Heed the history of financial markets.

Do you suffer from investor amnesia?

The new breed of traders could do well to heed the history of financial markets.

Sentiment indicators are levitating to dangerous levels, especially in the US, and we know bull markets die on euphoria and we know the runoff will affect us too.

Of course, this time it’s different, until it isn’t anymore. The experienced traders know the signs of a frothy market. Skyrocketing growth assets like Bitcoin, stretched multiples, IPO’s galore sucking up all that hopeful money – who’s the smart guy now? Novices using the dart board to decide, will it be this stock, or that stock. This fun game seems to the uninitiated an endless source of entertainment.

If you’re in the stock market and you know these signs, then what do you do? Be prepared and be prepared for the cost because it will cost you something at some stage. We can never by 100% right. But how much it will cost you depends on how prepared you are. In the meantime, we continue riding the magic carpet (Building stocks, Banks). Some traders will have neutralised already under the caution guise but that’s only an opinion and opinions rarely matter in the stock market, if the market rises another 1000 points do you fend off the irresistible urge to jump in again. Many won’t! It’s a tricky and challenging game.

Crowd behaviour is an ever present and powerful element in this mix. More buyers than sellers push prices higher. That’s where we are now and the crowd currently thinks the market is going higher, that’s what they’re saying – until the day of reckoning and I do feel for those Reddit, Gamestop, Meme stock players and Bitcoin youngsters yet to experience a big fallout. There will be tears, broken hearts, more money lost than made and the usual fallout. Heed your history or ignore it at your peril.

Sentiment indicators are levitating to dangerous levels, especially in the US, and we know bull markets die on euphoria and we know the runoff will affect us too. So many people are talking stocks at the moment, it is another sure sign of concern. Now that we can see just about everyone is participating in the stock market, we are approaching a level where the real ‘kicker’ kicks in and that is when there simply aren’t any buyers left to buy. When there’s only sellers, we know what happens. It’s a race for the exits and the price and value suddenly becomes irrelevant.

As experienced traders we need to be a smart as we can. We know there is no simple answer because we never know when it’s going to happen. Understood, no-one rings the bell at the top. Some sectors will fare differently. It depends on the fear element that takes hold. Will it be a ‘guided’ correction or a downright collapse even of all things good? The (systemic) GFC was very different to the (fearful) Covid collapse. We never know what the next one will look like. The systemic took much longer to recover than the fearful. Recently it has certainly been a meritorious rise by the tech stocks. But is the extent justified? They will be hit hardest and fastest as they were the ‘tallest’. Will our mining stocks offer some insulation? Hopefully some insulation will come from that play. Time will tell bit I’m always ready to move should I be told.

For the experienced stock trader, you will know there is no easy answer only the one that says follow you plan and hopefully you will get reasonably protected. Run some put options against your portfolio – there’s a thought. The permutations are exhaustive. Lift cash levels, diversify into other asset classes but be prepared to give up some gains from the market that may still come.

It’s never easy but the market is still going up. It’s trending higher. Here in Australia, we are watchful as we return to those market highs of 2007 and 2020 but not quite as overblown as the US. Common sense after such a mighty rise, and having reached such a significant technical level, sees the smart guys taking some risk off the table. We need to fight off that indelible urge to chase the dragon higher unquestioningly.

Think Smart and Be Smart and carefully weigh the risks and the historical odds. That way you won’t win all time, but you’ll win most of the time and that’s important. Every market phase is different. The key is to focus on specific stocks and there are some driving hard like those at the top end. Of our market. These are the safer stocks too. The Banks – amazing, TLS is recovering, WOW is wowing us, building stocks keep building their trends, Property stocks are joining the fray, WES is taking us to new heights, ALL REA SEK MQG BHP are all performing admirably. Keep your sensible hat on as always and follow the trends higher as they will always be your friend. And because it’s the top stocks it means the ASX/200, which is 50% driven by the top 16 stocks, is making New Highs – and that’s significant.

Happy Hunting! And don’t forget follow that trend