The current market action is being called a 'bubble' by many market participants. There are some good arguments for this characterization, such as the similarity of SPACs to internet stocks in 1999-2000. It has been fantastic for aggressive traders, but many sit on the sidelines out of fear that they will eventually suffer huge losses if they participate in the frenzy.
My goal is to navigate this action effectively and to extract the maximum amount of profit. To do that, I have to stay with the trend as long as possible and then quickly exit once conditions change. That does not sound that difficult in theory, but it proved tremendously difficult for many market players back in 2000.
One of the primary arguments that I hear against staying with a strong uptrend is that so many people suffered horrendous losses when the bubble popped in 2000. There are thousands of stories about people that racked up huge gains by aggressively trading crappy stocks in the bubble in 1999-2000 and then giving back every penny. They sat frozen as the market rolled over, and they did nothing as all their wealth disappeared.
Many market players are worried that will happen again when the current market undergoes a major shift in character. They are so worried that they will suffer losses when things top out that they forego even trying to make money in this very strong uptrend.
Why are so many people convinced that they will be unable to take action? Why can't they simply hit the 'sell' button when the market starts to struggle? Why do they anticipate a disaster when they can so easily exit? Is inertia a certainty that will keep them in the market when the bubble pops?
It is an interesting psychologic issue and deserves study by behavioral economists. The thinking of many people back in 2000 was that it was too late to sell and that the market was sure to bounce back at any minute. That thought process kept them frozen. They feared locking in losses, and hope kept them frozen. It is irrational thinking and shows how emotions and feelings can outweigh logic.
The reality is that selling is tremendously easy, and there is nothing to stop you from rebuying a stock that you recently sold. Most people fail to internalize that thinking. For them, the selling decision is monumental and consequential. Because they attached so much significance to the simple process of entering a sell order, they fail to use it as an important strategic tool.
Selling is the most powerful tool we possess as traders and investors. It is the single best way to control risk. It is more important than fundamentals, charts, and macro analysis.
Once you understand and embrace the power of selling, the action in a bubble does not seem nearly as daunting. You have the power to exit at any time. The only real risk you have is what occurs within the space of a single day. You can be 100% long today and sell it all tomorrow if you wish, so why not stay with a trend as long as possible?
The best advice that I can give traders and investors is to grow comfortable with selling. Institutional Wall Street has a bias against sellers and will counsel you to do it rarely. The truth is that selling should be your best friend. Do it often, do it incrementally, and do it at times for no real reason. It should be a reflexive action. When you feel frozen or uncertain about what to do, then defer to the act of selling.
What makes selling such a powerful tool is the ability to reverse it so easily. These days with brokers not even charging commission, there aren't any transactional costs to worry about. You may buy back higher in some cases, but that is just a cheap form of insurance.
The current market bubble is sure to pop, and as the bears are so fond of saying, it will end badly, but I have no fear of that because I have the power of selling to protect me. I may suffer some losses at turning points, but I will rack up far larger gains than those folks that are sitting on the sidelines right now, worried that they will do nothing as giant profits disappear.