As I write this (Wednesday, January 31st), the market had a strong pullback based on tech earnings and the Fed keeping rates the same. The question I keep getting is if this is a reason to worry and panic or if it is just a dip.
Let’s take a look at our sentiment chart, a proprietary market analysis tool I developed and one of the most powerful tools I have for swing and position trading.
We had a RED bar today, which signals market participants are on tilt and betting on lower prices. As we know, the market generally will bottom and rally once the news-driven emotional traders have finished exiting their positions and/or after they have bet against the market using 2x, 3x leveraged inverse ETFs or put options.
This color-coded chart tells us three key things:
- When individuals are bearish.
- When individuals are betting against the market trend with inverse ETFs and put options.
- When market participants are emotional, worried, and on tilt.
As technical traders who FOLLOW the market, plan our trades, and trade the plan, we are mostly free from daily news and gyrations as they are not taken into account for our strategy trade signals. But, with that said, eventually, one of these pullbacks will be the one that breaks the uptrend and starts a new downtrend. At this point, the market is just shaking off some recent gains to spook short-term traders who are over-leveraged and on the wrong side of the market, making them hypersensitive to every tick on a chart, highlighted in the real trader story I am about to share with you.
Quick Market Gain/Loss Perspective
To put into perspective the one-day move lower, where the markets are trading, and our CGS portfolio, let me remind everyone that the SPY hit a new all-time high one day ago. The QQQ hit a new all-time high six days ago, and our CGS portfolio hit a new all-time high this week. The SPY has only had a one-day pullback at this point, which is nothing crazy, yet this person is screaming that the sky is falling and is losing their shirt!
So, given all the gains and all-time highs we are experiencing, let’s flip to the dark side of things and break down an email I just received from a trader.
Learning Through Failures, Yours or Someone Else’s Is Powerful
One of the best ways to learn something is through personal experience or by watching others do things correctly or incorrectly. With that said, let’s break this email down and see what we can learn about how dangerous betting against the market is and the emotional mindset that follows.
The email below has been shortened and paraphrased to share only the educational points for us to touch on.
Email From Trader Who Follows Me:
VERY DISAPPOINTED with the new QQQ trade. This is my first trade, and you didn’t tell us the market was topping.
I held substantial exposure to 3x inverse ETFs for the SP500 and Nasdaq and exited those when I received the new QQQ buy signal from you. I took a huge loss on the inverse trades, and now I am taking a loss in QQQ. You made a bad call, Chris, and it likely had to do with you ringing the “bloody Nasdaq Bell” and all the excitement from that.
Where should we start on this, as there are so many things to address…
Let’s start with the “Very Disappointed with the new trade” comment. The new QQQ position we entered pulled back a little after entry a few days ago. Undoubtedly, we all want higher prices, but the stock market does not go straight up every day. No one likes trades going against them, but that is part of the game, and you need to deal with it or stop trading.
We all want our “first trade” to make money and pay for years of TTT subscriptions and then some, but that will not always happen. We can’t judge a strategy by one trade or your first trade. Asset Revesting (CGS) works over time. Don’t forget that just two days ago, our accounts were hitting an all-time high. We follow the market trends and manage our positions. If we protect our account from losses, the profits will take care of themselves. It’s a simple strategy but very difficult to follow if we don’t have proper expectations of the strategy itself and investing as a whole. Without realistic expectations, your emotions will always get the better of you.
Let’s address the comment about how the market was topping and that I should have told members before entering the trade. This comment confirms a lack of understanding of how the market moves. No one, and I do mean no one, knows when the market is topping or bottoming, and if they tell you that they do, take your money and run in the other direction. I always say to my subscribers and listeners, we don’t try to pick tops or bottoms; that’s called gambling. Right now, the market is still in an uptrend, and someday, a pullback will start the next downtrend. That may have happened this week, or it could be another 1-2 months out – no one knows until hindsight kicks in. Simply put, a one-day pullback in price does not signal a trend direction.
This person said they had substantial exposure to 3x inverse ETFs for the SP500 and Nasdaq and took a huge loss. Now they are losing money with QQQ, and it’s my fault. Sigh… Betting huge trying to pick market tops or bottoms is a sucker’s game. I actually covered this in great detail in the Jan 24th mentoring session with members. I always tell members that the most successful traders and investors are the ones who watch these mentoring sessions or join live and ask questions. These sessions are included in my investing alert newsletter and are one of the best ways to learn how the market moves and how we manage our positions and mindset.
Knowing this person is swinging hard with 3x leverage inverse ETFs during a bull market at all-time highs tells me this person has very little risk or position management. It’s just a matter of time before they blow up their account. It could be this year or 20 years from now, but it’s bound to happen; it’s just a matter of time.
I agree with this person that our position is currently down 1.7%. I am also in the trade, as the trade alerts I share with subscribers are the trades I use to manage my money. When will the market sell off? Maybe it sells off and gets stopped out this week, or maybe it rallies for months; who knows. At this point, we are trading with both the long-term and short-term trends, which are both up. I can’t help those who can’t control their trades or emotions, and the substantial loss this person took had nothing to do with me but rather their own highly leveraged trades.
The comment about my bad QQQ call and how it likely had to do with me having fun in New York ringing the “bloody Nasdaq Bell” is a perfect example of how trading without position or risk management will cause severe losses, high stress and can cause even the nicest of people to lash out.
I have thick skin, having received many emails, and much worse for 20+ years. And guess what? I can now predict when I am about to get emails like this based on the chart I shared above. The red bars mean people are scared, don’t know what to do, and can be unbelievably rude. With that said, I do feel bad for these people who are stuck on the dark side, and that is exactly why I started sharing my analysis and signals.
Investing could and should be fun and highly profitable, but if the market has gotten into your head and you lack self-discipline, then you are fighting a battle you won’t win. The crappy part is I know exactly what people in this situation are going through.
I have been through bankruptcy and lost everything, and have blown up several trading accounts; I have been to the bottom and back several times, and you call me a slow learner because it took three times before I realized if I don’t change things, I will never get to where I wanted to be financially.
In short, this article was to share a story and experience with you to help provide basic investing education. If you are an active trader or investor with loose risk and position management skills, then it is very likely that Mr. Stock Market controls your emotions and your trading.
If you want to take the first step towards taking that power back, controlling your emotions, and being happier in general, be sure to read this article on personality and take the quiz.
Chief Investment Officer
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