The Most Important Trading Issue Right Now
This market is miserable. Here's the key to playing it.
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The market is struggling on Tuesday morning as investors await the tariff announcement on Wednesday afternoon. There is limited liquidity, with buyers sitting on the sidelines, which means that sellers have to contend with weak bids. Breadth is more than two-to-one negative, and there is almost no speculative trading, with just a half-dozen stocks trading up more than 10%. The leading name is Newsmax NMAX, which turned into a meme play after its IPO on Monday.
At this juncture, the most important issue for active investors is time frame. The easiest mistake in a down-trending market is to try to catch a low, and then when the stock doesn’t bounce, the trade turns into a longer-term investment.
If you are going to buy in this miserable market, it is extremely important that you be clear about your time frame. If it’s a short-term trade, then be very disciplined about dumping the stock if it doesn’t perform, and if it does produce a profit, then don’t hesitate to lock in gains.
When the market is this bad, it can be very tempting to buy stock that looks like a bargain in the long term. What wipes out more traders than anything else is buying a downtrend that is too big and too fast and then being trapped when it never rebounds.
Psychologically, most buyers want to be the hero who buys a stock at the exact lowest price. The problem with that thinking is that you can only do that if you buy into the teeth of a downtrend. That increases risk substantially. The better approach is to wait for a bounce and then use the recent low as a stop-out point. That controls risk. It won’t be the exact low, but the downside risk is well-defined.
Markets this bad usually produce some sizable counter-trend bounces, but they have to be traded aggressively and within very short time frames. If you are a long-term investor, the goal should be to buy when there is a major turning point. That takes time, and you will only be a buyer after some upside has developed.
Be very clear about your time frames. A poor market like this can be a great opportunity, or it can be a trap if you are not disciplined.
I’m doing very little as the market action continues to deteriorate.
At the time of publication, DePorre had no position in any security mentioned.
