This is one of the biggest clichés in markets: “Stocks take an escalator up, and an elevator down”. But cliché or not, it’s the truth. We see it all the time. And I think it’s something we always need to keep in mind. Because it’s easy to forget when your stock just creeps higher a little bit each day. Then the day of reckoning comes and you give back all your gains, and potentially more.
A great example of this elevator down notion was 2008. How many years did it take us to get up to the 2007 highs in S&Ps? Five years or so? How long to give it all back? A year and change?
And it happens in the short term also. Remember uranium stocks creeping higher every day towards the end of 2010? And then boom – profits gone overnight.
This is just the way the market behaves. On the way up, Mr. Market tends to give you plenty of opportunities to buy. No question. But on the way down, you better have a quick trigger, otherwise it may be too late. That’s when “trades” become “investments”. Short-term swing traders start listening to quarterly conference calls to convince themselves that it’s coming back. And they never do.
So risk management. That’s it folks. “Where are we wrong?”, is the question we like to ask. Sure, it’s nice to have an idea where something you buy may go. Former resistance levels, measured moves based on price patterns and Fibonacci extensions can provide nice price targets. And that’s all fine and dandy. But the more relevant question, I think, is “what if it doesn’t do that?. What if it does the opposite? Where are we wrong? Where does the market tell us to get out?”
And not just when we first initiate a position either. I think as something is working we need to continue to ask ourselves, “ok, where do we get out? At what point has momentum, or trend, changed?”. Because without that plan, we may find ourselves in that elevator we mentioned above. And that’s not fun.
So like it or not, this is the way markets move. And it’s something we always need to remember – especially while we’re still riding the escalator.