Last week, I was on the phone with my friend. We’ll call him Marky.
Marky tells me he’s been shorting the stock market in recent days. More specifically, he’s been shorting the Nasdaq 100 as it keeps making fresh all-time highs.
Not after a reversal, a failed breakout, or a confirmed momentum divergence.
Nope, as it’s hitting new highs.
And then he asks me, “When do you think it finally starts going down?”
I laughed.
Not because I’m some genius. Mostly because I’ve heard this exact conversation a thousand times over the past 20-plus years.
Humans hate buying strength. They want to feel smart. They want to say they sold the top. They want to be early. They want the glory that comes with calling the turn.
The problem is that markets don’t reward people for sounding smart.
They reward people for being positioned correctly.
My 3 Rules for Fighting Trends
So I told Marky he needed to study my Three Rules for Fighting Trends.
Don’t do it. That’s the rule.
That’s the whole thing. Simply don’t fight trends. We know that stock prices trend. So why would you want to fight that?
But since humans insist on fighting trends anyway, we unfortunately still need Rules No. 2 and No. 3.
Rule No. 2: If you’re going to do it, you better be sure. And I mean really sure.
There better not be another opportunity anywhere else that’s better than stepping in front of a trend making new highs.
Because if there is, then you’re probably just forcing it. And forcing trades can get expensive quickly.
Rule No. 3: If you decide to fight the trend anyway, you better have extremely strict risk management procedures in place.
You need to know exactly where you’re wrong.
Not emotionally wrong. Actually wrong.
You want the market telling you immediately that your thesis failed so you can get out fast.
Because there’s a very high likelihood you’re going to be wrong.
See Rule No. 1.
Humans Love Fighting Trends
I still need to follow up with Marky to see whether he actually listened to me or if he just sat there stubbornly holding the position like a mule.
My suspicion?
Stubborn mule.
Not because Marky is unique. Quite the opposite.
Humans are stubborn, especially when money and ego get involved.
People would rather sit in pain proving themselves “eventually right” than simply admit the trend is going in the opposite direction.
Meanwhile, the market keeps doing what it tends to do. New all-time highs often lead to more new all-time highs.
That’s how uptrends work. Which is why I’ve written before that buy low, sell high is a lie.
The money is made buying strength and then selling at even higher prices later.
Not by constantly trying to fade momentum because something “feels extended.”
I’m not a permabull. In fact, I regularly get called a permabear during bear markets.
We wait for the trends to change first.
Breadth deteriorates. Momentum breaks down. Leadership shifts.
There are signs.
Randomly shorting new highs because something “feels extended” isn’t a strategy.
It’s just expensive entertainment.
Talk to Your Friends
One of the most underrated edges in markets is having smart friends you can talk to honestly.
Tell them the stupid decisions you’re thinking about making. Listen to the stupid decisions they’re thinking about making.
Compare notes. Challenge each other. Remind each other when ego starts taking over.
Because sometimes all it takes is one conversation with someone you trust to stop yourself from doing something incredibly dumb.
And if you absolutely insist on fighting trends anyway, at least follow the rules.
This Week in Everybody’s Wrong
On Monday, we revisited two of my favorite things.
You can listen to what people say or watch what they do.
Here’s why we trust dogs and the bond market.
On Tuesday, we explained how volatility compression leads to volatility expansion.
Everybody is debating what the Fed might do next.
But the market has already made up its mind.
On Wednesday, I shared about why I share so much.
Why wouldn’t I?
Full transparency is part of my edge.
“Being short a bubble sucks,” our friend Jason Shapiro said this week.
On Thursday, we discussed the difference between excessive optimism and disbelief and the bubble in people calling things bubbles.
I love bubbles and I wish we had more of them.
On Friday, we looked at a market making new highs again.
More stocks, more sectors, and more countries are joining the move.
This is not what weakness looks like.
On Saturday, our man Down Under Grant Hawkridge dropped his usual bit of data genius.
Grant is the HI (that’s “human intelligence”) behind just about everything we do around here.
And here he is with still more proof of concept.
Have a great Sunday.
We’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs