The Stock Market’s Beginning A Final Blastoff

“Hey Steve, my old day-trading buddies just called… The market’s up… They’re back into it again!”

I couldn’t believe my ears… “What day-trading buddies?” I asked politely.

“Back in the late nineties, I got into day-trading with some other guys. I turned three thousand bucks into fifteen grand!”

“Then what?” I said… I knew that couldn’t be the end of the story.

“Then I lost it all…”

That’s a real conversation I had this week. This friend was so mesmerized by the idea that he could turn $3,000 into $15,000 again, he’d put the outcome of his trading a decade ago out of his head.

The stock market’s up 50% since March. Apparently, some of the old dot-com traders are getting back in.

Back in March, when I was saying “buy,” those traders were nowhere to be found. But now that the market has run farther faster than anyone can remember, they’re getting in. They’re late to the party… but that doesn’t mean the party is over just yet…

If you are nervous, you can bail now. But here’s what I suggest instead: Change seats. Move to a seat that’s closer to the theater exit.

I believe we’ll see a rush for the exits sometime in the next two months. Sentiment is simply too optimistic. The trend is near its end. So we need to position ourselves close to the exits. What I mean by that is, we need to set our trailing stops and follow them… tighten them up if you must.

Do what you can to keep your upside potential here… but ensure that your downside risk is minimized. The best tool for this job is trailing stops.

You might wonder, “Steve, why even bother hanging around in stocks now, when you know sentiment is so bullish… when you know investors are so optimistic again.”

The short answer is, you can potentially make a lot of money if a “blast off” stage materializes. You don’t want to miss that.

I learned the longer answer from the writings of legendary hedge-fund manager George Soros. Soros says, find “the trend whose premise is false, ride that trend, and step off before it is discredited.” That’s the goal here. Another thing Soros said (according to fund manager Stan Druckenmiller) is “It takes courage to be a pig.” OK, then that’s what we’re doing, too.

The stock market is up 50%. From this point, the trend is “false” - it’s just speculative money piling in from here. We don’t believe in it… but we’ll ride the trend as high as we can.

Through our trailing stops, we hope and expect to step off without a bit of stress when the time comes, before the crowd runs for the theater exits.

Also, the statistics back up what I’m describing…

My friend Jason Goepfert at SentimenTrader tracks investor sentiment. His data suggests the potential for what I’ve described.

For example, his “dumb money” confidence index recently jumped above 70 - a very high level… which in itself is a danger sign. And whenever the difference between the “dumb money” confidence and the “smart money” confidence gets wide, Jason gets interested… Right now, both of these are happening.

Jason crunched the numbers for when those two things happen together and found that stock market history shows what I’ve described… Whenever the crowd gets this optimistic, the market can run higher for awhile… before it gives all those gains back.

Times felt terrible in March. As we said here in DailyWealth, that was the time to buy.

Things feel much better out there now. So the end of the rally is closer.

But don’t bail. Have courage. Keep holding your positions, as there could still be significant upside in the next few months… Just make sure you have a close eye on the exit door (through trailing stops), and pull the plug without hesitation when your trailing stops are hit.

We have the potential for a blastoff, before a bust. Position yourself accordingly.

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