Why the “good is bad” trade is so stupid

By Jani Ziedins | End of Day Analysis

Oct 17

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The S&P 500 finished Tuesday’s session unchanged, but that flat result hides some important psychology hiding in the intraday price action.

The index slipped Tuesday morning after retail sales smashed expectations and the “good is bad” crowd hit the panic button. But as I’ve written many times before, the “good is bad” trade is as dumb as it gets. It hasn’t worked for a long time, yet that doesn’t stop people from rushing to sell every time we get a piece of good economic news.

Stock prices are ultimately based on corporate profits. Interest rates and everything else are just noise. As long as corporate profits are strong, stocks will be strong—end of story. Forget all this, “But that means the Fed will keep raising interest rate nonsense.” Strong earnings = strong stock prices Q.E.D.

And no surprise, it didn’t take long before more sophisticated buyers jumped in and bought Tuesday morning’s discounts. There are plenty of reasons for stocks to fall, but stronger-than-expected retail sales are not one of them.

Of course, I shouldn’t complain too loudly because it would be much harder to make money without all of these dumb traders giving it away. Their loss is my gain.

At this point, I don’t see anything that concerns me about this market. Last week’s selling gave bears a golden opportunity to take control and send prices much lower. Instead, prices bounced in their face. That’s a sign of strength, not weakness.

Until we fall under recent lows, this market deserves the benefit of the doubt. Keep holding and lifting stops if/when we get through 4,400. Let those 3x ETF profits come to us.

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About the Author

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.