Regarding yesterday’s brutal selloff—here’s what to do next

Good morning! 👋

Many investors expected the markets to run higher if the Fed paused... but, as has been the case lately, things didn’t play out as expected, and the major averages got trashed.

The selling looks set to continue this morning, so I thought we’d take a moment to talk about it.

Specifically…

... What's happening

... Why, and

... What to do next

Remember how the game is played.

Wall Street has spent decades rigging the game in their favour.

All the “modernization” touted in recent years as a benefit to you is nothing more than thinly disguised game-rigging in their favour… multiple exchanges, extended hours, ETFs, passive investing, dark pools, target date funds, high-speed trading, and, as of late, 0DTE options.

Sounds hopeless, but it really isn’t.

In fact, this kind of market action is very predictable if you understand two things: 1) psychology and 2) market mechanics.

Just like playing poker, you need to learn to “read” the table.

The high-speed crowd took prices down hard on Tuesday ahead of the Fed.

They knew full well “the story” being played out in the mainstream media (a 99% probability of an anticipated pause that was being widely reported) would prompt many retail traders and individual investors to buy because they expected the markets to scream higher when that happened. So, they got to selling and scaring the pants off folks.

At the same time, they “ran” the trailing stops, meaning they pushed prices so low that they all got triggered. Those that didn’t came into play anyway when fear took over.

Wednesday morning, they shifted from Fear to FOMO.

This time around, their goal was to run to the upside by doing the same thing to breakout and momentum traders counting on a rise who had entered their orders ahead of time.

Remember, big traders can “see” the entire retail order book, as can market makers, so this isn’t a guessing game on their part. They know exactly when and where to push your buttons for maximum impact. At the same time, those same big money traders created such a violent updraft that they ignited a short burn, which tends to push prices higher, faster.

Then came the coup de grâce. At about 1430EST, they’d determined that there was enough money on the table to make another downside reversal worth it.

Predictably, the weak and the skittish got separated from their money in both directions, which is exactly why Wall Street’s biggest traders do what they do.

The selling is continuing this morning for a different but related reason we’ve talked about many times.

Fed Chair Jerome “JPow” Powell made it very clear that he’s not done raising rates this year, so, not surprisingly, the US 10YR has risen to multi-year highs. That, in turn, makes the cost of leverage go up.

So the same highly leveraged traders who engaged in Tuesday and Wednesday’s shenanigans are selling hard again this morning to avoid the institutional equivalent of a margin call. They typically start with Big Tech because it’s the most liquid and easiest to move quickly.

They will be back, and it’s important you prepare for that now.

Here’s the thing.

I know it sounds hopeless, but actually, nothing is farther from the truth if you know how to play the game.

1) First, recognize what’s happening, and do NOT let your emotions get the better of you.

The real key to long-term investing success is NOT getting sucked into their game. You know that they’re going to play it, especially when there are major earnings announcements or market-moving headlines like what the Fed’s going to do next.

So make the decision ahead of time to sidestep the chaos and keep your emotions off the proverbial table.

Turn off the TV and shut down your cell phone if you must. Go for a walk with your spouse and the dogs if you want. I do all three, personally. 😊

2) Second, “Buy the Best, ignore the rest.”

I mean it… top-tier names only. Short-term market noise is just that… noise. It does not impact the fundamental case for owning truly great stocks.

You don’t see Buffett heading for the hills, do you?

I didn’t think so.

Neither do I.

In fact, I bet he’s out there doing the same thing I’m constantly advocating you do… buying or adding to great companies on big down days when everybody else is scared out of their wits.

3) Use the right tactics. Many people think that investing is an all-or-nothing decision.

Nothing could be farther from the truth.

The world’s most successful investors constantly add to or harvest profits in the same stocks, especially on big down days when most people want to stick their head in the sand and put a sign on their asteroids saying, Kick me when it’s over. That’s why I encourage you to do the same thing.

Harvesting profits whenever you’ve got gains is another tactic I hammer on frequently, using something called the “FreeTrade” that I pioneered more than a decade ago in my research when I introduced it to retail investors.

People challenge me all the time about how much profit potential they’re giving up, only to fall quiet on days like today because they’ve realized the error of their ways.

Remember something else we talk about frequently… Mistakes are tuition.

Every time the opening bell rings, you’ve got a chance to use what’s happening as an opportunity to learn. So, as my grandfather would say with a wink and a nod, get after it!

There are plenty of people who have gone broke taking losses, but I have never in all the years I’ve been involved in global markets heard of anybody who’s gone broke taking profits.

If you’re a part of the One Bar Ahead® Family, you know exactly what I mean by that and how to do it. If not, and you’d like to learn, I’m here. Upgrade to Paid

So now what?

I want you to take a deep breath.

The sky is not falling.

Let me show you a chart that my team and I run every night.

... The probability of a higher close a day from now is 53%

... The probability of a higher close three years from now is 82.9%

... The probability of a higher close a decade from now is 93.3%

To my way of thinking, the real problem here isn’t rigged markets, Wall Street, politics, inflation, rates, or a dozen other headlines raging across the internet and on the financial news channels.

It’s about one thing—millions of investors have been bamboozled into short-term thinking.

YOU are not powerless, and YOU don’t need to play that game.

Chaos always creates opportunity.

So, I respectfully suggest that you stop worrying about s**t you can’t control and start focusing on the stuff you can—like buying world-class companies AND using the right tactics to control risk.

Your portfolio will thank you.

Not a lot of people realize that big dips are where you really make your money as an investor; you just don’t get to see that until whatever crisis du jour is in the rear-view mirror.

Hang in there!

As always, let’s MAKE it a great day.

You got this!

Keith 😊