A lot of people are skeptical of the recent rally in the markets. Perhaps due to their disguised envy amongst the winners, some point to dumb money and the liquidity induced trillions of FED printed money buying the market at irrational exuberance levels amidst record levels of job losses. Some go to the point of making parodies and Schadenfreude out of the recent winners.
Here are a few examples:
Would you have predicted that $PSEI would rise 16% in a single week breaking 6,500 amidst the reopening of the Philippine economy this June? You might have been bullish but surely you may have been surprised with the strength and legs of this rally. Philippines exhibited the strongest and sharpest rally amongst the Southeast Asian nation as well as the entire Emerging markets region. Has sales gone back on the reopening efforts? Moreover, many companies that filed for bankruptcy filings and were thought as fraud went up 100–300% in a few days. People are feeling it eerily resembles the Tech Bubbles in 1999 and yet there’s a huge disconnect with the economy and the job losses right? Is a rally on hope and not data sustainable?
Portfolio snapshots are everywhere. Is euphoria in the markets?
The thing that the “smart bears” have to be careful of is that the herd is larger than their egos. By their own admonition, the smart are few. The dumb are a lot. And since this is a numbers game and a money flow game, wouldn’t a million “dumb” people easily eat up one smart sell which is why prices can continue ripping higher.
We go back to the primordial question. Do you want to make money or do you want to be right? Is your pride keeping you off from trading an otherwise great risk reward setup?
Add Routines to Your Investment and Trading Processes. Here’s my advice on how to handle “frothy” markets.
1.) Balance FOMO and JOMO with SISO. Everyone knows “FOMO” or “Fear Of Missing Out” When you miss out on $ZM’s 200% rise in 2 months let alone a 50-100% rise in the airlines in a few weeks, you probably feel like crap for selling early even if you may have made 100% in a short time. The only way to eliminate FOMO is to learn JOMO (The Joy of Missing Out) because you know that another good trading setup or investing in another great company is going to come your way. Trades are truly like buses. They come in droves. Similarly you also must know how to SISO (Scale in and Scale Out.)
Ultimately though, you have to realize that there’s an element of luck in making these insanity moves. For instance, would I have known that buying a company that was supposedly going to be delisted for accounting fraud would go 300% in the next 3 days? I just followed my plan, scaled in, scaled out using technical resistances, placed my trade like I would any position with a 5% of my portfolio account. When you focus on your process, you frankly would just open up your heart and mind to whatever outcome even to the point of getting a jackpot.
How much higher can easy money continue to push the markets? Does it matter? Question is — Will you be able to keep your profits? Answer is — Scale In and Scale Out. Learn to Ladder into your positions (allow yourself to enter 1/3 of your intended sizes) and out of your positions (1/3) in the same manner. That’s the only way you can accept how to participate in a rising market while allowing for the inevitable pullbacks even when you think to yourself it cannot get any higher. This is also true for selling when you deem it cannot go higher (scale upwards). Have those routines in your trading and investment processes.
Hope these help.