Fighting The Last War

Know when it's time to move on.

The quote "generals fight the last war" is a phrase we sometimes hear on Wall Street and can be forgotten or unheard of by newer traders. It refers to the tendency of military leaders to base their strategies and tactics on past conflicts rather than adapting to the current situation. In the context of trading, this quote can be applied to traders who base their trading decisions solely on past market trends or patterns, without considering the current market conditions.

Traders or investors who rely too heavily on past data or trends risk missing out on new opportunities or misreading the current market conditions. Instead, successful traders and investors must constantly adapt their strategies and remain alert to new developments and trends in the market. 

One example would be the tech bubble. During those days, if you added .com to a stock’s name, you could buy it and triple your money by the time the market closed. When that bubble burst, people could not fathom the ride was over, and many gave back large sums they had made using strategies that had previously worked while tech was soaring. 

We all know of a few perma-bears that made one great call at the top of the market in 2008, and now they look at everything through that lens and see the next crash around every corner. “If all you have is a hammer, everything looks like a nail”. 

So let’s play general for our own trading and our portfolios. If you are still looking for the hottest meme stock to buy for a MOASS-level short squeeze or the next company selling a bike with an ipad strapped to it, we are fighting the last war. Are we positioning ourselves for profits based on what the last cycle showed us would be profitable? If so, maybe it’s time to look elsewhere.  

So where are the right places to look? 

No one knows where the next leaders will come from, but historically we know these will not be the last leaders. The issue with the last leaders is there are bag holders in those stocks now. This refers to people that are holding the stock from much higher levels and looking for their moment to sell for a lesser or no loss. This will create tons of overhead supply as sellers come in on each pop. 

So for myself, I want to look where there are no motivated sellers and I see these from 2 camps.

IPOs are new stocks that just hit the market. The ones that hold up are a great place to look since, as they make new highs, we know that 100% of short sellers are wrong and 100% of long traders are right. 

Relative strength is the other place to look. If the market is selling and the old leaders are falling out of favour, then the stocks that are not being hit have a good chance of the new leaders. 

Zoom is a good example of all 3 of these. See the chart below for the explanation, but as an IPO, it held onto its gains well while steadily making new highs. During the pandemic, when the world was crashing, ZM held strong and became one of the leaders that took us out of that bear market. When the dust settled, and rates started to increase, people realized that video conferencing was everywhere, and it fell from its leadership position. 

So my suggestion to you is to have a plan to know when the war is lost and move on.