Should We Be Worried About Too Much of a Good Thing?
Jani Ziedins | Apr 04, 2023 12:29AM ET
The S&P 500 added 0.4% Monday, extending last week’s big run above 4,100.
These gains leave the index near the year's highest levels, a far cry from the banking crisis lows from a couple of weeks ago.
It is obvious now that buying the overblown fear was the right call; luckily, readers were ready for it. As I wrote last month, just before the market bottomed and bounced:
[I]f the market bounces following next week’s inflation data, I will be one of the first to jump aboard that bandwagon. Start small, get in early, keep a nearby stop, and only add to a trade that’s working.
If the selling resumes and I get dumped out again for a small loss again, it happens. For every bounce that works, there will be two or three that don’t. But as long as my losses are on partial positions and my wins are with full positions, I will come out ahead in the end.
Now, to be clear, I wasn’t predicting a 300-point rally from those lows over the next few weeks, but I did recognize that the rubber band had stretched pretty far in one direction and the potential for a reversal was high. And that’s exactly what we got.
But now that we are 300 points higher and the crowd is far more comfortable, I’m worried about the opposite.
Stocks move in waves; they always have and always will. After a nice run like that, rather than pat myself on the back for profiting from March’s reversal, I’m getting nervous that too much of a good thing can end poorly for anyone that holds too long.
Don’t get me wrong, I’m not calling this a top. Momentum is far more likely to continue than it is to reverse, but with 300 points of upside in our rearview mirror, this is the wrong time to be getting greedy. Savvy traders are taking worthwhile profits and getting ready for the next opportunity.
That said, the other critical thing is to resist the urge to fall for “too far too fast.” No doubt this latest wave of buying will end in a wave of selling, but we want to see that wave start before we jump aboard the short bandwagon. There are few ways to lose money faster than shorting “too far too fast.” This is one of those times when it is better to be a little late than a lot early.
It’s been a good run, but now is the time to lock in profits and prepare for the next trade. (Which could include catching the next wave higher if the short squeeze keeps going.)
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