Random Musings about the Current Market

The following were my opening comments in the Leavitt Brothers weekly report.

Whatever the market’s ultimate plan is, all traders will be tested. No one will get a clear path to operate on.

If the market ultimately goes up, there will be enough drops and enough sideways periods to cause doubt and discomfort among the bulls. Many will panic on weakness or just be worn out by the passage of time.

If the market ultimately goes down, there will be enough “green shoots” and pockets of strength to cause the bears to question whether it’s a given the lows will be taken out.

In either case, the market seems intent on acting in a way that will result in the least number of traders participating.

Right now, both groups are frustrated. There are enough ups to keep the bulls in the game and enough downs to keep the light of hope burning for the bears. Only day traders, who don’t care and just play whatever takes place each day, are happy with the current lack of directional staying power. Anyone who wants a trend would like the market to make a decision.

This is a good lesson – a lesson all traders, regardless of market preference, need to learn. That is, that there is no such thing as a good market or bad market, and some application of the 80/20 rule will apply.

I’ve talked about this before, that there are no good markets and bad markets – only markets that are appropriate for your trading style and markets that are not.

Some traders prefer steady uptrends. They are low stress and low maintenance, and positions can be held for months instead of weeks or days. But they don’t produce many outsized winners, so some traders don’t like them.

Other traders prefer an uptrend, with a couple 5-7% corrections thrown in. The uptrend forms the backdrop to trade aggressively, and the corrections set the stage for outsized gains because if the market drops 5%, many individual growth names drop 20%. And it’s these bigger drops that enable traders to buy more shares. But those drops can be scary and can cause doubt, so some traders don’t like them.

And still other traders prefer a range. They are ping pong players, buying low and selling high, shorting high and covering low. They don’t want a trend; they want prices to swing up and down in a range. Other traders hate this type of market.

So there are no good markets or bad markets.

You have a trading style. You have an environment you operate best in. There’s a type of market that’s perfect for you, while other conditions are either tolerable or should be avoided.

At any given time, you should be asking yourself: What kind of market is this? What is it doing? What is it offering? What is it trying to tell me? Is this a market that I operate best in?

If the answer to this last question is yes, then, by all means, trade – possibly aggressively. Take advantage of opportunities and make as much as you can.

If the answer is no, scale back. You don’t have to be completely in cash, but you should recognize you’d be wise to focus on playing defense and be in full capital preservation mode.

Some application of the 80/20 rule applies to trading.

You will make most of your money from a small percentage of your trades. And most of your profits will also come from a small subset of time during a year.

If you have a good year, most of your profits will come from 2 or 3 periods, each lasting 2-6 weeks. There’ll be several months where you’re trying to grind it out, and there’ll be 2-3 months where you’re out of sync and in survival mode. Most of your profits will come from a total of 2-3 months.

If you have a good decade, most of your gains will come from just a couple years. Perhaps there’ll be an 18-month bull market and a 1-year uptrend and a great 6-month move. The rest of the time you’re just grinding it out.

It’s important to come to terms with this; then you know there are times when you’ll push hard and times when you’ll back off. A trap traders fall into is being overly active at all times because they want to be consistently profitable. But since the market hands you unequal opportunities, your results will be lumpy, not consistent. Which is my point of this whole rant.

Some application of the 80/20 rule will apply. You will get most of your results from a small percentage of your trades and time in the market. When you accept this, it’s easier to resist FOMO (fear of missing out). Even if others are trading and making money, you can be at peace, knowing your style is not in sync with the market, but your time will come. Maybe next month. Maybe in two months. And you’re okay with this. Making money is not hard, but the goal is to make it on top of previous gains, not get back what you lost during a rough period you overtraded.

Is the current market right for you? Are these the conditions you operate best in? If so, keep going. And push a little, if appropriate. If not, that’s fine. The fact that you recognize this is fantastic. You have a defensive posture and have come to peace with your inactivity. Use this time to study and learn. Your time will come.

FOMO is the urge to do something because others are, even though you know deep down inside the environment is not right for you. Resist it and believe “your” market is around the corner, and you’ll easily make up for lost time.

The current market is tough for a trend trader, regardless of the length of trend you prefer. Prices steadily rose in June and July. Then they declined for three weeks in August. A bounce followed, but now we’re in the midst of a losing streak. The market went up, then down, then up, and now down. Each swing has gotten smaller, and the current price is smack in the middle of the range. If you like this, keep going. If you don’t, it’s fine. “Your” market is coming.

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