Larry’s Note: Throughout my career, I’ve just about seen it all – from booms, busts, and crazy bubbles to market crashes. And what I’m seeing now has me concerned.
We’re facing a market divergence that could mean trouble if you don’t know how to react. Retail investors keep pushing this market higher and higher… even while many institutional players are taking a step back.
But having lived through countless crazy periods before, I’ve learned how to trade them for sizeable profits. And I want to share that knowledge with you.
A nervous twitch…
Rapid gum chewing…
Bouncing up and down on your toes…
These were a few signs I learned to read in the trading pits of the Chicago Board Options Exchange at the start of my career. They made it clear when something big was about to go down.
The nervous energy and noise would build like a crescendo across the trading floor as phones started ringing off the hook. Panicked phone clerks desperately signalled to their traders in the pit to size up the bids and offers.
Of course, you never knew what the folks on the other end of those phones were going to do. They might buy up a few price levels to pull volume into the market just so they could sell it down.
But if you survived long enough to make it as a trader, you soon learned that you could make a ton of money on days like these. However, you also needed to be extremely cautious.
The wrong step meant you could blow up your account…
Growing Complacency
Of course, things have changed a lot since then…
For a start, there’s no screaming or crazy hand signals. No more exasperated phone clerks hunched on the floor at the end of an exhausting day.
Now everything is done with a click on a phone or computer. A million shares or option contracts can be exchanged in the blink of an eye… and in complete silence.
You can trade from anywhere. All those old mannerisms and trading ticks are now hidden.
But rest assured, they remain entrenched in human nature. No matter how much we might try, folks will never be robots.
And that’s why I’m worried… and have been for some time.
Just as smartphones have greatly increased access to trading, they have bred complacency as markets soared to new highs.
And that’s a warning that things could be about to change…
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Flashing Warnings
Last week, we witnessed a telling signal when both Microsoft (MSFT) and Meta Platforms (META) surged off the back of earnings. On Thursday, they gapped 8% and 11.5% higher, respectively, after posting strong results.
Yet despite that price action (and combined $6 trillion market cap), the S&P 500 spent the rest of the day tracking sharply down and closing near its lows.
That slide accelerated on Friday, even though both Amazon (AMZN) and Apple (AAPL) comfortably beat earnings estimates.
The big earnings beats from these Mag 7 juggernauts weren’t enough to maintain the market’s rally. Instead, the market was more concerned about softening jobs data and the impact of new tariffs.
That reinforces how fully priced for perfection the market has become. And it’s going to stay susceptible to further sell-offs…
I expect bigger and more dramatic swings in the second half of the year. The story for this year hasn’t been written.
To be clear, I’m not saying that a major crash is imminent. But a sharp pullback could be in the cards. Markets are looking skittish right across the board.
So remain disciplined… and above all, be cautious and tightly control your risk. Because my warning signals are telling me that anything could happen.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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