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Just a handful of months ago, former tech darlings crashed, recession fears brewed, and new layoffs were announced on a seemingly daily basis. To make matters worse, the US Federal Reserve raised interest rates viciously to tamp down rampant inflation – triggering an unforeseen spat of bankruptcies in the regional banking sector.
Fast forward to 2023, and the Nasdaq is off to its most robust start to a year in its 52-year history. Though participation has recently broadened, the equity index star thus far is the Nasdaq 100 Index ETF (QQQ). QQQ, which contains large-cap tech darlings like Apple (AAPL) and Microsoft (MSFT), is up a scorching 45% year-to-date and is knocking on the door of all-time highs. Meanwhile, stocks like Meta Platforms (META), Nvidia (NVDA), and Tesla (TSLA) are each up more than 150% for the year (NVDA is up a mind-blowing 228%).
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What Now?
Once again, equity markets have successfully climbed the proverbial “Wall of Worry”. However, few investors and analysts saw a bull market coming, let alone this magnitude of returns. Regardless of whether you’ve caught the bull market, there is little value in “Monday morning quarterbacking.” An old Wall Street saying warns, “You’re only as good as your next trade.” With that sentiment in mind, today I will lay out 5 tips on how to handle a raging bull market.
5 Tips on How to Handle a Raging Bull Market
If you missed the move, don’t chase it. Investing is a highly emotional endeavor. Seeing your neighbor or friend making money in the market may trigger your “Fear of Missing Out” instinct. However, the only thing worse than missing a move is chasing a move and compounding your mistakes. Remember, stocks will pull back eventually and test their 50-day moving average, an area with favorable reward-to-risk in uptrends. With the QQQ stretched 9% above the 50-day moving average, now is not the time to chase.
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If you’re already long, know your time frame and strategy. When it comes to selling winners, there is no right or wrong method, and there are multiple ways to “skin the cat”. For example, you can sell into strength, use a trailing stop, or wait for a moving average break. What’s critical for investors is to be cognizant of what happens in a worse-case scenario. Ask yourself, “What would happen if the market pulled back 10% from here?”. Do you have a plan? Also, ensure that you’re not over-exposed to one particular industry group. Typically, stocks within an industry group are highly correlated and will pull back simultaneously.
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Conversely, don’t be short just because something is up a lot. Carvana (CVNA) is up more than 1,000% year-to-date. While it might be tempting to short a name like CVNA, it is important to remember that trends often last longer than most expect. Think back to GameStop (GME) in 2020 and 2021. While it may have been tempting to short, the stock ran from $1 to $100!
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GME’s move was so spectacular that multi-billion-dollar hedge fund Melvin Capital blew up due to its short position. Remember, “Markets can remain irrational longer than you can remain solvent.”
Have cash on hand and build a watchlist of stocks to buy on pullbacks. As I mentioned, trends tend to persist much longer than most anticipate. The average bull market lasts roughly four years, so remember, the trend is your friend. What separates savvy investors from amateurs is the ability to wait for“your pitch.” Like a lion waiting to pounce on its prey, wait for big winners like Microsoft (MSFT) to pull back to logical support areas.
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Pay attention to “price action versus news” and sentiment. Equity markets tend to price in the news ahead of time. For example, in late 2022, US equities bottomed the day inflation hit its highest level in 40 years. In other words, despite the “bad” news, markets priced in the future.
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On Wednesday, Apple shares spiked intraday on news that the largest US company is rushing to develop its own generative AI tools to compete with OpenAI. Though the news was “good”, the stock backed off into the close of the session – a sign that Apple and the market may need to pull back.
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Pictured: Stocks often retest their breakout zone after a long-term break out.
Furthermore, the NAAIM Exposure Index, a sentiment gauge representing the average exposure to US equity markets, is at its most bullish level since late last year.
Image Source: NAAIM
George Patton once said, “If everyone is thinking alike, then somebody isn’t thinking.”
Conclusion
In a raging bull market, investors best serve themselves by exuding patience, managing emotions, and implementing common-sense measures. If you don’t have a plan, get one and follow it. Avoid getting caught up in the bull market hysteria.
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Apple Inc. (AAPL) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
GameStop Corp. (GME) : Free Stock Analysis Report
Tesla, Inc. (TSLA) : Free Stock Analysis Report
Invesco QQQ (QQQ): ETF Research Reports
Carvana Co. (CVNA) : Free Stock Analysis Report
Meta Platforms, Inc. (META) : Free Stock Analysis Report