The Nasdaq hit a new all-time high on Monday as the S&P 500 entered the gap that was created back in late February when Covid-19 worries first took hold.
It has been a remarkable recovery for the market especially since Covid-19 continues to rage and there is little clarity about the ultimate economic impact that it will have.
By nearly any measure, the market action is wildly illogical. The bulls point to the massive monetary and fiscal stimulus as justification for the action and many others take comfort in the price action that shows little worry or concern. Still, it is impossible to not wonder how the market can recover so easily as we deal with a crisis unlike any that we have seen before.
There are basically two ways to deal with this market. You can either anticipate that disaster awaits and take action now or you can continue to trade the market action that is occurring and react once it shifts.
It should be quite clear that I embrace the reactive approach to the market. While it is highly likely that we will experience some deep corrective action sooner or later, I see no way to predict when it might occur. The easy thing to do is to conclude that downside is inevitable and to raise cash and institute shorts. Who can question a cautious approach like that?
The problem is that the folks that have been anticipating disaster have been doing so for weeks or even months and have lost out on a huge amount of gains while they wait. It is easy to dismiss gains that you never had but there is a substantial price that is paid for being anticipatory. Active bulls have been building a huge cushion of profits recently and even if they suffer a huge hit when the market turns they are likely to still be in better shape than those that have been awaiting disaster.
A good illustration of this can be found in Apple (AAPL) . A bear could have easily anticipated a top in the $360 area and would now have a 20% unrealized loss on a short position. A bull would have to hold for a drop to $350 in order to suffer a 20% loss. Is anticipating a collapse a safer strategy than waiting to react to weakness?
There are good reasons to be nervous about this market and it is easy to give in to fear. However, the prudent way to handle an extended market with strong momentum isn't to short it but to try to profit as much as you can while closely managing your positions.
My game plan is to simply focus on the stocks that I own. When they act poorly and I start losing money then I will sell them. I will give back some of my recent gains but I can afford to do that and will stay far ahead of those that have been fighting the trend.
The big mental obstacle that many people have to this approach is they fear actual losses far more than they worry about opportunity cost. Economically they are the same but never earning a gain in the first place doesn't carry the same emotional impact as an actual loss.
If you examine your thinking you will likely find that you are much more willing to incur extreme opportunity cost in the hopes of avoiding some actual losses at some vague time in the future.
Focus on your individual positions and keep trying to build a big cushion of profits. When the turn comes you will be able to navigate it without suffering too much damage. Predicting a future crisis is a suboptimal approach.
We have some minor weakness in the early going as the market digests earnings reports, contemplates the chances of another fiscal stimulus bill, and grapples with the fallout of the Covid-19 crisis.