You never know when stocks can go a lot higher; it’s important to remember that.
Investors are showing notable levels of worry and concern right now. There are a lot of factors at play that are driving this concern. To name just a few, there are rising interest rates, geopolitical concerns, and fears of trade war. And that is only scratching the surface.
It is also late in the business cycle. A recent survey of fund managers by Bank of America Merrill Lynch showed “late cycle” concerns are at an all-time high.
But at the same time, the phrase “wall of worry” was invented for a reason.
Markets have been climbing a wall of worry for many years now, and it is entirely possible that this wall of worry climb-up will continue.
At some point, the good times will end and a serious correction will come — a new bear market will arrive. This is just the nature of reality; everything moves in cycles.
But it’s good to remember just how powerful existing trends can be. The bullish trend that has driven equity markets for the past 10 years could yet have some life left in it.
There are some very smart people who see pain ahead for the markets.
But there are equally smart people, like my good friend Dr. Steve Sjuggerud, who see the opposite — the possibility that a “melt-up” could be coming, with a spectacular blow-off top and a final leg of huge upside to this decade-long bull run.
How do you decide which is correct? With TradeStops it can be as easy as green, yellow, red – like a traffic light. If the system remains green, you stay with the trend of the stock you are holding.
This is a very simple idea. But nature shows that simplicity can be powerful. It can also take courage to stick with a trend — to stay with investments that are green — even when fears are rising and concerns are building up in the financial press.
Remember, as we’ve discussed previously, most investors are risk-seeking with their losses and risk-averse with their gains.
Our goal at TradeStops is to make money rather than be right. And using TradeStops to manage our positions based on what is trending and what is not is a way to do that.
One of the psychological advantages of TradeStops for investors is that it can help simplify the decision-making process — making things as straightforward as green, yellow, red so that decisions are easier.
That can be a more profitable change and a more relaxing one, versus being overly concerned with all the news that is out there.
The point about stocks going a lot higher — and the need to remember that possibility — is also useful in terms of providing balance. Investors have been living in the shadow of fear for the past 10 years, ever since the extreme pain of the 2008 financial crisis.
As a result, it has become easier to bring to mind all the things that can go wrong and all the reasons a bull market can end. Sometimes, for the sake of perspective, it is helpful to remember there are reasons why the bull market can keep going.
And once again, TradeStops can help simplify the whole decision-making and analysis process by keeping you involved with trends that are working (green) and keeping you away from trends that are not working (when yellow turns to red).
Perhaps investing, like life, doesn’t have to be so complicated after all. If recent volatility has you down, take a deep breath and think green, yellow, red; let the algorithms in TradeStops take the weight off your shoulders.
Richard Smith, PhD
CEO & Founder, TradeSmith