When Stocks Tumble | Podcast Episode #436

0:07
Hey, I’m Ryan Mallory and this is my swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market and I’m ready to show you how hey everybody, this is Ryan Mallory with shareplanner.com’s Swing Trading the Stock Market in the stock market and on today’s episode we are going to talk about when stocks take a tumble. And we have seen stocks taking a tumble here over the past month or so.

0:44
I’m really peeking out back on July 16th of last month, we hit new all time highs. And ever since then, it has been an absolute sell off in this market.

0:57
So for today’s e-mail, I have a listener that emailed the show asking me what am I doing right now while the stocks are taking a tumble?

1:06
And I try to make these podcasts as Evergreen as possible, meaning that whether you’re listening to it in the moment right when I released this podcast episode or you’re listening to it 10 years down the road, which I still hope people are doing at some point. I know people are still listening to the ones that I did back in 2017.

1:22
So I guess that’s a good sign that you find just as much relevance out of it that you’re not listening to.

1:26
And it’s like, aw, man, this was pretty relevant back in the day, but has no application to it now. So that’s the intention here to what you hear me talking about right now applies down the road as well.

1:38
So I don’t use real people’s names on the podcast.

1:42
They send me an e-mail, I replace it with a good Florida redneck name. Being that I’m from Florida and I grew up redneck.

1:47
So I feel like I’m inclined to to use some good redneck names that I grew up with. For this particular e-mail, I’m going to take out his real name and give him the name Larry.

1:55
Larry makes for a great Florida redneck name. Now, I know there’s other Larry’s out there that maybe was born in Wisconsin or something or New York, but there’s a lot of Larry’s down here and they usually make some fantastic Deep South Florida folk.

2:11
So Larry writes, hey Ryan, a while back you gave some great advice on using the broader gauges to guide whether to enter into individual stocks.

2:21
The basic idea that you just don’t try to fight a dropping industry or sector in hope that your individual stock that you pick will somehow buck the trend.

2:30
How are you currently though playing this market with everything looking like it’s pointing downward?

2:35
Are you just focused on inverse ETFs and shorts or are you looking for the short term bounces and just shrinking your whole period?

2:43
If you’re playing long these days, what are you looking for? Many thanks, Larry.

2:43
If you’re playing long these days, what are you looking for? Many thanks, Larry.

2:49
OK, Larry, good question. Pretty concise question too. But I actually have a lot to say on this because one of the things that I do enjoy in the stock market is a good bear market because I do think it affords a lot of opportunities. And while a lot of people find it extremely high risk and unnerving, and it definitely has those elements to it, there’s ways that you can play it that allows you to reduce that aspect of it by simply letting the market work for you rather than you work for the market.

3:12
So as Larry mentioned, he says that I like to use a top down trading strategy. I like to get long on a stock when not only the stock market is going up, which is definitely a requirement. You know, I want it to be in a bullish trend, but I also want the sector that I’m trading in. So if I’m buying like Apple, I want the sector technology to be trending higher and I want the industry that it’s in, which is electronics, to be trading higher as well. If those things don’t all align, then I have no reason to get long on that stock because then I’m really fighting with a variable that’s working against me.

3:43
That’s one of the reasons why I think often times utilities can be a difficult sector to place because when the market’s trending higher, utilities tend to be one of those sectors that lags the rest of the market because they’re considered more of a safe sector. And so when the safe sectors are often times the best is when the market’s selling off. But often times what you’ll see then is that initially utilities will buck the trend of the market selling off and you’ll see the buyers flooding into it. But as the market continues to sell off down the road, you’ll start to see utilities sell off as well, just not to the same extent as what you might see out of discretionary or industrials or tech.

4:31
And if you’re going to get into utilities when the market’s selling off, aren’t you already breaking the top down trading strategy when the overall market is pointing downward? Why would I get into a safe sector? I’d rather short the market or short individual stocks.

4:44
So going back to the initial comment that Larry makes here, the top down trading strategy means that I want to get into the best stock that’s in the best industry, that’s in the best sector following the market higher. That’s when I’m bullish on the market.

5:00
When I’m bearish, it becomes a little bit different. And that’s where his questions of how am I currently playing this market sell off? Am I just focused on inverse ETFs and shorts or am I actually looking to get long on something?

5:08
So in order to make money in a bear market or in a market that’s selling off, we don’t really know if this is going to be a bear market or not. I mean, it has all the markings of it. We’re coming out of an inverted yield curve, which in the past has always led to a recession. You got the SAHM indicator that has a 0.5 reading, which I won’t get too much into that, but that’s also a very recessionary-type statistic, so the market’s definitely fearful as well now, which it wasn’t before, but it is now of a recession taking place.

5:40
But within a stock market sell off, one of the things that you will get are dead cat bounces. So since July 16th, where we peaked, we’ve seen the S&P 500 go from a high of 5669, OK, 5669 all the way down to 5119 points. That’s over a 500 point drop. That’s significant. That’s almost a 10% move.

6:03
And so when you get those kinds of moves, there’s ultimately going to be a reflex move or reactionary move. And that reactionary move is going to be the dead cat bounce. So I do think that there’s opportunities to play those dead cat bounces.

6:17
I think the dead cat bounce can be very difficult, which is why if you’re going to play them, I wouldn’t play with a lot of positions. I would play in a way that it’s not going to torment you because you’re 100% long trying to play a dead cat bounce and you’re seeing three, four percent fluctuations in your market and you’re using a three to one inverse ETF on all of them. That will give you a lot of heartburn, guys.

6:37
But you can play the dead cat bounces. That’s one way.

6:40
The other way is to play it short. So when the market starts to act like it’s getting bearish or getting very sell-oriented—is that the politically correct way to say it? Very sell-oriented?

6:52
What I try to do is I try to focus more on the ETFs and that takes some additional risk out of the equation.

6:58
Why won’t I just short an individual stock? It’s because I don’t have as much of a window of opportunity to capitalize on some of these moves.

7:08
If you really just look at the move that took place here—and for the people watching or listening to this podcast in the future—this is a sell off that started on July 16th, 2024. We’re now at August 8th, 2024, so not even a full month into it. And the bulk of the move happened over a three-day period where the S&P 500 went from a high of 5446 all the way down to a low of 5119. That was the bulk of the move—not all of it, but that was the meat and potatoes of the move so far.

7:46
And so if I’m getting short on a stock and let’s say the stock has an upgrade on the day that one of these sell offs takes place, well then all of a sudden I got a stock going in the exact opposite direction as the market is selling off.

7:53
And I already know that this market isn’t going to have a huge window of opportunity because these sell offs happen fast and quick.

7:58
So I don’t want to waste it on a day where I’m in an individual stock and it’s running against me.

8:04
So I do focus more on the inverse ETFs. Plus you’re not dealing with margin, plus you’re not dealing with the headline risks as well.

8:09
I mean, there’s plenty of headline risks on inverse ETFs in a bad market because it gets very sensitive to everything.

8:14
But at least it’s being spread out among a lot of stocks because even when you look at a stock market that is selling off heavily, like what we saw just a few days ago where it was like, you know, 10 or 11 to one, you still had Apple running 2% higher.

8:25
So you have to keep that in mind that your window of opportunity to make profits in a bear market is going to be limited because there’s a lot of back and forth. There’s a lot of consolidation, there’s a lot of false breakouts, there’s a lot of dead cat bounces.

8:50
Even so, there’s a lot of things that don’t necessarily equate to a market sell off, but there’s a lot of volatility that can disguise that. Perhaps like it’s not surprising when you see a 100 point rally quickly get vaporized and you might only end up the day up 0.1%. It feels very bearish, but in the grand scheme of things, that didn’t really move that much.

9:05
But intraday wise, it did move a lot. So the window of opportunity is short. So I don’t want to be stuck in a stock that’s not participating. And there’s a chance for that. There’s probably about, on most days—when in a heavy sell off—there’s still probably about a 15 to 20% chance that your stock does not participate in that sell off.

9:23
And if it does participate in the sell off, it may not match what the market returns are for that day. And that’s the other thing. I want to make sure that I’m at least keeping up with the market on the sell offs in terms of the inverse relationship. So if the market’s going down 2%, I’d like to at least think that I’m making 2% for myself.

9:38
And so I focus more on the inverse ETF. So for like the Qs at this point in time, I focus on PSQ—that’s a one-to-one inverse ETF. And then if I’m looking at two-to-one, which is normally what I do, I’m looking more for like a QID. On SPY, it’s SH for the one-to-one and SDS for the two-to-one.

9:54
Sometimes I’ll get into three-to-one, but man, it is a lot harder to manage the risk. And let me tell you, if you get caught in a gap up—boy, you’re hating life at that point too.

10:02
So yes, there’s much more risk when you’re starting to short individual stocks. I still keep a bearish watch list just because I know a lot of people like it and I don’t completely rule out the fact that I won’t possibly get into an individual stock if it’s the right setup.

10:21
But shorting is not for long term. I don’t expect to short a stock or an ETF or to buy an inverse ETF for more than maybe a week, two weeks if I’m lucky. And the reason why is just because you have so many dead cat bounces in between. Markets are going to react.

10:38
And there’s a good chance that, you know, these dead cat bounces—they can move 3 or 4% in a single day and they can stop you out fairly quickly. And if you have profits, the last thing you want to do is be up 12% on the stock and all of a sudden you’re only up 4% on the stock.

10:52
So it also causes you to get out quicker as well. It’s very difficult though, to play both the long and the short side. Not that it can’t be done, but you got to be able to pick your spots very strategically and be willing to miss those spots as well.

11:06
So right now, I’m focused more on the bounce back to a key level that I’m watching, which I like to use the AVWAPs a lot for, for a bear market. And I’m not necessarily looking to get long here, even though I think that the market is going to bounce and it so far is showing a tendency to want to do that.

11:21
I’m not necessarily inclined to play that bounce. I’m looking more for my re-entry to the short side because I think the path of resistance ultimately is to the downside in this particular moment.

11:35
And you also have to be careful about playing the intraday swings because the intraday swings—especially when you see these big-bodied candles that are popping—if you get a 100 point move as a gap higher at the open, but you don’t get much movement thereafter, it’s kind of easier to stay out of it.

11:51
You don’t feel rushed because the market’s not really moving in regular trading hours. But when you see the market move like 100 points during regular trading hours, you feel that FOMO moment. Like you feel like you have to be doing something.

11:58
It’s like this market’s moving without me. I need to make a trade. I should probably buy TQQQ or SQQQ. I don’t know if I put four Qs into that—TQQQ or three Qs.

12:10
But anyway, that’s T plus three Q. But you feel like you have to be doing something and then as soon as you get into it, the market all of a sudden reverses on you.

12:16
And so the intraday moves can be difficult. Yes, you can make money off of those intraday moves, but I’m not looking to get lucky intraday. I’m looking to pick my spots.

12:28
And so that means I have to let a lot of this noise play itself out. But what’s not noise? swingtradingthestockmarket.com. Yes, you can go to swingtradingthestockmarket.com.

12:37
It’ll take you to my SharePlanner website. I make it swingtradingthestockmarket.com because it’s the same as this podcast and it makes it easy to remember.

12:42
But go there, you can get all my stock market research each and every day. It’s really an awesome offering there. You’re supporting the podcast in the process and you’re going to be getting my daily watchlist.

12:54
I’m going to do a watchlist review where I’m actually reviewing the stocks that I put out there that morning or the night before. Plus, you’re going to get my weekly bullish and bearish master watchlist, the stocks that I’m following for the week ahead and that I’ll be curating a lot of my setups from.

13:07
On top of that, you’re going to get big tech updates, you know, on all the big companies like Meta, NVIDIA, Apple, Microsoft, Google, Tesla—might be adding another one.

13:18
I’m thinking about adding Eli Lilly, LLY. I feel like that one’s starting to get into that mega-cap range.

13:24
There is not like a NVIDIA or Google or Microsoft, but it’s getting close. So it’ll be like the first time I put a healthcare stock in that mix.

13:31
But so that one might be getting added into there. And plus I’m going to be doing stock market updates and I do them in video format.

13:38
So it’s a really cool way to stay on top of things and to stay on top of what I’m looking at in the market beyond just what I say in this podcast.

13:45
So check that out. swingtradingthestockmarket.com.

13:49
And so I said that shorts are not made for the long term. They’re just not. Yes, stocks can sell off for the long term. You take a stock like Crocs, which could have been a phenomenal long term short going back from November of 2021 all the way until June of 2022. And technically that doesn’t even meet a long term definition. But that was a stock that I remember going from like 190 down into the 50s.

14:11
But in the process, you’re also paying margin, you know, you’re paying interest on those shares that you’re borrowing from your broker. So that’s one of the drawbacks to the shorting. Again, I’m not against shorting individual stocks. I just think that often times there’s better alternatives, you know, where you can follow SPY and you can play the shorts off of that or off the NASDAQ.

14:30
I do think Russell 2000 is a very difficult index to short. And the reason for that is because it tends to march to its own drummer. So you can have this like inverse relationship between the large caps and the small caps where when the large caps sell off and the whole market feels like it’s going to trash, you got small caps—not every time—but some of the times all of a sudden going higher and like, what the heck, why are we fleeing into the small caps when the rest of the market’s down?

15:01
And sometimes it can be because of interest rates or some other outside factor, but when I get short, I like to focus on the large cap indices. That’s your NASDAQ and that’s your S&P 500. Sometimes I’ll dabble in the Russell, but it’s going to probably be because I already have positions in both the S&P and the NASDAQ short and I’m looking to add more exposure.

15:13
Oftentimes I’ll even get into DIA, which you guys know, I don’t even like DIA. I’ll short DIA before I’ll short the Russell 2000. And it’s kind of like shorting Netflix or Tesla. If somebody told you the market was down 1000 points on the Dow or 100 points on the S&P 500—I can’t believe I just quoted the Dow, but whatever, I’ll go with it—if somebody told you that…

15:40
See, that’s what happens when you start talking about the Dow—it starts to creep into your everyday language, right? But somebody told you the S&P 500 was down 100 points, but Tesla was up 5%, we wouldn’t be totally shocked. That’s one reason why you won’t see me shorting Tesla either, just because I don’t want to be right about the market going down but wrong about Tesla going up.

15:59
That’s kind of how the Russell 2000 is. You can get like a heavy sell off, but then the Russell 2000 is running higher. It’s just totally different. I don’t have all the answers for why that happens at times, but there is oftentimes an inverse relationship between the Russell and the NASDAQ.

16:13
If you were bullish on stocks from 2023 to the midpoint of 2024 and you bought the Russell, you didn’t make much money. Russell didn’t go anywhere. That’s why you got to be careful with that index.

16:26
And a lot of people don’t believe it because they see the swings that the Russell makes. It can go down 3% or 4% when the S&P 500 is moving in a much tighter range. And so they think that that’s where it’s at. But they oftentimes mistake volatility for profits.

16:41
The other thing—and this is what I’m going to wrap up with—use volatility as your friend. One of the things that people do is they position size themselves in a bear market or in a market that’s selling off similar to how they play a bull market.

16:50
You don’t have to be 100% short when the market’s selling off. In fact, that’s only going to create more anxiety than if you were 100% long in a bull market—way more—because the volatility is so great.

17:03
So what you want to do is scale down your position sizes or just don’t have as many open positions. For me, I like to just not have as many open positions. The volatility is so great, the price swings are so great that one position can equal like having three or four positions in your portfolio, especially if you’re doing inverse ETFs, which again, those are much higher risk plays.

17:25
You’ve got to understand what you’re getting into, understanding your own risk profile—not financial advice—but for me, when it gets into the bear markets, less is more.

17:36
Like I do not need a ton of positions. I can do fine with one or two positions, be 80% cash or be 70% cash and just let my small exposure to the bear market work its wonders. And oftentimes it’s better than if I was 100% long in a bull market.

17:51
So keep that in mind. We covered a lot today, but I’m glad somebody asked me about this. We’ve talked about it in the past, but I always think it’s good to relate this back to the current circumstances that we’re seeing.

18:01
I think it can be a huge help when people down the road want to say, hey, what was Ryan saying back in 2024 when the market was selling off?

18:09
What was he saying back in 2020? And yes, your philosophies also change throughout time because your experiences shape what your philosophies are. So, you know, listening to something that I might have said in 2020 might be completely changed between now and then.

18:22
I’m not sure how it would be. I haven’t gone back and looked at it and seen exactly what I said. But this is what I’m telling you now.

18:28
So in any case, if you enjoyed this podcast episode, I’d encourage you to leave me a 5-star review on whatever platform you’re listening to me on.

18:36
Plus send me your questions. I need more of your questions, guys. ryan@shareplanner.com.

18:41
I don’t want to beg, but I’m kind of begging here. Keep sending me questions because I love hearing your life stories.

18:46
And if I did not get to one of your questions, that might have just meant that I missed it. I’m the only one that reads my emails, so there’s a chance that I might have accidentally deleted it.

18:54
Send it to me again. I don’t really delete the emails, but who knows? There’s a chance that I could have. Resend me your questions because I will try to make a podcast episode as long as it’s relevant to swing trading in the stock market.

19:04
Yeah, they are. I’ll make a podcast without it, so send me that.

19:08
And don’t forget to check out Swingtradeinthe-stockmarket.com.

19:12
Thank you, guys. God bless.

19:17
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19:25
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19:31
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19:43
If you have any questions, please feel free to e-mail me at ryan@shareplanner.com.

19:52
All the best to you and I look forward to trading with you soon.