The Best Traders Don’t Waste Their Time Doing This
The most successful traders I know stay focused on individual stocks. There are good reasons for that, and here is an example.
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There was early pressure on Thursday, with “sell the news” action on several earnings reports and mild profit-taking in semiconductors. Breadth is running only about 43% positive. However, the Mag 7 is still running hot, and dip buyers are already showing up.
Despite the strong action in both indexes and many stocks, some loud bears are trying to short the indexes into a top, convinced that everyone who is long is foolish.
My best advice is to ignore this noise. Most of the highly successful investors that I know of make their money trading individual stocks. They may trade indexes periodically or use them as hedges, but their primary focus is on other market factors beyond the major indexes.
One thing I have learned over 30 years of trading is that trying to precisely time a top in the indexes with shorts is a terrible strategy. It is not only extremely difficult, but it also distracts you from much better trade opportunities in individual stocks. In most cases, I’ve found that “calling a top” is not an effective way to generate profits. I seldom trade indexes because it is too much effort for too little return.
Why Top-Calling Fails
The first problem with shorting an index top is the math. Indexes do not turn the way individual stocks turn. They roll over, then they rally, then they roll over again. The early entries get squeezed before the trend actually breaks. By the time you get a confirmed downtrend in something like the S&P 500, you have already absorbed two or three painful counter-moves, and most traders do not have the discipline or the position sizing to survive those squeezes intact.
The second problem is asymmetry. When you are long an extended bull market, the worst case is a drawdown you can manage with stops and position sizing. When you are short, the worst case is unlimited, because the squeezes can be vertical. Overbought can become more overbought, and the people fighting it pay for it. We saw it in 2020. We saw it in early 2024. We are seeing it right now in the chip names that have been called overbought for two months and that keep going up.
The third problem is the most important. Shorting indexes at tops is a distraction. While you are watching the S&P 500 and waiting for the rollover, the actual money is being made in individual stocks that are making huge moves. The opportunity cost of focusing on the index is enormous. Every hour spent obsessing over whether the market is topping is an hour not spent finding the next small-cap earnings winner or the next stock breaking out of a multi-month base. Those are the trades that compound.
The Ego Problem
There is also a deeper issue, which is that calling a top is mostly an ego exercise. The trader who calls the top first gets to be the smartest person in the room. The trader who quietly compounds 30% a year trading individual stocks gets no social reward for it, but ends up much wealthier. The market does not pay you for being right about the index. It pays you for being right about specific stocks at specific times.
I have watched smart people destroy their accounts trying to be the one who called the top. The pattern is always the same. They short too early, get squeezed, double down, get squeezed harder, and capitulate at the wrong moment. The few who do nail the top almost always give the gains back by holding the short too long, because once you have been right, you become convinced you are smarter than the market and everyone else. That is when the rallies take you out.
What Successful Traders Do Instead
The traders who do best in markets like this one are the ones who stay focused on individual setups, manage risk through position sizing rather than through index hedges, and let the broader market do whatever it is going to do. When the market eventually corrects, and it will, the right response is to reduce exposure in your individual names as their charts break, not to be short the index ahead of time.
I mentioned on Wednesday that it is often better to worry about what may go right than what may go wrong. Top-callers are professional worriers about what may go wrong. They build their entire trading approach around the bear thesis, and the bear thesis is right maybe 15% of the time over a multi-year horizon. That is a poor foundation for any strategy.
Xeris Biopharma Holdings (XERS) is exhibit A this morning. The stock had some great volatility after a big earnings report that allowed me to add substantially to my position. It is now hitting new intraday highs. None of that has anything to do with where the S&P 500 is or whether the indexes are at a top. It is the kind of trade that compounds over time, and it is the kind of opportunity that gets missed when you are staring at a chart of the S&P 500 waiting for the rollover.
My Game Plan
The action Thursday morning is what it has been all week. The indexes are mixed, the chip leaders are cooling slightly, and the rotation I have been talking about is showing up in a few places. The equal-weight S&P 500 (RSP) is pulling back and basing just below the breakout level. The interesting trades remain in individual names, particularly in the small-caps reporting earnings tonight and the laggards starting to base.
The big mistake right now is not getting caught long at a top. The big mistake is letting the noise about a top distract you from doing the actual work that makes money in this market.
Stay long the names that are working. Trim into strength when the parabolic moves get extended. Buy the laggards that are firming up.
Ignore the top-callers. By the time one of them is right, the patient stock pickers will have made enough on individual setups to absorb a correction without much trouble. Build a cushion of profits and tune out the bears until there is some actual weakness.
At the time of publication, Rev Shark was long XERS.
