How to Navigate a Market That’s Priced for Perfection

So far this year, the markets have surprised many people by continuing to skyrocket higher.

Analysts are hurriedly upgrading their forecasts just two months into 2024. For example, Bank of America strategists joined UBS Group AG and other brokers in upping their year-end S&P 500 target by 400 points to 5400.

That shows how unprepared they’ve been for this rally.

But right now, stocks are priced for perfection…

Last Friday, the S&P 500 closed out at yet another all-time high, gaining just under 1% for the week.

Much of that action is coming from the Magnificent 7.

Yet it’s not even all of the seven… Amazon (AMZN), Nvidia (NVDA), and Meta Platforms (META) are all making fresh highs – with Microsoft (MSFT) also recently looking stronger.

But Apple (AAPL), Tesla (TSLA), and Alphabet (GOOGL) have been languishing.

So this rally is dependent on a tiny coterie of stocks doing the heavy lifting.

That means any surprise or shock in the market could lead to a drop.

And that’s the reason I want traders to keep the right mindset as they navigate the market right now.

So recently, I shared the first four of my top trading rules.

To catch up, you can find Part One here and Part Two here.

And today, I’m going to share the next two rules on my list…

Rule No. 5: Put a “P” (Profit) on the Page

Regular readers know our first objective as traders is to always put a “P” (profit) on the page.

No matter how small or how few times per trading session, you should always look to have a positive profit-and-loss (P&L).

Not every trade needs to be a grand slam. If that were easy to do on every single trade, everyone would do it.

Trading is really about building up a strong base of capital, little by little. Then you can use that capital base to take on larger position sizes – while still keeping the same risk discipline.

Let’s say you make a 10% return on a $1,000 account. That’s $100. Your account size is now $1,100, and a 10% return is now bigger at $110.

That’s a very simple example.

But you can see how shooting for singles on numerous trades will grow your account size larger and exponentially increase your overall cash returns.

Even smaller wins can add up impressively with a little time.

Aim to constantly put a “P” on the page, so you can build up a strong base of capital. Once you’ve done that, you can take on larger and riskier positions.

That takes us to the next rule…

Rule No. 6: Earn Your Risk

This one takes a bit of explaining… but it’s the main concept that made me the trader I am today.

When you first start trading, you should only trade very small position sizes and take small gains as they come.

If you try to shoot for the home run, you’ll quickly wipe out your account, wind up penniless, and swear off trading forever.

The only time you should swing for the fences is after you’ve built up a strong foundation of capital to work with.

Just as I described above, every profit you take grows your account.

You can keep your position size the same percentage of your trading account, and your return will increase exponentially.

That’s how smart traders get rich.

They “earn” riskier trades by profiting on a large number of smaller ones. That’s sustainability.

And sustainability, along with strict discipline and money management, is what makes a good trader a great trader.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict