Why You Should Not Cut And Run

Random Thoughts

The Ps had a decent day, tacking on nearly 1 ½%. This action puts them within spitting distance of all-time highs.

The Rusty gained 1 ¼%–enough to put it at all-time highs.

The Quack put in a similar performance. This action puts it at multi-year highs.

Just a week ago, the market looked pretty darn iffy. I was asked if it was time to bail on the portfolio. My answer was no. And, now the market is back to making new highs. Will things always work out? Of course not but more often than not, following the plan is the way to go. Once, or maybe even twice in your career, you’ll bail out on everything and then breathe a sigh of relief as the market rolls over while you remain unscathed. 99.99% of the rest of the time, you’ll watch in anguish as the market takes off without you. Or worse, you are right about the market but your previous stocks somehow defy gravity.

Come to the chart show today. I’m going to flesh the above out in a lot of detail—showing the actual portfolio and what happened. I’m also going to discuss risk of ruin, discretionary vs. mechanical systems, getting risk vs. reward correct—or at least, getting your head wrapped around it, and I’ll likely have some tangent rants inspired by your questions and comments (one of the few things I can guarantee).

Anyway, I digress. My point is that when a market is near new highs, you don’t won’t to fight it. Let things shake out. DO become selective on new positions—especially when on a net net basis, the indices have been sideways. But, don’t cut and run. Stick with the plan.

You never really get an “all clear” in this business. However, as I preach, as a trend follower, you certainly don’t want to fight new highs. As usual, follow through will be key.

In order for a new trend to begin, a market has to first make new highs. Write that down.

So what do we do? Based on the nature of the recent slide followed by a sharp retrace, I’m seeing mostly shorts setting up. This is normal based on the pullback nature of the methodology. Therefore, I would not get too excited about this. Also, conversely, I’m not seeing a lot of meaningful longs at this juncture. Considering that the market is at new highs, I don’t see any reason to run out and short the market. And, because I’m not seeing many meaningful longs, I don’t have anything to buy. That’s a long winded way of saying that I’m going to do anything new—and so should you. Let things shake out. If the market follows through, we’ll have plenty enough time to add on the long side along the way. And, if the market rolls over, then we’ll put some shorts on. And, of course, if it goes sideways, we’ll continue doing nothing.

In all seriousness, I think today’s chart show has the potential to  be one of my best ever. If you are not saving lives, building buildings, repairing automatic transmissions, or doing other great things, then stop by. Email me if the “book’s in the mail” (honor system) and you need a password.

Best of luck with your trading today,

Dave