February 14, 2017

This is a bull market - covered shorts

I've seen a lot of traders come and go. Usually, they go when they fail to adapt. Believe it or not, I knew people who couldn't handle the change from fractions to decimals, which happened over 15 years ago. I've seen many similar situations over the years.

I'm a technical trader, but I also try to respect the fundamentals. However, the level of attention that I'm willing to give fundamentals can change depending on the environment. Fundamentals didn't matter in 1999, when the Nasdaq climbed more than 80%. They mattered a heck of a lot more in March 2000, when stocks crashed.

I've covered most of my shorts. Many of those shorts were initiated when the market was drifting sideways, as it did for a good chunk of the past year. At the time, it made sense to play the market from both sides because it had no clear direction.

Now the direction is clear, and I've adjusted. It's no fun taking a loss on a stock such as Chipotle Mexican Grill, which I shorted at $385 and covered at $415, but I'm not going to exercise the same level of patience with shorts in a roaring bull market as I would in a weaker environment.

Nvidia is a great example of the current "damn the fundamentals, full speed ahead" market environment. The stock trades at 76x trailing earnings and 43x forward earnings. None of that matters right now because traders are simply buying every dip that Nvidia can muster.

That's not a knock on this stock, or any stock. As traders, it's our job to adjust to whatever environment the market presents.

This is a bull market, the S&P 500 is trading at all-time highs, and corporate taxes are likely to be slashed in the near future. If the market (or an individual stock) wants to go higher, why fight it?