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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.
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.