A word on stocks and current conditions.
Between 2009 and January 2018, an unprecedented bull run drove stock prices into the stratosphere. An entire generation has never known anything but a bull market. An entire generation had no idea that markets could behave the way they have been behaving since February 2nd, 2018. This is why there is no substitute for experience. One cannot fully appreciate this type of volatility until one has seen it with his or her own eyes.
I have seen this four times in my trading life.
1999-2001 – The Nasdaq boom and bust.
2004 – Chaos due to wars
2008 – Global meltdown
2018 – Now
The flash crash in 2010 was not the same as the previously mentioned. It was short-lived and the result of computer glitches and a system which was incapable of safe guarding against those glitches. Very different scenario.
On February 2nd, I called friends and family members who I knew had longer term investments and told them they may want to bail the following week. On Monday, I said wait for the bounce. On Tuesday, I said I would bail if it was me. Go to cash and sit still. Things are about to get wild. A couple of them listened and are quite happy they did. A few did not and probably aren’t very happy about that decision at this point in time.
One gentleman told me he believed the fundamentals were strong so he was averaging in again and buying more. To quote him, “I hope you’re not selling because that’s how you take losses.” He is a friend and I tactfully tried to explain what was happening while earnestly attempting to get him to reconsider given the circumstances. You don’t take losses because you sell. You take losses because the value of your investments decline. The thinking which accompanies a quote like that is precisely the kind of thinking which caused inexperienced individuals to watch Nasdaq stocks in their portfolios go from $100 a share to $0 a share back in 2000/01 and never exit their positions at any point on the way lower. People had made hundreds of thousands and simply watched it all disappear without every picking up the phone once and simply saying, “sell”.
Fundamentals matter but they do not dictate the extremes which can occur when markets go haywire. HFT programs, algorithms, day traders and hedge fund managers who book profits based on quarterly earnings do not care about fundamentals when the Dow drops 1,000 points in a day.
I am not a genius. This is not rocket science. People who do not watch the ladders or Level II platforms do not understand what’s happening. When the liquidity evaporates and the ES futures are being pummeled on thin volume, that is a problem for ‘buy and hold’ believers. Conversely, when the majority of shorts decide to cover at the same time and the ES spikes 20 full points higher as a result, that is a problem for ‘sell and hold’ believers. A ‘buy and hold’ strategy or ‘sell and hold’ strategy is madness during times like these. Holding a position for hours or days in the face of such volatility is akin to betting on red or black at the roulette table. It is a straight-up gamble. The indexes could rise or fall 10% in a day. It simply depends on which way the feeding frenzy goes and how long that frenzy lasts.
This is not a dot com bubble nor a reaction to wars nor a global meltdown due to insane speculation on housing. This is its own craziness but the characteristics are the same. If you have never seen this, it can be extremely difficult to trade. But if you have seen it and understand what’s happening, it can provide more opportunity in a couple months than you may find in years. For skilled stock traders, this is a dream come true.
As my customers know, I primarily trade treasury futures. I am still trading them. Naturally. They’ve been a bit thick and slow (which is surprising given what other markets are doing) but the reads are there. But I am also trading the ES on a frequent basis right now and have even been trading stocks which is something I haven’t done in years. I have experience with this and I understand the risks. For me, this situation is one that I simply cannot watch from the sidelines.
I am not recommending inexperienced traders get involved with this (or recommending anything for that matter). I’m just offering perspective. It is very easy to lose money right now. However, you will rarely see these types of runs on such a consistent basis so experienced traders should make the most of it. Fortunes have already been made and lost in the last two months and they will continue to be made and lost in the next few months. I don’t think there will be a crash like 2008 nor do I think the indexes will make new highs anytime soon. I think things will continue along the same lines. Big up days. Big down days. The occasional sideways day. Maybe the indexes will trend down a bit more but they will probably level out at some point. I don’t think the S&P is going to 2100 but 2350 is certainly within the wheelhouse of possibilities. So is 2800. And that’s the beauty of it.
Whatever your personal situation and comfort level, do not dismiss this action nor miss the opportunity to learn from it. Particularly if you are a young trader in your 20s. You only see this a few times in a decade and when it happens, the opportunity is enormous. You may wait years to see it but when it happens, you should be ready to take advantage of the moves.
As I’ve said hundreds of times in my material and webinars, context is everything. If you trade or are planning to trade stocks or stock index futures, in my humble opinion, it does not get any better than this. To the untrained eye, it looks chaotic and there is definitely a chaotic aspect to it. But if patience is exercised and you can spot even a few of the pressure points where one side is clearly winning or the where the bounce is now showing promise of turning into a full-on reversal, the chaos turns into an optimum situation and the money comes faster than you’ve ever seen.
Do not start trading stocks just because you read this blog. The treasuries are still solid and consistent. If it ain’t broke, don’t fix it. But I think all of my students should view this as a teachable moment.
Good times. Enjoy the ride.