Morning Market ThoughtsGood morning. Today the opening bell rang and the VIX (Volatility index, or as many traders call it, the “Fear Index”) opened below 9 again. It’s never done that before — trading two consecutive days below 9. Since the index was created back in 1989, it’s only traded below 9.0 on seven days. Six of those were in the last six months. (This information comes from an article at Zerohedge.com). So something is going on, and I can tell you what it is.
There is no fear in the market now. This is a buying frenzy that just keeps going. The best strategy on Wall Street is BTD — “buy the dip”. Every time equities are lower, they are snapped up by eager buyers who seize the chance to put more money to work. And every time they BTD, they make money. Now, this is a dynamic that the Fed started under Greenspan, and was continued by Ben and Janet. It’s known as the “Greenspan Put”, the “Bernanke Put”, and the “Yellen Put.” Pretty soon, you’ll hear of the “Powell Put” when Jerome takes over the chair at the end of the table. Central banks have been the biggest market manipulators in history. (My opinion, though I have not done an exhaustive study of market manipulators. Rather, it just seems pretty obvious…at least to me).
So when every dip is followed by a rip, the bulls start feeling pretty smart. In fact, the bulls laugh at any trader or commentator who expresses negative views about equities. They believe that any bear is a really dumb bear, and that the market has changed from what it was back in the dark ages. “We are now in a new world, where Wall Street has no edge. Information is everywhere. And everywhere we look, all signs point to higher prices. What’s that I hear in the distance? Bobby McFerrin! “Don’t Worry. Be Happy!””
It’s very tempting to get so bull crazy that you start counting the profits that you plan to make this year. You get excited. This beats the snot out of that desk job you have where the highlight of your day is going down to the corner store during lunch and buying a couple of $10 scratchers in the hope that you won’t have to go back to work.
It’s good to be a trader these days. But there’s something you should be thinking about. Actually, a couple of things.
1. When the bull is running, it pays handsomely to run along with it rather than stand on the sidelines with a grumpy look on your face because you’re out when everyone else seems to be in. You keep waiting for that day of reckoning when you’ll be proven correct and all those idiots who have made a killing in the market finally realize that you’re the smartest one in the crowd. They admire you for being so resolute in your refusal to join the buying orgy.
2. When the inevitable correction does occur (as it must), you will now have something in common with all those foolish bulls who made so much money during this high momentum bull sprint. The foolish bulls will be on the sidelines with their tails between their legs, lavishing you with praise.
But there’s just one problem here. They will have lost part of the profits they made on the way up, because no one is able to identify the precise top. So as the market rolled over, the more disciplined of those foolish bulls sold their positions for nice profits, despite not selling at the exact high. They’ve now raised some cash. So you and the disciplined bulls who took part in that major blowoff that has dominated the market for the past couple of years are all in the same position. You’re in cash.
But sadly, those foolish bulls have more cash than you do because you’ve done nothing, while they have increased their wealth. So as the next opportunity presents itself, their original stake will be bigger than yours and they can continue on their merry way to growing their wealth even more, while you’re standing there wondering what happened. If you’re so smart, how come the dumb guys have more money than you?
Remember the “Parable of the Three Sons”? Each of them did different things with the fields their father gave them, but they all achieved something that benefited the kingdom. It wasn’t a competition. Doing something that you love is critically important. When you do something you love, and do the work to do it well, you cannot fail. You’re just a work in progress on the way to wealth.
There are many ways to make money in the financial markets. Whichever way you choose works for YOU. At least it should work for you — if not, then make some changes and find something that does.
There is money to be made now. At some point, that opportunity will vanish. Prepare for that eventuality…but make hay while the sun shines.
RISK MANAGEMENT COURSE
I’ll be teaching a class on risk management next week. It is free to members. After next week, it will still be available for a modest fee in our educational department. I’m putting a lot of time, imagination and energy into this training session. Few things in life are certain, but I can tell you this. It is an absolute certainty that the concepts I will teach you next week will be reflected in your trading results. If you do what I teach you to do, you cannot help but get better. And that’s a promise. If, at the end of the free course you disagree, then let me know and I’ll refund your tuition.
I had originally intended to teach a course on the correct use of stops. But as I got into it, I quickly realized that such a course was incomplete because there is more to risk management than just setting a stop that cuts your losses. So I will incorporate calculating proper position size in this course. With the proper position size, and a consistent use of stops, how can you not become a more profitable trader?
One final note: Each day I get up and review all of my positions, including a quick search of any news that impacts the stock, along with premarket moves. I then review my stop levels. I have a spreadsheet that is quite useful to keep track of the risk on each trade (both percentage and dollar risk). In this spreadsheet, I also update the status of my entire account. If all of my stops are hit simultaneously (unlikely…but it could happen), how much of a drawdown will I take — both as a function of dollars and percentage. As of today, I am 92% invested. This is pretty high for me, particularly in a market that almost seems to good to be true. (When something is too good to be true…it’s false).
But though I’m 92% invested, I am only at a 4.25% risk in my account. If everything goes to a SHTF scenario, I’ll be down less than 5% from where I am now. With just a 5% downside, I’m comfortable participating in this probable blowoff. I’ll keep managing my risk along the way, never striving to get out at the exact top. I will take what the market gives me, and never demand that it give me more.
Hope this helps you in your own trading.