In the late 1990’s there were day traders popping out of the woodwork. People of every profession began leaving there jobs to become a day trader or a swing trader; I remember taxi cab drivers, construction workers, landscapers and many others coming into the day trading business. Many of the people that took on the day trading profession did very well during the bull market, but when the year 2000 came along, the new bear market was a different story.
You see, during a bull market it is easier to be on the long side (buy side) of the tape. The bull market will save many traders and investors, even if they are wrong. Remember, a rising tide lifts all boats. When a correction or a bear market happens, it will humble most novice traders and investors.
I remember meeting a person in 2006 that told me they were a professional trader. I asked that individual how long they have been in the business and they told me one year. As many of you know, 2006 was a bull market so it was easier for the majority of the people trading to make money. This particular person told me that they were predominantly trading Nutrisystem Inc. (NASDAQ:NTRI). I said to the that person, the life cycle of that stock is a little long in the tooth and that NTRI’s best days are probably behind it. Well, this person was not too happy to hear my view of the stock, he defended it with all of this economic data. I told him that the chart was really all that is important. There are only two things that anyone needs to know about stocks, and it is whether the institutions buying it or selling it. Remember, PE ratios, book values, earnings per share, and other economic metrics really do not matter if the institutional money is not coming into the equity to boost the stock. A couple of years later my new acquaintance who loved to trade Nutrisystem was no longer trading stocks. In fact, he lost all of the money that he had made in NTRI stock and much more. The 2008 bear market took hold and wiped him out. Unfortunately, this story is true and will continue to occur with many other new traders and investors throughout the rest of history.
At this time, I see something similar occurring in the stock market. Many individuals are now starting to play stocks on their own. Many people have abandoned their mutual funds and stock brokers. Some individuals are just buying ETF’s and letting them ride. The recent easy money created by the Federal Reserve and other central banks around the world has once again created another bull market. Many people are now saying that if the stock market declines, the central banks will just print more money and inflate it again. While these people have been correct for the past five years, this bull market is now getting long in the tooth. Trading volumes have been extremely light creating a dull market which favors the upside, but this is alarming as complacency by the majority of the trading community is now at an all time high. Many people believe that the stock market can never decline again because of the central bank intervention, but we all know that this is not true.
Here is the bottom line, bull markets are definitely easier to trade than bear markets. There is an old saying that stocks take the stairs up and the elevator down. This means that the bear phases are very fast and often fall further than most expect when a decline occurs. Traders and investors need to prepare themselves now by getting educated. This means they should study and learn to read the charts. The charts are the study of institutional money flow and that is what moves stocks. So enjoy the bull market while it lasts, but be prepared, for the bear will wake up from its hibernation period and will appear again.
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Nicholas Santiago
