Keep Your Powder Dry In A Market Like This

 


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Do you remember the “frenzy" or “froth" moves that were among the wildest aspects of the late-1990s bull run?

In those days it was common to see gains of 20 and 30 points or more in one session. A stock might open at 120, promptly run to 150, settle back to 130, and then sprint to 150 or higher at the close.

The true frenzy plays popped at the open on a bit of news or rumor. The excitement spread, pushing the stock ever higher. Suddenly, the entire market realized that maybe the news wasn’t all that great and maybe shares that were selling at $20 yesterday really weren’t worth $50 today. Then the stock often sold off hard, pounded by short sellers back down to $20 or lower and the poor souls who bought at $50 were left holding the bag.

But for serious day traders with the proper tools and nerves of steel, it was heaven.

Today you don’t see those point gains because the price of most stocks is much, much lower. But gains of 20-30% in one day do appear from time to time.

We’re all human and say to ourselves, “Wow, I wish I had been in that thing!" when XYZ stock pops from nine to 12 at the open. But you shouldn’t be too eager to buy into a rocket unless you have the proper day trading tools.

Why? Because the news or hype that drove that stock at the opening bell could dissipate at the moment you place your order. All too often, XYZ will jump from nine to 12 and then head back to nine or even into negative territory as the traders who got in early cash in their profits. You’ll probably be forced out of your position at a significant loss as the pain becomes too great. If you hang onto the shares, you could be stuck with a loser for a long, long time.

So if you sense a frenzy building, hop on while it is still in the scope of reality and take the ride up. But once it’s over, it’s over. Get out and walk away. If you missed the initial build-up and the 9-buck stock is at $12, the prudent thing is to stay away. Sure, it could go to $20, but it’s more likely to go back to $9.

Keep your powder dry. There will be other frothy plays on other days.

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