The One Lesson You Must Learn From This Market Recovery | Tackle Trading
With last week’s rousing recovery, small-caps now sit a whisker from record highs. The last quarter of twists and turns, of whoops and whirls, is now a memory. With all lost ground now recovered, it’s worth taking a moment for retrospection. What should we have learned from all the drama? Which eternal trading principals were taught afresh? What worked and what didn’t? These are the questions inquiring minds should be pondering.
Because another correction will come. And if you didn’t learn from this one, you’re bound to commit the same mistakes during the next one.
Last week I highlighted a few of the trading tactics that helped me weather the storm. This week I want to focus more on the behavior of the stock market during the tumult.
Of Trends and Friends
We’ve all heard about the power of trends. And if you haven’t, I suggest you scurry on over to review the Technical Analysis 101 series. Here’s the key when it comes to trends:
The trend is your friend unless it’s the end. Then it’s a fiend that kicks your spleen.
The friendliness of the market trend has once again been made manifest. If there’s one key takeaway from the latest correction finally ending it’s that stocks recover. The advance for the U.S. stock market over the past couple hundred years has been permanent, and the declines have been temporary. Got that?
Advance = Permanent, Declines = Temporary
Just so nothing is lost in translation, we’re talking about the market in aggregate. Individual companies of questionable fundamentals have and will continue to blow-up spectacularly.
More to today’s point, since the penultimate low in spring of 2009, the weekly and monthly trends have pointed higher. The past four months of churning and burning did nothing to change that. With the RUT now approaching a new record, we can officially say that any and all weakness in recent months was a buying opportunity. But, really, should that be surprising? Hasn’t any weakness ended up being a gift horse for the past decade?
Recovery has never been a matter of if, but when.
Now, that doesn’t mean we always wear rose-colored glasses. Getting defensive when the market tells you to is smart. But remember, getting end-of-the-world bearish hasn’t paid out in ages. One day the market will top, and a bona fide bear market will arrive, but good luck nailing it real-time. Investors who have allowed the fear of a crash to prevent them from investing at all have missed out on one of the best bull markets ever.
Investing now with a plan for dealing with bear markets = smart. Not investing because you fear a crash = dumb.
Seed Sowing
An optimistic way to view corrections is as episodes that sow the seeds for future profits. They rinse out excesses and thereby create more sustainable trends. And they reveal real market leaders. Typically the stocks that hold up best during the downturn are those that lead once the selling pressure abates.
If you’re curious how to identify such stalwarts, try keeping an eye on the new 52-week high list. Companies notching new highs when the S&P 500 is wallowing in the mud are major muscle-flexers and easy fodder for bull trades.
Financial freedom is a journey
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Originally published at https://tackletrading.com on May 15, 2018.
