Let the Dust Settle

Like the Sun Tzu quote, “In the midst of chaos, there is also opportunity.” We are smack in the middle of the chaos and opportunity is all around us. There was a point, not too far ago, the coronavirus (as it was once referred to) was spreading outside China, the market had been reacting extremely negative to the news; and rightfully so. However, when it came to emotions, mental stability was/is usually not at the forefront.

Emotions are very dangerous to a trader; why do you think the largest hedge funds in the world utilize algos as part of their business model?

The emotions in the market are in full effect. For example, in 4 days of trading, $SPY had erased all its gains for an entire month during the beginning of the pandemic; and an additional 8 points – just for good measure. Yes, the market was clearly overbought and due for a pullback, but the ETF was down 8% off pre-selloff highs. Emotions were the obvious driver of the selloff and those trying to ‘catch the knife’ ended up getting stopped out, sending the market further south.

During that chaotic panic selling, holding a long position overnight in anything, was most definitely not the smartest of trading decisions. Of course, as a long-term investor, you expect pullbacks, but this wasn’t a pullback; it was panic selling – period, full stop. It was in your best interest to take some profits; if you were planning on holding through this particular storm.

This too shall pass.

Don’t think for one moment that the selling won’t stop. The Street is always strategically plotting for the next move; it’s chess not checkers. Fundamentally sound companies were getting destroyed with the junk in the market; and those are the securities that the boys ended up positioning themselves in. Deeply discounted securities were being brought down to levels that haven’t been seen in quite some time.

Those that haven’t experienced some panic selling like we all witnessed during that time, should take note on the “it can’t go any lower” mindset. That level of selling should have taught every trader patience, above anything else.

During times when the market is bleeding out, it’s usually a solid strategy to let the dust settle and take some shorts along the way.

There is always plenty of opportunity when emotions flood the markets. And when long-term investor sit back watching their unrealized profits quickly vanish, more times than not, intelligent trading decisions get thrown out the window.

It’s one thing to believe in your research in a particular security, but it’s another thing to force your opinion onto a market that is acting far from rationale. The markets can become a very uncertain arena. It’s at these times when market participants must take a hard look at their positions and ask themselves is their more pain ahead? If the answer is unequivocally yes, then it’s highly advisable to take the “L”, sit back and wait. Wait for the dust to settle down a bit. Le the Street print the low. Let the Street test that low at least once more, and THEN swing the bat.

It's never cool to be the first one to the party. Take the meat of the move and put risk to reward far in your favor.

Trade Smarter.

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