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When To Sit In, When To Sit Out

As we get ready to turn the calendar to 2021 and prepare our outlook for a new year of trading, there are a few things that I have been keeping a close watch on.


Spectacular Gains in 2020 Will Need Time To Be Digested


The stock market has seen just an incredible run over the last nine months with the S&P 500 up over 70% off the March 2020 lows and the Russell 2000 up more than double. These type of moves are wonderful to be a part of but cannot last forever. Some sort of sharp pullback is likely in 2021 as profit taking sets in. Sometimes, but not always, selling occurs in January or February rather than in December as investors try to delay paying taxes if possible.




Sentiment Extremes

With all the opportunities to make money in 2020, it's only natural that bullishness will rise. It seems like everyone has become a bull in the later part of 2020. This is showing up in both call buying and in sentiment surveys. At these levels, the market usually needs a correction to work off some of the enthusiasm.






Extended Leaders

Since the March lows, many stocks have doubled or even tripled in just nine months. I'm not seeing many quality set ups at this point. Many stocks are looking to be quite extended and may need some time to reset.




I continue to hold some of my positions such as Tesla and Apple, but I have been raising some cash over the last week or two. I raised cash by being stopped out of positions like Fiverr, Palantir, and Pinterest and by selling stocks I owned into strength on the way up such as PLUG, APPS, FND, DQ, GRVY, FTHM, and BLNK. I'm not looking to add any new positions as I'm not seeing the type of set ups I would like. However, I'm very flexible and will take quality set ups when they emerge and will continue to hold stocks that are holding up well.


When the market does correct, it is important to note that this is a normal part of the process. Markets correct at least 10% usually at least once every year to year and a half. It's just part of the process. Just as we have Winter, Spring, Summer, and Fall, the market too goes through seasons. Although a correction of 10-15% can be scary, in the overall context of a large move like we just saw in 2020, it can be deemed both healthy and expected.


The Money Is Made Sitting

Legendary trader Jesse Livermore famously stated, "It was never my thinking that made the big money for me. It always was my sitting." That statement rings just as true today as it did 100 years ago. Huge fortunes were made in 2020 sitting with market leaders such as Peloton, Zoom, Square, Tesla, Nio, and many others. If a correction sets in, big money will be made sitting as well, but this time by "sitting out." During the early months of a new bull market, "sitting in" big winners leads to literal fortunes. However, during a correction "sitting out" and avoiding a downturn and having to power to "sit out" until proper opportunities emerge can also lead to fortunes as you save yourself time, aggravation, and money and find yourself prepared mentally and financially for the next bull run.


Disclaimer: This information is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. None of the information contained in this post constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. From time to time, the content creator or its affiliates may hold positions or other interests in securities mentioned in this blog or the associated Twitter and Instagram feeds. The stock or stocks presented are not to be considered a recommendation to buy any stock or stocks. This material does not take into account your particular investment objectives. Investors should consult their own financial or investment adviser before trading or acting upon any information provided. Past performance is not indicative of future results.