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The action in markets over the past few months has been nothing short of astonishing.
Retail investors are piling into the latest hot thing in the hope of quick gains. And fair to say, that strategy has worked well so far!
Buying in Nvidia (NVDA), Palantir (PLTR), and Ethereum (ETH) has generated some eye-watering gains…
NVDA has more than doubled since April, and PLTR has tripled since the start of the year. And ETH, which was trading at around $1,800 at the start of May, recently pushed through the $4,750 level.
It wasn’t that long ago that a stock doubling in a year was incredible. But now investors want to achieve similar gains in just months… even weeks.
A whole lot of people view the market with a gambler’s mentality. And that’s something that never ends well…
Markets Are Rallying… But Not Forever
Who doesn’t want to bank incredible gains?
But the problem is that these kinds of gains are an anomaly. The market’s move off its April lows is one of the biggest (and fastest) rallies in the history of the Nasdaq.
Right now, buyers are relying on the “greater fool” theory. They assume that there will always be another buyer behind them to keep pushing the market higher. But there’s no strategy or rationale behind their trades.
Now, incredibly, the prospect of a 0.25% rate cut a month-and-a-half away is justifying the latest wave of buying and overextended valuations.
However, you can’t bank on markets endlessly rising.
Eventually, everything reverts to the mean. The more skewed or overstretched a market becomes, the more brutal the correction is when it snaps back the other way.
The one common denominator all bubbles share is that everyone thinks this one will be different. But my four decades in the markets have shown me that they all come to an end (though the trigger may be different).
And it always results in massive pain…
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Stay Cautious in a Bubble
As a trader, you can’t stand in front of the market. You have to respect the price action, no matter how much you disagree.
Trying to prove the market wrong is a surefire way of going broke.
That’s why I’ve remained extremely light with my positions lately. I’m not going to risk my capital chasing overpriced stocks just because everyone else is piling in.
That’s just another form of gambling.
Neither am I going to open lots of short positions just because I think I’m right. Until the market starts to turn, that’s a losing proposition.
Instead, I’ll remain cautious and extremely disciplined… because I know how these things end.
The key, in the meantime, is to protect your capital ruthlessly. That will ensure you have dry powder to exploit incredible opportunities when this crazy market unwinds.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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