Heroes Who Take Risks Are Made in a Melt-Up. But Beware — it Won’t Last
Let’s go back to a time before the coronavirus sell-off. The bull market had lasted for 10 years and every investor was simply wondering when it would finally come to an end.
I know a lot of investors, myself included, were waiting for what we call the stock market euphoria phase. It’s the point in the bull market where everything seems to go up — way up, regardless of fundamentals or any logical reasoning.
A period where heroes are made because they take extreme risks and are rewarded for it. Like buying the most beaten down companies, companies that are literally going bankrupt, only to realize huge profits over the next few weeks.
Now let’s fast forward to today… Welcome to the euphoria phase. No, it didn’t come like we expected, but it’s here none the less.
After the stock market plunged 30% from its all-time highs, the rebound back to around those levels has been quicker than anyone imagined. And it’s created the euphoria phase we were all looking for to occur before the major selloff.
Since it came after the big drop, I want to talk about what it tells us to expect in the coming months. But first, let’s run through a quick example of the extreme euphoria we are seeing.
Welcome to the Euphoria Phase
A 45% rally in just over two months for the S&P 500 is nothing short of incredible. Stock market geniuses are coming out of the woodwork, posting advertisements all over the place about how this approach or that penny stock will make you rich.
The truth is, it doesn’t work like that, at least not overnight.
The method to making money in the stock markets is the same: finding consistent returns to grow your money over time — and it’s not easy.
But with the way the market has rallied in recent weeks, many newbies think it is that easy. For new investors who just started over the past two months, it seems that way though.
Virtually anything they bought in recent weeks has gone up. Whether it’s a cruise line that is on the brink of bankruptcy — or companies that have actually filed for bankruptcy — it’s mostly all surging higher.
Hertz Global Holdings (NYSE: HTZ), the rental car company is a great example. The stock has surged nearly 1,000% over the past few days.
But you only saw gains like this if you bought the stock the day after it filed for bankruptcy. I don’t know about you, but I’ve never heard of a strategy where you can buy stocks after they file for bankruptcy and see incredible returns.
But this is the kind of stuff that happens during this phase of a market melt-up. Skill, strategy and money management don’t exist. It’s just about everything going up, all the time. And it’s not going to end well.
A Bigger Sell-off Still to Come
The euphoria phase can last longer than we expect it, too. Maybe it lasts through the election and into the end of the year. Maybe it’s already topped out. It’s hard to tell when it ends, but once it does, it will lead to another massive sell-off.
But this time, the new investors are all caught up in the plunge, causing them to add to the panic-selling pressure on the way down.
This is the making of an even bigger drop than the 30% one we saw earlier this year.
Trying to navigate a market like this can be difficult if you are attempting to pick the winners and the losers. When companies filing for bankruptcy are the outperformers, this is a chase I don’t want to be a part of.
That’s why I don’t play the game of knowing which beaten down stock will bounce back. Instead, I follow proven strategies to deliver consistent returns regardless of the market environment.
In my options service, Quick Hit Profits, we went on a 10-trade win streak from April 15 to June 5, grabbing gains anywhere between 8% and more than 50%.
And the best part, I didn’t have to pick and choose which stocks to trade.
My system told me every move to make, and it was spot on.
To me, it doesn’t matter when the euphoria phase will end. Because I’ll continue following strategies that create gains regardless of the market condition.
If you want to learn more about my approach, my colleague Matt Badiali put together a special presentation. Click here to learn more.
Chad Shoop, CMT
Editor, Automatic Profits Alert
• Chad Shoop is a Chartered Market Technician for Banyan Hill Publishing, and an expert at trading options with three different trading systems to stack profits. Follow him on his YouTube channel and on Twitter @ChadShoopGuru.
The post Heroes Who Take Risks Are Made in a Melt-Up. But Beware — it Won’t Last appeared first on Money & Markets.
Investing has consumed my life since college. While double majoring in finance and economics at the University of North Carolina at Greensboro, I founded the university’s economics club, joined the finance club and participated in the Chartered Financial Analyst research competition to represent our school.