As the DOW closes above 13,000 for the first time since 2008, as a continuation of its impressive run from the lows of last October, some praise has to be given to the bulls who have capitalized on this run; especially to those who have steadfastly profited from the more recent 3 month surge in the general indices. But I urge traders to be cautious here.
Within social media trading circles, there is some ‘bull euphoria’ occurring, as players plan their trades and trade their plans, and all goes swimmingly. But you know what they say: it’s easy to make money in a bull market. What most traders have trouble with is the risk portion of their trade plan. That is, while they may set appropriate stops or exit levels, it doesn’t matter if your stops keep getting hit; it’s still a losing trade. And don’t forget how quickly a euphoric bull market can turn bearish. The problem facing traders right now is not about not buying “the top,” which would be dreadful, but it is buying too soon on any type of correction. Either, or both, actions would result in your stops getting hit for losing trades, whether or not they’re planned appropriately with proper risk/reward metrics.
One of the best traders on ‘the stream,’ vcutrader, who has been bullish for as long as I’ve been following him, has acknowledged that the market is at least approaching full value. Further, there are still fundamental flaws in the system, and a host of reasons to be bearish on the market. While short term traders may be able to hop in and out of a stock to snag 4%, 5%, maybe even 10% gains very quickly, those with a longer time horizon are stepping out of the way right now. Energy is approaching the levels where it begins to crimp growth, as energy expenditure encroaches upon 9% of GDP. There is still fear that China may not handle their slowdown very well, and the numbers support the pessimists. As evidence, for example, take a look at their import/export and manufacturing data released earlier this month. Europe is a mess, and the numbers coming out of the EU do not support “growth through austerity,” nor success in their bailout packages. I wrote more extensively about that here. And of course we have our own issues, with housing numbers spelling at best sideways movement, at worse another drop. In fact, just today the housing numbers were bad, in addition to some miserable durable goods numbers that typically correlate well with GDP. Combine that with policymakers struggling to get anything of value completed and a domestic market that just soared 27% in 6 months, 2/3rds in the last 3 months, and there exists a great reason to take your foot off the pedal.
The psychology of trading always plays a huge role in determining who wins over the long run and who loses. It’s often hard to recall just how close in your past you were feeling doomsday emotions, scared to hit the buy button and wondering if any of the above listed risks were going to take the global economy south. If you’ve come out of these last 6 or 3 months a winner, then give yourself a hand, and take a vacation. Or at least stay frosty at the keyboard.
