Part 3: Bracket Orders
Welcome to the Rude Awakening for February 9, 2021…
We started day one with talking about the problem, the problem being that we don’t have an edge, we don’t have an advantage when we simply buy stocks. It is a probability of 50% that we’ll be successful in our assumptions.
We talked about the solution yesterday, that is building asymmetric trades. That’s building a trade where we have a one to three ratio of risk to reward. So, for every dollar we risk, we have $3 of potential profit.
Today, we’re going to get into bracket orders, and how to actually structure that type of a setup.
After this ten-part series, you will have the edge you need to feel confident in all your trades, no matter what the overall market is doing.
And for a quick update on market action today…
“Stocks dip, pausing after reaching records”
Yesterday, the major indices reached record levels.
The Dow hit its newest all time high. The Nasdaq and S&P hit intraday all time highs.
But this morning, stocks are pulling back a bit.
Yahoo Finance reports…
The S&P 500 fell about 0.2% shortly after market open, and the Dow shed about 100 points, or 0.3%. The Nasdaq fluctuated between small gains and losses. A day earlier, the S&P 500 rose to a fresh record intraday and closing high. The Dow posted its best start to a February since 1931 with a month-to-date rise of 4.7%.
Bitcoin prices (BTC-USD) surged more than 18% overnight to close in on $48,000, adding to a record-setting rally triggered after Tesla (TSLA) disclosed it had purchased $1.5 billion worth of the cryptocurrency earlier this week.
Prospects for more stimulus out of Washington have remained a major driver of equities over the past week. Congressional committees this week are set to work out details of the legislation for another virus-relief package, which is expected to include another round of $1,400 stimulus checks, hundreds of billions of dollars in state and local aid and an extension to enhanced federal unemployment benefits beyond their current March end date. Goldman Sachs economists increased their 2021 and 2022 annual U.S. gross domestic product (GDP) growth forecasts by 0.2 percentage points each to 6.8% and 4.5%, respectively, amid their expectations for an eventual stimulus package worth $1.5 trillion, according to a note Monday.
But even in absence of additional stimulus, corporate America has already been showing signs of a stronger-than-expected rebound, with fourth-quarter earnings results blowing past estimates. More than three-quarters of S&P 500 companies have so far reported earnings results, and 66% have beaten expectations for both sales and profit, according to a Bank of America analysis.
“Corporate earnings have defied a shrinking economy: 4Q EPS [earnings per share] for the S&P 500 is now up 0.3% YoY vs. -2.5% YoY in GDP,” Bank of America strategist Savita Subramanian wrote in a note Monday. Heading into fourth-quarter earnings season, consensus analysts expected that S&P 500 companies would, in aggregate, post another earnings decline.
Despite this minor pullback, we are still in an extremely bullish market.
Like I keep telling you: Bullish activity is good for investors, of course, but we still know that this market is overvalued. We have been due for a retracement for quite some time.
That’s why I like putting on asymmetric trades, getting my money in and out of the markets rather than giving it over to the whims of wild swings like we have seen.
Have a great rest of your trading day.
See you tomorrow!
Editor, Rude Awakening