Don’t Trust the Stock Market’s “Head Fake” Rallies

2 | By Shah Gilani

“It’s all good until it isn’t” is one of my favorite sayings, which happens to be exactly what happened with the bull market’s last run-up to all-time highs on February 12, 2020.

The hot-mess rally, after news about the spread of novel coronavirus in Wuhan, China, knocked global and U.S. markets down from mid-January, looked good. It looked like virus fears were overblown when China said the rate of infection was slowing. Stocks got right back on the bull and rode it.

It was all good.

Until it wasn’t. The virus was actually spreading across China and the globe. When markets realized they’d been duped by fake news out of China, the selling began.

Now, we’re facing the opposite of “It’s all good.” Now, “It’s all bad until it isn’t.”

That goes for rallying markets too. Most rallies we’re going to see are traps, they’re “head fakes,” because the news is all bad, until it isn’t.

Winning big in the stock market is all about the BIG picture, first and foremost. When the outlook is good, for the economy, for companies’ sales and profits, and for markets, investors and traders should be playing from the “buy” side or the “long” side, as they call it on Wall Street.

In other words, play it like it’s all good until it isn’t. Which means keep riding the bull until something kills it, something bad.

But when the BIG picture is bad, economic growth is threatened, companies’ customers, suppliers and profitability prospects are “indeterminable,” play the market from the “sell” or “short” side. That means take profits, raise cash, and look for opportunities to make money when markets go down.

In other words, play it like it’s all bad until it isn’t.

It’s not the moment or time for “rah, rah, don’t worry, everything’s good” and “don’t be afraid of what may not be there.”

It’s the opposite of that.

Overall, It’s not that I’m not optimistic, I am because this will all pass and everything will be good again. It’s just not now. That’s not reality at this juncture.

Frighteningly, and I’m not trying to frighten anyone, I’m trying to tell-it-like-it-is and advocate caution and concern, the extent of the impact on the country, on the world, on economies, on companies, on markets is a great unknown.

The one thing markets hate most is “unknowns.” Investors and traders sell on account of unknowns.

We don’t even know what we don’t know about the novel coronavirus. Markets, at least, know that.

That’s why a sustained rally that leads to a return to across-the-board buying and a renewed bull market isn’t only unlikely, it’s unrealistic.

It’s All Bad Now Until it Isn’t

Until the news, globally, on the coronavirus is better, a lot better, it’ll be bad out there. It’s bad for countries, it’s bad for economies, it’s bad for companies, and it’s bad for markets.

So, don’t get “head faked” into jumping back into stocks with both feet.

All rallies now are suspect, until things get better.

That doesn’t mean there aren’t already great buying opportunities out there.

It means if you’re going to start buying beaten-down stocks, don’t go all in. Allocate maybe 10% to 20% to each new position out of the total amount you want to spend on a new position. If markets fall, you can buy more at lower prices to add to your position.

That’s “averaging down,” and if you have to grab some great stocks now because there are a lot of them on sale, that’ the smart way to do it.

That’s what I’m going to start doing, just not today.

I’ll tell you what, when I start, I’ll tell you right here what I’m buying and how much I’m applying to each new position I’m going to take.

I’m 100% in cash, I have been since Friday, February 21, 2020, when I didn’t want to own any stocks going into the weekend. So, I’ve got a lot of buying to do, eventually.

In the meantime, we’ve been killing it in my subscription newsletter services, buying puts all over the place and logging regular 50% and 100% plus gains, over and over. We’re putting on more downside positions today.

That’s because it’s all bad until it isn’t.



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2 Responses to Don’t Trust the Stock Market’s “Head Fake” Rallies

  1. Linda Weekes says:

    Unfortunately, I think you are very right and the markets and the media are still underestimating the extent of the potential damage from the virus to the world economy. I believe we have a short window before the panic accentuates and this turns into a serious bear market. I have not positioned my portfolio for this , just for a normal correction, but will start the process of going to more of a cash position tomorrow. I am a retiree who needs dividend income , so this is a significant problem. What will retirees do?

    Regards Linda

  2. randy a says:

    U mean its going 2 get worse? This isnt blood in the street? Oil producers dropping up to 65% in 1 day. i remember 2008 as the good old days. oil & gold miners were doing better then. If it gets worse its not just the end of the bull market- its the end of the world as we know it. oil company’s will go bankrupt & there wont be anymore US oil company’s. Followed by the banks who they owe billions to.And we will be dependent on Saudi Arabia for oil.Our economy will collapse & bernie sanders will be elected president. PS I’ll believe corona virus is a serious threat when i start tripping over dead bodies in the street. But just 2b safe dont drink corona beer.

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