Always See The Other Side Of The Trade

"Just be the ball, be the ball, be the ball. You’re not being the ball Danny."

-Chevy Chase, Caddyshack

I’ve spoken to several traders who were caught very short and on the wrong side of the market this morning.  The odd thing was that the market’s strength has made them more stubborn and even more bearish despite the fact that several indexes are breaking to new multi-year highs.  If you’ve been unable to come to grips with the potential for a strong rally, please take a look at the chart of the Dow from 1932 – 1938. 

Be aware that the negatives were even more pervasive from 1932 to 1938 than they are today.  But during the middle of the worst economic depression in US history the Dow rose from 40 to 190 over four years.   So despite the numerous negatives we are facing today – economic "imbalances," rising interest rates, rising inflation, rising energy prices, rising debt levels, popping housing bubbles, etc, etc. – always take into account the market’s reaction to the "negative" news.  And also be aware of the positives – a global capitalistic boom, strong earnings growth despite rising input costs, the potential for lower energy prices, increases in productivity, and strong corporate balance sheets.  Here is an overlay of what the Dow did in the 1930s, and what the NASDAQ is doing now. 

Source: Bullandbearwise.com

I’m not suggesting that the market of today will continue to rise and double, as it did in 1935, 1936 and part of 1937.  But it could.  Traders need to be prepared for that to occur. 

One of the reasons I often highlight both bullish and bearish scenarios for the market on the very same day is that it forces me to "see" the other side of the trade.  It’s fine to have a belief about what the market could do, but don’t become wedded to it.  Investing and trading is all about playing the probabilities and managing your losses if you are wrong.   At any point in time, the market can decide to focus on the positives, or the negatives, depending on liquidity, psychology, fundamentals, structural issues, and other factors too numerous to mention.  That’s what makes trading so difficult if you don’t "see" the other side of the trade.  So if you’re bearish as the market rips higher, please keep the charts above in the back of your mind and above all, keep your losses to a minimum.