Why The Stock Market Is More Predictable Than Most People Think
Jani Ziedins | Jun 28, 2022 03:11AM ET
The S&P 500 finished Monday ever so slightly in the red. While a 0.3% loss isn’t trivial, it is fairly insignificant compared to last week’s staggering 6.5% gains.
While one day of support isn’t conclusive, the longer we hold last week’s gains, the more real they become. So by that measure, every hour further we get into this Tuesday and Wednesday, the better it looks.
Headlines haven’t changed in a meaningful way, but that’s kind of the point. This year’s 20% retreat from the highs priced in a whole lot of bad news. That means we are not deciding if the economy is good or bad, but if it is bad or really bad. And at least for the time being, our environment seems less bad than investors were fearing two weeks ago when stocks were testing multi-year lows.
But this isn’t a surprise. As I wrote hours before last the latest big rebound kicked off:
Maybe we get a little more selling on Friday, but everyone knows markets moves in waves and after falling more than 500 points over a handful of days, the next near-term bounce is just around the corner.
We don’t need to be psychic to know what the market is going to do because it always does the same things. In this case, emotional selloffs get carried away and go too far. And when that happens, it means an equally impressive rebound is coming up. And that’s exactly what we got.
Predicting the market is easy, the hard part, and where all of the money is made, is getting the timing right. And that’s where it pays to be a nimble trader. We don’t buy dips, we buy bounces. Start small. Get in early. Keep a nearby stop. And only add to a position that is working.
Catch part of last week’s 6.5% rebound in a 3x ETF and now we’re talking real money!
But now that stocks are dramatically higher, a big chunk of the upside has been realized and the risks of a near-term pullback have increased. While we can stick with this bounce as long as it remains above our trailing stops, this is the time to be getting defensive and ensuring these nice profits don’t escape.
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