Why smart money keeps buying these bounces

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The S&P 500 tumbled Friday morning after the monthly employment report came in unexpectedly strong. As has been the pattern for a while, the “good is bad” crowd hit the panic button because this increases the odds of another Fed rate hike.

The dumb thing about the “good is bad” trading philosophy is stock prices are based on corporate profits, not the Federal Funds Rate. Strong employment means people have lots of paychecks to throw around, boosting corporate profits. I don’t see how this is a negative for stock prices. And neither do most investors; that’s why those opening losses were quickly erased, and the index finished Friday up a very respectable 1.2%. There are lots of reasons for stocks to fall, but strong employment is most definitely not one of them.

As for trading opportunities, no matter how bad the market felt these last few weeks, these waves of selling presented savvy traders with low-risk entry points. While no one can say if the bottom is in yet, we do know the market always overdoes things, which means at some point, this wave of reflexive selling will go too far, and then it will bounce hard.

I have no idea if 4,200 support will hold up next week, but it is holding right now, and that is good enough for me. I bought this week’s bounce and already lifted my stops up to my entry points, turning this into another low-risk trade.

Maybe I get dumped out again next week, like my previous trades, but buying these bounces early and quickly lifting my stops meant every time I got dumped out, it was a breakeven trade. Being wrong and not losing money isn’t a bad way to trade. But it only comes from having the courage to buy these bounces early and the discipline to move my stops up once the bounce starts working.

I have no idea if Friday’s bounce will stick next week, but by getting in early, this is another low-risk/high-reward trade. If it works, I make a pile of money. If it doesn’t, I get out near my entry point and try again next time.

One of these bounces will stick. There is no reason it can’t be this one.

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