The stock market has become a casino. But, most folks don’t know they’re gambling.
That’s a problem.
You see, when you know you’re headed on a weekend trip to Las Vegas, you grab a pile of cash and you say to yourself, “This is what I’ll play with. Once it’s gone, I’m done.”
In other words, you know you’re gambling. You know you’ll most likely lose the money. And, you limit the amount you put at risk.
Most folks playing the stock market right now aren’t thinking that way. They’re putting their entire savings at risk. They’re focusing entirely on how much they can make. And, they’re ignoring the potential for loss.
How do I know?
The FOMO Is Too Strong
Because everyday my email is filled with folks demanding new trades. “The market is moving,” they’ll write. “We’re missing the chance to profit.”
What we’re also missing, they ignore, is the probability for losses.
Of course, we could trade every day if that’s our objective. The market offers infinite opportunities. But, just because we can do something doesn’t mean we should do it.
There are plenty of subscription services that make trading recommendations every day. From what I’ve seen, most of them are running about 50/50 over the past two months. In other words, they’ve had about as many winning trades as losing trades.
But we look for trades that are low risk and high reward – with a strong emphasis on the low risk side of that equation.
We’re not going to chase momentum. We don’t make trades just for the sake of doing something. We’re not going to gamble.
Instead, we look for opportunities to buy call options on fundamentally cheap stocks that are in an extremely oversold condition. And, we look for the chance to buy put options on fundamentally expensive stocks that are extremely overbought.
Those opportunities have been somewhat rare this year.
The stock market so far in 2024 has been momentum based. Strong stocks have gotten stronger. Weak stocks have gotten weaker. Folks following a “momentum” strategy have done well.
It’s like following the hot roller at the craps table.
The problem, though, is the hot roller ALWAYS craps out. And, that usually happens when all the gamblers have the most money on the table.
That’s where the market is right now.
The stock market’s dramatic rebound off of the early-August decline has convinced most investors that buying the dip will always pay off.
Valuations don’t matter. Economic conditions don’t matter. Technical setups don’t matter. Most traders think the market is primed to move higher – no matter what.
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This Is Gambling – I Won’t Do it, And You Shouldn’t Either
It’s the same thinking that persisted back in 2021 – when famed gambler, Dave Portnoy of Barstool Sports, ran a daily video stream of all the stocks he would buy. He made big bets on momentum-based trades. And, he did quite well for a while – until he crapped out.
You can search the internet and find plenty of videos of Mr. Portnoy ridiculing Warren Buffett and declaring himself the greatest investor of all time. Those were made when Dave was riding the momentum wave higher.
There are also plenty of videos of Mr. Portnoy cursing the market makers, his brokerage firm, and the market environment in general as he blew up his account when his trades crapped out.
Please understand… I have nothing against Dave Portnoy. He seems like a genuinely nice guy. And, he has done quite well for himself by building a gambling empire.
But, his experience is the perfect illustration of momentum trading – where the focus is on the reward rather than on the risk.
That’s not how I trade, and it’s not how you should trade either.
Regards,
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Jeff Clark
Editor, Market Minute
P.S. As I said, I’m not a momentum-based trader. That’s too close to gambling for me. I’m a “reversion-to-the-mean” trader. It’s how I’ve earned my readers consistent – and low-risk – gains like 333%, 490% and 1,343%.
My type of trading is especially useful in times of upheaval – like the upcoming U.S. elections. Because I believe America is reaching a breaking point.
Unrelenting inflation, historic debt, and rising political violence have collided with insanely high stock valuations.
At this point it won’t matter who lands in the White House… but what you choose to do with your money, will matter.
I’ll show you how to avoid being on the wrong side of this turmoil right here.