They say bear markets make fools out of both bullish AND bearish traders.
That’s because while stocks trade lower during a bear market, there’s typically plenty of volatility.
Bear market rallies can come out of nowhere — causing bearish traders to lose money — before stocks resume their trend lower.
It looks like that’s what has been happening in the first few weeks of this year.
Many of the most speculative (and risky) stocks have been moving higher. After a rough bear market in 2023, traders have been putting capital back into many of these names, sending shares sharply higher.
As you’ve probably guessed, I’m not too keen on joining this trend.
Nothing has fundamentally changed for most of these companies. And the macro environment is still very challenging.
Inflation may be easing a bit. But rising prices are still a major challenge here in the U.S.. And the Fed is committed to stamping out inflation through its blunt tool of higher interest rates.
Unless rates pull back significantly… AND the economy continues to expand… Valuations for the most speculative growth companies are still just way too expensive.
So I firmly believe this bear market rally (for the most speculative stocks) will soon run out of steam.
Speculative Trading and Timing
Even though I’m confident that the popular tech stocks will soon trade sharply lower, timing is difficult to predict.
So far, resistance areas that should have caused these stocks to trade lower simply haven’t stopped the rebound.
As you’ve seen, we’ve had to close out several bearish plays on these positions, taking losses as our put contracts have declined in value.
Meanwhile, some of our bullish plays haven’t performed as well as expected.
Part of this is because the “risk-on” mentality is driving investors out of value stocks and into growth plays. (A temporary trend in my opinion).
And part of this is due to company-specific issues. For instance, Intuitive Surgical (ISRG) experienced temporary weakness in China as the country’s reopening coincided with a surge in covid infections.
During times like this when timing is difficult, it makes sense to hold more cash. (At least until we start seeing more momentum with positions trading in the right direction.)
This is also an important time to remember that the Speculative Trading Program is designed to be a small portion of an overall balanced investment approach.
I explain some of my thoughts on this in our Spec Model Trading Manual — which you can access here.
Here’s the basic idea…
Aggressive Trades In a Balanced Portfolio
The Speculative Trading Program is a very aggressive approach to trading. Which means when our positions are working, gains can accumulate very quickly!
It also means that losses can add up quickly when our positions aren’t working out.
Because of this high-risk / high-reward approach, I recommend using a small portion of your overall wealth with this strategy.
And I also recommend pulling some profits OUT of our program when gains accumulate. That way you get to keep profits when our strategy is performing well.
And if you put some of those profits in a more stable investment program, the gains will be protected during seasons when our speculative program is not performing as well.
For my own family, I keep most of my capital in my more stable Accelerated Income Model. This strategy generates more reliable returns, and helps to build wealth slowly and steadily.
You’ve probably seen the rebalance alerts sent out last year where we pulled $5k from every $10k of profit and moved the cash out of the Speculative Trading Program.
Throughout 2022, we pulled a net total of $165,660 OUT of the model (including our final distribution at the end of the year).
I wanted to give you that number to put January’s pullback into context.
So far this month, the Speculative Trading Program has pulled back and we’ve added $40,000 of capital back into the model. And on Monday morning, we’ll be adding another $5k to reset the model.
And while this is disappointing — believe me, I’ve got my own money invested in this model, so I understand the frustration — this month’s pullback is less of a problem when put into context with last year’s success.
All of that is to say, I’m still very confident in our approach with these speculative plays.
I appreciate your business very much and I’m looking forward to the opportunities that are setting up for this year.
If you have questions about our model, the broad market, or specific plays — please don’t hesitate to ask!
While I can’t give individual investment advice, your question may be one that other members have as well. I would be happy to share my response with our entire group if appropriate.
I hope you’re having a great weekend, and I look forward to our trading profits to come!
Here’s to growing and protecting your wealth,