How To Be Wrong And Still Make Money
2022.10.10 21:12
The crashed 2.8% Friday after the monthly report showed robust hiring.
S&P 500 Index, Daily Chart
Solid employment and a strongly negative reaction means we are back in the bizarro world of “good news is bad”. Obviously, investors are far more concerned about interest rates than unemployment, so anything that hints at the Fed continuing to raise rates sends traders scrambling for cover.
I will be the first to admit that I came into this week bullish. As I wrote last Friday:
At the very least, we should be lightening up our short positions because greed never pays. But more than that, this thing is a tightly compressed spring poised to rip. Wait for that bounce to start and then jump aboard. As I often remind readers, the biggest and fastest rallies occur during bear markets. And the last time I checked, we are still in a bear market.
Two sessions later and the S&P 500 added 5%. But a few days after that and almost all of those gains had been wiped out.
Does that mean buying Monday’s rebound was a mistake? Absolutely not. As independent traders, our greatest strength is the nimbleness of our size. That means we can buy one day’s bounce, collect those profits a few days later, and even switch direction and short the next drop.
While last week’s 5% rebound proved fleeting, it was still a very profitable trade for those of us that had the courage to jump aboard. As I wrote Thursday evening:
Thursday’s weak close convinced me to peel off some of those profits to reduce my risk headed into the employment report. As much as I think the next move will be higher, there are no guarantees in the market and we only make money when we sell our winners. As easy as it is to buy back in, it felt foolish to wager all of my recent profits on the outcome of Friday’s employment report.
As soon as stocks pop Friday morning, I’m more than happy to jump back in. And if the market goes in the other direction, that’s fine too, I lock in my remaining profits and go short.
As luck would have it, the bears won the day. I dumped my remaining longs for a still respectable profit and went short Friday morning.
Sure, it would have been nicer to lock in all of my profits Thursday, but what I missed selling Friday morning, I more than made up shorting Friday’s tumble lower.
While Bulls and Bears are busy arguing about who is right, I’m over here following the market’s lead and making money no matter which way we go.
As for this week, expect the selloff to continue and even exceed the 2022 lows. But as is always the case, as soon as I get out, the first thing I’m doing is looking for the next buyable bounce. Just because this week’s bounce didn’t work doesn’t mean the next one won’t.
A bounce off of 3,500 would be a great entry point. And if that one doesn’t work, no big deal, I collect some quick profits and get to try again next time.
