When this rally first started in September I wasn't so sure that the market was ready to break out of the consolidation phase that it has been in since the summer. The bearish sentiment at the time was certainly high enough to warrant a good bounce which I had noted, but the gap and run nature of the initial advance made me skeptical as to its sustainability because it smacked of panic short covering which once exhausted often leads to full retracement....that was pretty much what was going on the entire summer with any rally attempts. But as the rally continued I started noticing some different behavior and I adjusted to a bullish stance. Instead of dumb money shorts capitulating and weak longs getting sucked in as what was happing all summer, the opposite happened. A lot of shorts stayed put or doubled down while potential weak longs mostly sat on their hands. As a result this market has been fueled by one short squeeze on top of another. As I alluded to with my "Just" post 2 weeks ago, these jokers have been their own worst enemy. They were looking for the sucker to unload on but it turns out they were suckers all along with their group think.
Given that most of the rally has been done via strength in the morning, there's a very good chance that we will see at least 1 decent correction before the year is over...probably sooner rather than later. Despite how impressive this rally has been it's not the foundation for sustainability because history also shows that emotionally led advances (whereby most of gains have occurred in the morning - a symptom of short covering and/or weak longs chasing) aren't sustainable, despite how impressive and prolonged they appear to be. Once most of the bag holding, top picker bears have gone broke or give up, which typically coincides with weak longs rushing in, all it takes is a flimsy excuse to spring the trap door to the downside which is usually fast and furious wiping out gains that took weeks to make in just a few days. The flash crash was an extreme example of this. More "normal" examples were the mini-corrections we saw last year in July, and October. This rally has been unique because as I've pointed out, the top pickers have been especially stubborn and relentless this time around thus constantly pushing forward the day of "reckoning" ahead. These bag holders blame manipulation, computer trading, and here's a new one...POMO, for their demise. But I believe the real reason is themselves thanks to their weak top picking exploits. Here's how these idiots pick tops: "Short at 1130, stop at 1140", "long QQQQ Sept puts" and when those go bust "long QQQQ October puts" And they keep doing this over and over until they are wiped out forced to cover. Then they wonder who's doing the buying!
Picking tops using tight stops and front month options is such a loser play. When picking a top you need to give yourself a lot of wiggle room because odds are high you will be early. You therefore need to make yourself a strong holder. The best way to do this is use longer dated options. Give yourself plenty of time and only commit a limited amount of capital such that you can afford to lose 100% on the trade and still not be crippled by it if you get it wrong. By using options instead of shorting or bear etfs you don't have to worry about getting stopped out by force at the worst possible time.
The allure of getting rich quick by betting big, doubling/tripling down on losing positions and betting the other way after a stock has made a big move are probably the most popular and costly mistakes people make and they are often done at the same time! You know I'm against picking tops and bottoms but there are exceptions and if you're going to do it, you gotta do is smartly like how I pointed out. Give yourself time and don't bet big initially so you can be a strong holder able to withstand an adverse move. Once you are in a position of gain and thus the market is confirming that you're right, and then you are in a position to press your bet more by adding to it. When the initial position shows a loss, don't average down because that's rewarding, which is at least for the time being, a wrong decision. This is an important part of my philosophy to trading/investing which is basically start small with any idea and only add when in position of a gain. Resist the temptation of picking tops and bottoms is another thing I go by. There are exceptions to this rule but they are rare. You would do yourself a huge favor if you simply never allowed yourself to pick tops or bottoms no matter how tempting. The majority of my profitable plays were buying stocks that were trending higher (in a non parabolic way) not too far off from their 52 week high. If you can find fundamentally cheap stocks that are showing this behavior (typically in out of favor sectors) then you have a "sweet spot" situation where both fundamentals and price momentum are on your side. Huge gains can be made in such situations with minimal risk. If you happened to get caught with a bad entry point odds are you will eventually get bailed out by the positive fundamental trend in place.
In this game you need to have convictions and be right about them to make money and stay right to make big money (i.e. don't take profits too soon) but often times you don't get rewarded right away i.e., your position may show a loss initially and it so it requires you to have courage and patience to be eventually be proven right. At the same time you need to be disciplined such that you reduce the adverse impact of taking losses i.e. being wrong. These two things run contrary to each other yet they must be both incorporated otherwise you won't succeed in the long run. I believe my philosophy of trading/investing is the best way to combine conviction with discipline. It's by no means a bullet proof strategy but aside from trading on illegal insider information or being able to see the future, there's is no such a thing.
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