Wednesday was another disappointing session for the S&P 500 with the index losing 0.8%, adding to Tuesday’s 0.3% decline.
While this 1% slip from record highs isn’t a big deal by itself, the bigger worry is this is the start of something even larger.
The size and speed of gains since October’s lows was shocking to say the least. As I often write, markets love symmetry and something that goes up too much tends to fall too far in the subsequent pullback. It is only fair to ask if we are on the verge of that next pullback.
Only time will tell, but that’s the problem—we won’t know until after it happens. All too often, traders wait until the market moves against them before selling. But what’s the point in selling after a big chunk of our profits have already evaporated? Why not sell before the pain of regret forces us out?
That’s why I like trading with trailing stops so much. They take these decisions out of my hands and I don’t have to worry about “what if?” When my trading plan tells me it is time to get out, I sell. Easy as that. And guess what, if prices bounce an hour later, it isn’t hard to buy back in.
Only inexperienced traders try to pick tops. Unfortunately, that approach leads to an emotional attachment to that position because no one likes admitting they are wrong. But guess what? Trading is hard and we are wrong a lot, like a lot.
Those of us that have been doing this for a while are more than happy to sit back and simply follow the market’s lead. I don’t care if this goes up or down. All I care about is that I’m in the right place at the right time.
As I wrote yesterday:
There is nothing wrong with locking in some very healthy profits following such a big run. We only make money when we sell our winners and this is as good of a time as any to harvest some of those well-earned gains. Sometimes all it takes is a little profit in our pockets to help us look at the market more clearly and sleep better at night.
And that’s exactly what I did. I started locking in profits Tuesday and Wednesday when prices started retreating. I still have some money in the market and will be ready to jump back in with what I sold if prices find a bottom and bounce. But if the selling continues, I’m out and waiting for the next bounce.
Odds are good I sold unnecessarily the index will be back at the highs soon enough, but I don’t mind. The inconvenience is cheap insurance against holding through a much larger decline.