Every trader, money manager, GURU, hot innovative fund, etc., will go through the four unavoidable stages in the market; Rip higher, rug-pull, grind higher, sideways/chop action.
- Rip higher, a great period, everything is clicking. You are the hottest thing since sliced bread, money finds you, you are the talk of the town, you are literally the next Warren Buffet.
- Then the rug is pulled from under you, swift nasty action, you lose in a couple of weeks what to took you months to make.
- After a few months, you start to grind it out, slow, steady action, you are mechanical, not emotional, you are in the zone.
- Then you might enter the sideways/chop stage. You wake up one day to realize that there has been no net change in your account in the last 3-6 months. And if for some crazy reason, this happens while the SP500 is moving higher, then doubt creeps in.
Many times what you do is not in tune with the market. Sort of like two baseball players, Aaron Judge and Giancarlo Stanton, both are power hitters; both face the same pitchers. Still, on any given timeframe, their number can be polar opposites.
Here is a real-life example of the four unavoidable stages so you can get an idea of what I’m talking about.
Every stock, ETF, Mutual fund, Crypto, go through these stages as well.
You will go through these stages for the rest of your investing career.
The key is to repeat them at higher levels each time in stair-step fashion.
You will have a serious problem if you believe that you can avoid them. They are unavoidable. Sometimes it is you; sometimes, it’s the market environment.
$ARKK is a great example. $ARKK was the hottest ETF in 2020; it had a stellar return, the Koreans started calling Cathie Wook the money tree. Everything clicked for $ARKK in 2020.
Investors did what they always have done; chased performance. They don’t believe in the four unavoidable stages.
In February, $ARKK went through the rug-pull stage, it fell 33% in 17-days.
Since then, the fund has been in the sideways/chop action phase, going sideways with no net change while the SP-500 treks higher.
Eventually, $ARKK leave this stage and enter another one.
Every money manager has gone through these stages; Peter Lynch, Ken Heebner, Warren Buffet, Janus 20, Cathie Wood, everyone.
Your job is to know and ACCEPT these four unavoidable stages, act accordingly, don’t get too high after a good period, and don’t get too negative in the down periods. It’s all part of the game. You cannot have one without the other.
You can view over 400 of my trades here https://www.tradervue.com/shared/users/8059.