When the Blood on the Street is Yours

Market conditions have been nothing short of abysmal this week.

The small end of the market has seen a panicked capitulation in crowded trades.

There weren’t many places to hide apart from the banks and consumer staples.

Despite my many warnings over the last month about falling market breadth and rising rates, I have also been caught up in the selling. I added to Uranium positions in one of my trading services, ‘Retirement Trader’, at exactly the wrong time.

It doesn’t matter how long you have been an investor; the market can still surprise you.

The task isn’t aiming for perfection or working out what the future holds. The task is always about managing uncertainty.

Position sizing and stop-losses (if you use them) are the only ways to manage your lack of control over the outcome.

When you have entered a position, your only choice is to hold on or get out.

If the position goes against you, there is always the desire to hold on because you may be made whole again, whereas getting out locks in a loss.

If the position was too big to begin with, the desire to hold on is even greater because the size of the loss you would have to lock in is so large.

If you enter the trade knowing you are only risking, say, 2% of your capital, then when the stop-loss is hit, it is far easier to hit the sell button and accept the loss.

A 2% loss really isn’t worth getting worried about. You can get 5 trades wrong in a row and be down 10%, which is easy to recover from.

If you were risking 5% of your capital and had five losses in a row, you would be down 25% and need to make 33% to get back to your starting point.

That’s a far bigger hill to climb.

There was nothing remarkable about what happened this week. It is part of the normal cycle that stocks go through.

If you have been knocked around by the events, ask yourself whether you are following your own trading and investing plans regarding position sizing and risk management.

You can talk to a novice about what it’s like to trade markets till you are blue in the face, but no one will truly understand what it is like until they get their hands dirty.

Someone telling you a stock fell 50% in the last month is just an interesting story. Actually seeing your hard-earned capital dive dramatically is another kettle of fish.

It can lead to irrational decision-making in the heat of the moment. Plans are thrown out the window, and the desire to end the pain takes over.

That’s how you end up selling during the final capitulation phase, then looking back six months later and regretting it.

Now that we are seeing some serious capitulation, we may be getting close to a minor or major low.

We all want to be buyers when there is ‘blood on the streets’. But when it’s our own blood, it can be harder to keep our wits about us and continue searching for opportunities rather than licking our wounds.

We need to keep an eye on the unravelling of the AI trade, which is once again on shaky ground. It is about the only thing holding US markets up while most stocks drift sideways or down.

It is clear that much of the positioning in resources over the past couple of years has been driven by the search for a picks-and-shovels entry into the AI trade.

But the long-term stories for lithium, rare earths, uranium etc aren’t totally derailed if an AI reckoning occurs.

So perhaps we are seeing yet another opportunity to enter long-term positions in bullish themes. The question is whether we can navigate the carnage and remain standing on the other side.

Charlie and I consider the above in today’s Closing Bell video and also look at a beaten-up tech stock that is coming back to life after good news this week.

Closing Bell