If you have been trading or investing for any considerable amount of time, I am sure that you have heard many popular market adages over that period. Just think about it, when was the last time that you heard someone say “bulls make money, bears make money, but pigs get slaughtered?” I must hear that saying at least once a day and so often that I have become immune to hearing it. Today, I’m going to share with you three stock market adages or saying that you can live by. These saying can help to make you money in any market, but more importantly they will help you from making mistakes and losing money. So here are the three market adages to live by:
1. “The best market moves come from failed moves.” This statement has helped me more than any other market adage in my life. When there is a chart pattern or formation that fails, that is the way the market talks to us. For example, I remember back in July 2009 when everyone was still panicking over the credit and housing collapse; there was a bearish head and shoulders top formation which triggered on the chart of the S&P 500 Index. The calculation of the pattern signaled a severe drop was coming for the S&P 500 Index and the major stock indexes. Almost everyone on CNBC and Bloomberg television were talking about it. The popular financial CNBC contributor, Art Cashin was explaining it on CNBC for several days. Even the financial TV anchors were discussing it over and over in detail. The result was, the pattern failed several days after triggering and it created a massive short squeeze to the upside. In fact, the S&P 500 Index gained nearly 100 points in a little over a week’s time. Always watch for failed moves as it will usually lead to fast moves in the other direction of the trend, as you can see in the chart below.
2. When someone says that “it is different this time” be on guard. When it comes to the market, it is never different. How often did you hear in 2005, and 2006 that real estate will never go down again? Even the chairman of the Federal Reserve said that real estate was not going down. Well, we all know what happened in 2007, and 2008 as real estate in the United States tumbled. In fact, housing prices have still not recovered from those sharp declines. The same thing happened in 2000 with the technology stocks. In fact, the NASDAQ Composite which is a tech heavy index is the only major stock index still trading below its 2000 peak. When someone says that “it is different this time” it is best to run for the hills. Remember, even the bible says that “there is nothing new under the sun” so why would the market be any different?
3. “Never short a dull market.” This market adage remains true to this very day, but most people do not understand what the word dull means. The word dull simply means light volume. Just look how difficult it has been to try and short the major stock indexes over the past several years. The trading volumes today are less than they were ten years ago. In fact, the only time volume has picked up or increased is when the stock market was under distribution or in the middle of a correction. Now let me be clear, there can be and are often great short trades out there, but it is very difficult for the layman/inexperienced to sell short the major stock indexes during light volume periods. When the crowd joins in on the trading and the volume picks up it is usually time to sell and possibly short the market. Until then, never short a dull market.