The market is full of bulls and full of bears. This is always true. Timing is everything that defines you as an active investor, but its perhaps not as important for the passive investor. Time is somewhat on their side. The parts to avoid which we have all had to learn at some point or another is that you don’t buy high, sell low. Its this lesson that separates the dumb money from the smart money. As Forrest Gump says, “Mama always said, “Stupid is as stupid does.”
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So what does the Dumb Money do?
Its not that Dumb Money is bullish or bearish, its really that they are late to both sides of trade entries in the majority of times. By the time Dumb Money buys, they are providing exit liquidity for the Smart Money, and when they sell, its more likely to be near or at the bottom of a market cycle, giving great entries points for Smart Money Investors.
The trick is to be a contrarian. If you have found yourself in a bullish long position with a late entry (with no stops), you are going to have to wait it out. By selling and conceding your position and crystalizing a loss, you are unlikely to reenter at the right time. The Dumb Money started to charge in just as the market topped.
Since 1st August 2023, SPX has rolled over from highs of 4606 to having tested 4337 within 3 weeks of trading. I.e. if you entered in at the 4600 levels, you were late. If you turned bearish at the 4400, you were late to the sell off. But how do you know when is the signal to buy and sell. The first rule is pretty basic and its having the discipline to sticking to your own investment style and process.
For more concrete indicators, I find the Stochastic RSI very reliable for my buying and selling signals. Its near impossible to call the perfect top and bottoms, but this indicator does land you in the right ball park at least.
In essence you avoid being the Dumb Money by selling when the Blue and Orange lines are above the 80% level with tops typically arriving at the 90-95% - you can always leave a little for the next man, no one went poor taking profit.
On the flip side when you hit below the 20% level you are in the Buy Zone. As above on the 3 Day Chart there are buying opportunities within this 3 day timeline. Please use the correct timeline for your investment time horizon, i.e. if your investing for 1 year in the market, you’d want to be buying off the Stochastic RSI (1 Month) when its 5%-10% and holding until its in the 80-90% zone as you perhaps consider tapering off your position. But, if you are trading in the short term, use the shorter chart to assist you. (Seems obvious, but probably needs stating for any avoidance of doubt).
If you mess up these timings you will find yourself chasing the market which is to be avoided at all costs. Perhaps the hardest part is to sell at a peak Stochastic RSI level and just walk away and not look at the markets until your buy set up alert triggers. Sometimes your best trading days are the days you don’t trade at all.
In any event, I am investing for the full year, having entered in March 2023, post the SVB bail out, which was a signal for me. I did not hit my take profit levels, which I might review for next year (but I have CGT on my mind). I remain cautiously bullish between now and the end of the year, there could well be a sustained retracement but follow the put / call ratios to support your entries or exits too if trading in the short term.
Take care out there.
NB: This is not financial advice, please contact your own independent advisor before deploying any of your hard earned capital.
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Why dpo you think stohastic RSI is better than the ordinary one?