The obvious mistake the cynics keep making

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The S&P 500 lost 0.9% Thursday after the index slipped under 4,300 support for the first time in nearly two weeks.

Powell said rates are not too high and the Fed could continue raising rates if economic activity is too strong to allow inflation to continue cooling.

This week’s selling is another attempt at the “good is bad” trade. Somehow, people think a strong economy is bad for stocks because it means the Fed will keep hiking rates. But here’s the thing: stock prices are primarily based on corporate profits, not 10-year yields. And when it comes to corporate profits, a robust economy matters far more than 5% interest rates. In fact, one interpretation of the recent increase in Treasury yields is the bond market expects the economy to be strong next year. Does that sound like a good reason to dump stocks?

Regardless, I trade the market, not my opinion. That means I got dumped out of my long trade early Wednesday when the market slipped under my trailing stops near last week’s lows.

Sure, this wasn’t the trade I was looking for, but the market rarely gives us what we want, so I had to make do with what I got. This week, that meant getting dumped out of a partial position for a small loss after buying Monday’s bounce that didn’t work.

But this isn’t a surprise. Bounces fail twice as often as they work. While that doesn’t sound like good odds, if we lose money on partial positions with nearby stops and we make money on full positions with further away price targets, the math works very nicely in our favor.

Monday’s partial trade didn’t work, and now I’m left watching prices fall from the safety of the sidelines.

As I alluded to above, I don’t believe in the “good is bad” trade, and I will keep buying bounces as long as this stubbornly robust economy keeps defying the skeptics. Maybe the market gives me a very tradable bounce on Friday. Maybe the bounce won’t arrive until next week. Either way, I know it’s been forever since the “good is bad” trade worked, and the odds are good this instance will blow up in the cynics’ faces, too.

Until further notice, I’m looking at these dips as buying opportunities, not an excuse to run and hide. The sky is not falling.

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