Buyers have to be feeling like Bud Abbott out there right now with sellers being the sad, loving partner Lou Costello. I grew up watching this comedy pair. One of my favorite skits, obviously behind "Who's on First" was "Two Tens for a Five."
Abbott tricks Costello by asking if he has two tens for a five. The process goes back and forth multiple times, each time Abbott only surrendering $5 to get $20 in return. That makes for some easy money.
That's the market over the past few months. Surrender up $5 to get $20 in return. Well, maybe the returns aren't quite to that level, but it's been silly season. What I think we're seeing is many buyers willing to pay $20 for a $5 asset/value rather than sellers giving it up on the cheap. That doesn't matter in the short-term if you are a buyer and IF you can find a person willing to buy your $5 asset for more than the $20 price you paid.
Right now, buyers have only had to wait a few hours, a good night's sleep, or a couple of days to see big returns on their momentum chasing money. Earlier this year it was anything stay-at-home. Before that it was anything FAANG related. Right now it's anything EV, SPAC, low-float, or Bitcoin related. Cybersecurity and biotech are also seeing some love.
While this is great, it never lasts. Oh, it lasts longer than most of us grizzled veterans think it should or will, but for those coming into the markets for the first time in 2020, this was a year of easy money. I traded through the dot-com timeframe, and I actually think post-March has been easier than 1998 or 1999. That's just my opinion but I'd posit this was one of the easiest years in history to make money.
What that means is feel free to celebrate your profits but understand making money this year doesn't make you a genius nor guarantee profits moving forward. Sadly, it may have done nothing more than teach new traders some terrible risk management, impatience, and bad habits. Not all markets will be this forgiving or quick moving.
When will it change? Again, I don't know. That's why I believe traders should employ a trim and trail profit capturing technique here. As positions rise, consider taking off chunks and locking away the profits. If a stock goes up 10%, consider taking off 10%. If it goes up 50%, consider taking half. Develop a formula. Use your past trades as high-level guides on the moves you witnessed. When coming up with your strategy, racket down the expected moves going forward and set your scale based on that.
For instance, if you've been able to catch a lot of 20% mover, cut future expectations in half, and base your trimming and trailing from that number. Ironically, 20% has been a daily move for so many stocks these days, so many traders are probably starting from a much higher number than 20% on their winners. Hence, the idea of pulling back the base to establish your scaling model.
In no way am I trying to call a top. I've seen too many folks killed doing that in my career. I'm simply advocating developing a risk-managed and disciplined exit strategy. Selling pieces doesn't make you bearish. If the stock continues to run, you'll still participate, but from a psychological standpoint it will help you manage any unforeseen pullbacks in the overall markets or single stock names.
Stay sharp out there.