Why I would rather be lucky than good!

Many investors and traders seem to think that you need to know what will happen next in the stock market to make money. While it may seem enticing to try and make predictions about what will potentially happen, it is not imperative to make money in the stock market. This week’s action in the stock market was a good example of how if you pay attention to price and volume and you are objective about what you see, you don’t need to know what will happen next or the outcome of news events.  

Until recently traders and investors alike have been clinging to the possibility that the Federal Reserve will pivot back to QE and lower interest rates. On Friday, these hopes were dashed during Powell’s speech at the Jackson Hole economic symposium. Powell was clear that the central bank's main priority is to get inflation back under control and that would bring “some pain to households and business.”

While the remarks clearly impacted the market as seen by the steep declines on Friday in all the major market averages, if you are objective about what you see in the market and put yourself in the best possible position to get lucky, you don’t need to try and predict anything. If you assess the situation and look for the best risk-reward relationship, you allow yourself to be wrong by taking a small loss and if you are right, then you stand to win big.

Take for instance the S&P 500. How could one have identified an opportunity to get positions short ahead of remarks by Powell?

To show you that this is not strictly hindsight analysis check out my community discord. On several occasions, I wrote to the discord community about how the S&P 500 had already retraced 50% of the market downturn and is running up against overhead resistance near the 200-day moving average on lower-than-average volume. I also talked about how in a bear market, it is not uncommon to see a 50% rally in the indexes.

If you consider the context of the overall market and the possibility/probability of where the market could go, you can create a hypothesis about the market that has a highly skewed risk-reward relationship.

First, for all intents and purposes, we are in a bear market. Second, if we look not too far back into history to the 2000 and 2008 bear markets, we can see that it is not uncommon for bear markets to have 50% rallies/retracements to the upside. Additionally, it is common that most bear markets have three legs down. We have already had three legs down and the S&P had already retraced more than 50% of the decline from the top. If we are being objective, there is little or no real new growth leadership in the market in terms of individual stocks and most of the movement in the market was in names that had been previously beaten down hard.

If you are a betting person like we all are in the market, then the odds favor another leg down in the market. If you are open to this idea, then you could have positioned yourself short the SPY using an inverse ETF like SPXU with a remarkable risk-reward relationship. If you use the overhead resistance and confluence at the 200 SMA as your selling guide on Aug. 16^th as SPY approached the 200 SMA and you consider the possibility that this is the third leg down which will potentially undercut the major low in the market as it did in 2000 and 2008, your reward to risk ratio is 25 to 1. While this is a bold move, it is not a risky one and if it plays out in your favor, you stand to win big!

Former money manager for William O’Neil, Gil Morales says this all the time. “I would rather be lucky than good.” Fortune favors the bold, so why not be bold?