It was a good week for the S&P 500 as it put Coronavirus fears out of its mind, gained 1.5%, closed at record highs. While this health epidemic is far from over, previous contagions didn’t have a lasting impact on stocks and traders are assuming the same will happen this time too.
The problem with this optimistic outlook is it already prices in a favorable outcome. With stocks selling at record highs, buyers are not being compensated for holding this risk. While the market will most likely be correct in this assumption, why would anyone want to own the risk if they are not getting paid for it in terms of buying stocks at a discount?
The market’s ambivalence skews the risk/reward against us. With stocks at record highs, the upside is already priced in there is a fair amount of air underneath us. This is skew is even more pronounced ahead of a three day weekend. If things go well over the next three days, that is what the market expects and stocks will rise a modest amount. If something goes wrong, there is a lot of room to fall.
Now don’t get me wrong, I’m not a bear in any shape or form. I actually like this market a lot. The problem is I don’t like paying full price for stocks. I prefer waiting for nervous sellers to give me free money.
The correct time to buy was two weeks ago when fear and uncertainty were peaking. Now that calm and complacency returned, this is the time to be taking profits. Rather than pay premium prices, we should be the ones selling them and that is exactly what I’m doing. This market likes to pause at the round 100-point levels and given the nearly 200-point rebound since the Coronavirus lows, 3,400 is a good place for the market to slow down and catch its breath.
I’m taking some profits off the table proactively and moving the trailing stops up on my remaining positions. We only make money when we sell our winners and for me, this is a good time. While I might be getting out a little early, if the market trades well next week, I can always buy back in.
Enjoy the long weekend.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM