The S&P 500 finished Tuesday almost exactly where Monday’s session ended.
The flat trade over the last week is proving both bulls and bears wrong. As I’ve been writing for a while, this is a sideways market, not a directional one.
Economic headlines are largely stable, meaning bulls are not turning into bears and bears are not turning into bulls. When few people are changing their minds, stocks end up rangebound.
Sure, it’s been a nice run from the March lows, but now that we are at the upper end of the trading range, rather than get greedy and keep holding, savvy traders are collecting profits and getting ready for the next trade.
Trading is a game of managing risks and rewards. March’s run consumed a whole lot of reward, meaning there is far less upside left for those still holding. Pushing up near multi-month highs means the risks of holding is greater than they were at lower levels.
At the same time, only fools are rushing to short everything they can get their hands on because “stocks are too high.” Momentum is far more likely to continue than reverse, so anyone betting against recent strength is going against the odds.
We are traders and we want to trade, but sometimes the best trade is simply waiting for the next trade. Making money is a lot easier when the risk/reward is stacked in our favor.
Maybe we get an unexpected headline that sends us back to the lower end of the 3,800-4,200 trading range. Or maybe something good happens and we push through old resistance. But until either one of those things actually happens, I’m happy watching this from the sidelines.
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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.