up or down and that means we should be wary of predictions of an imminent crash or surge to record levels. Stock prices fluctuate, that’s what they do and we shouldn’t be surprised when prices bounce from the lows and stall after reclaiming a big chunk of lost ground.

Powell is testifying in front of Congress over the next couple of days and we have the monthly employment report due on Friday. Both of those have the potential to move the market, but if the headlines continue coming in near expectations, expect this sideways grind to continue. Buy weakness, sell strength, and repeat as many times as the market lets us.

As easy as it is to buy back in, we should never be afraid of taking worthwhile profits off of the table. Rather than make the same mistake overconfident bears made near the lows, we want to ensure we protect these profits and it is worth locking in some partial profits proactively. Sure, we are probably selling a little too early, but by putting some profits in our pocket and reducing our exposure, it gets a lot easier to ride through these inevitable whipsaws.

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