The Bears Won’t Win
I’ve been accused of being a “perma-bull” more than a few times throughout my career.
In fact, I’m smack in the middle of a texting war with a trading buddy of mine back in Chicago. He’s constantly sending me dire economic data (as if the market hasn’t seen the ugly numbers before) and insists stocks “HAVE TO CRASH” — and soon! Every pullback is the beginning of the end for him…
Oh, and he’s coming to my place for the Fourth — so I’m sure he’ll be bringing his doom and gloom with him instead of a side dish.
But here’s the thing…
Markets have been through dozens of crises in the last decade. And guess what? We made new all-time highs following each one of them. As an old trading veteran, I know that markets can be irrational and do not have to reflect current fundamentals. This is always true. But markets can also forecast a better financial future. Optimism always wins!
The stubborn short sellers do periodically see market meltdowns. But if they fail to take profits almost immediately, they see their winnings evaporate again and again.
Don’t let a couple of red days cloud your judgement. There’s still constructive action taking place in this market! Remember, tech stocks made new all-time highs this week to continue the weekly winning streak. As I have said many times before, sometimes it is more important what a market does not do in seemingly obvious situations as opposed to what it does do…
The money flow in this economy is epic and stocks remain the choice for yield in this always uncertain environment. The bears might have won their own little battle late last week. But in the long run, my money is with the bulls.
Keep it In the Money,
Chart of the Day: Know when to fold ‘em
Last week, I highlighted the strong performance from the infamous FAANG stocks that were once again beginning to lead the market higher.
Apple Inc. (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Netflix Inc. (NASDAQ:NFLX) and Facebook Inc. (NASDAQ:FB) each posted new all-time highs at some point last week. And I was especially interested in the Facebook breakout, which I highlighted as your Wednesday “Chart of the Day”.
That’s when the trouble started.
Despite a beautiful technical setup, traders hammered Facebook shares shortly after the stock broke out. Facebook’s woes continued into the weekend as telecom giant Verizon announced it was joining a Facebook advertising boycott, sending the shares lower by as much as 7% Friday morning.
Here’s an updated look at the damage:
“From failed moves come fast moves in the opposite direction” is an old technician’s adage that rings especially true in this situation. As the Facebook breakout failed to hold, sellers took control of the stock and were able to sink shares to new June lows in a matter of days.
This scenario also demonstrates why stop losses are so important. If you honored a simple stop loss, you could have easily exited this failed breakout – before getting hammered by Friday’s nasty drop.
Trading Tip of the Day
“As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.”
– Jesse Livermore
Well before most speculators discussed the market in terms of trends, legendary trader Livermore possessed a deep understanding of the madness of stock market participants. He knew the trend was his friend – and he was more than content to ride it until it stalled out.
These days, it feels as if traders’ timeframes are getting shorter and shorter. Instead of letting a trade run its course, speculators are taking profits in a matter of hours, or even minutes. Sure, they might make some spare change here and there. But the real money is made by grabbing onto a big trend and not letting go until the market shakes you off.
If you’re confident in your process, don’t be afraid to let your winners ride!
— Greg Guenthner