When good enough is good enough

Free After-Hours Analysis: 

The S&P 500 added 0.4% on Wednesday, making it four winning sessions in a row.

Headlines haven’t changed in a meaningful way, and in fact, some weaker-than-expected economic news came out over the last few days, causing many investors to cheer because they assume the Fed is done hiking rates.

Is weaker-than-expected economic news good? I don’t buy into the bad-is-good trading philosophy, but if traders want to buy bad news, no one can stop them.

As for my personal trades, I really liked this market last week when the index was under 4,400. Now that we are above 4,500, the risk/reward flipped against us. A big chunk of the upside has been realized, and there is not a lot left in this move over the near term. On the other side, risk is a function of height, so by that measure, the index is 150 points riskier than it was last week.

Combine these two ideas, and this is a better place to be collecting our 3x ETF profits than adding new money. By the time it looks safe, it is usually too late to buy. No doubt, it won’t take long for many of Wednesday’s tardy buyers to regret that decision.

Now, don’t get me wrong, I’m not predicting a return to recent lows under 4,400. But everyone knows the markets move in waves, and after a nice bit of up, we need a little down. Anyone expecting another 150-point rally over the next few sessions doesn’t understand how markets work.

Smart traders buy when they don’t want to buy, and they sell when they don’t want to sell. This beautiful rebound above 4,500 makes it hard to pull the plug on a 3x ETF trade that is working this well. But collecting worthwhile profits is never a mistake. Remember, we only make money when we sell our favorite positions.

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