Last week I talked about how important it was to have a sense of the market's "narrative." In fact, some folks might say I'm obsessed with the market's narrative.
But that obsession puts triple-digit "profit paychecks" into my Stealth Profits Trader readers' accounts over and over again.
On Friday morning, for instance, we booked a 101.9% return on U.S. Steel call options.
Now, I could've backed out of that trade during a small pullback it had, but this company, even the sector as a whole, really, perfectly fit the overarching narrative of this market - even with more and more people calling for a top.
It goes to show the real value of sticking to your guns, acting on your convictions, and keeping on top of, you guessed it, the narrative.
But... it is true that traders can take this too far, or in distinctly unprofitable directions. Let me let you in on a dirty little secret...
Beware Too Much of a Good Thing
Like I said, markets like this will reward savvy, narrative-aware traders.
But some people cling to the narrative for way, way, way too long.
You can generally divide these folks into three groups - groups with catchy nicknames:
- The Perma-Bulls are mostly sell-side brokers, money managers, and fund managers who have a vested in interest keeping the public hooked on positive news about the market.
Of course, their "vested interest" is that they only make money when the public invests (or stays invested). So in the media and in articles they do what Wall Street-types call "talking their book" - they hype up the investments they already own, hoping to get us to buy in as well.
Now, I believe the stock market has, and will continue to have, a long-term "upward bias" (i.e., stocks generally want to go up), but - and this is a big but - I know it's equally important to get out of the way when the market is in a bear run. Like they say, "Bulls make money. Bears make money. But pigs get slaughtered."
- The Gold Bugs are folks who are always bullish (positive) on gold. More than that, they're fanatical about the metal. Usually, they disdain anyone who has a bad thing to say about their favorite investment that also serves store of value. Don't get me wrong: I think owning some gold is a good thing. But you have to be willing and able to see the ups, the downs, and the sideways of a gold investment.
- Contrast these types with the Perma-Bears. They can only see the negative in the markets, in the global economy and, usually, in human nature. We've all heard 'em - they've called the last three market tops 50 times, or they've been calling for a top to the bull market that started in 2009 every other month since... 2009.
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Now, I, too, believe that we could see a significant market pullback when global debt problems come to a head, or if China's growth strategy flattens, or if the banking system falters, or if worldwide tit-for-tat trade wars reverse the positive effects of globalization.
Those are a lot of "ifs," and I won't let "ifs" like that cloud my reading of what's driving market action this week, this month, and this quarter. It's critical to protect against downside risk, and by all means, protect yourself, but living in fear of the next big drop often prevents one from jumping on the next big opportunity.
I could go on, but you get the picture.
Like a busted clock, investors and traders who put themselves into strict, rigid categories will be right once or twice. But most times, and for the most part, they'll miss out.
So I recommend something like this instead...
Be Rigorously Flexible in Your Approach to Trading
The key to "managing your narrative" and making sure your outlook generally tracks with the market's reality is simple:
Have a "strong opinion, loosely held."
A very sage and successful investor told me that once, and it's led me to some extremely profitable places.
A strong opinion allows me to take decisive action when the time is right. So when pundits keep calling for a pullback because of the White House's policies or the quiet nature of the markets at a top, Stealth Profits Trader readers are making triple-digit gains on PNC, LZB, X, and others.
But a strong opinion is only half of the successful equation. After all, the Perma-Bulls, Gold- Bugs, and Perma-Bears have very strong opinions.
The key is keeping that strong opinion "loosely held." This means that when the indications that the narrative is about to change or has already changed become compelling, then I let go of the outdated indicators and stake a claim to the new narrative.
I then act boldly based on that narrative when I see new profit opportunities. Then I do it again and again. It's that simple.
Before I go, let's look at how the narrative is playing out on the S&P 500.
There's Not Much Action, but There Is Confirmed Support
Last week I suggested that we might have a new "line in the sand" support area near the top of our old sideways box. This week's market action has confirmed that as our closest important support level.
The other key thing to note is that while the market is making new all-time highs, it's doing it v-e-r-y s-l-o-w-l-y.
This is both good and bad. It's bad because the lack of significant market movement to the upside (or either direction for that matter) means that profit opportunities are limited, and we really have to pick our shots.
It's good, however, because markets rarely fall or have severe, direct drops from slow-grinding new highs. Markets tend to form rounded tops and make one or more "lower highs" before they have serious down moves.
For now, like last week, keep strong stocks on the pullbacks.
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.