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Profits Make You Weak

By Amber Lee Mason, editor, DailyWealth Trader
Monday, June 23, 2014

If you've been following our "big picture" in stocks, it's time to congratulate yourself...
We got the "big picture" right.
We've been bullish. We're "long" the market. And the benchmark S&P 500 is up 45% in the last two years. And it just hit another high in a string of all-time highs...
You can see the "big picture" in the below chart of the S&P 500 Index...
The bull market has allowed my DailyWealth Trader subscribers to see big gains in French pharmaceutical giant Sanofi (SNY), credit-card company Discover Financial (DFS), big tech fund QQQ, double-long biotech fund BIB, aluminum producer Alcoa (AA), and many more. It has also allowed us to close nearly two dozen winning option trades since the start of the year... without closing a single loser.
It has allowed us to book hundreds – literally hundreds – of winners since DWT launched two years ago.
That's worth celebrating.
If you've been sticking to the "big picture," you should congratulate yourself for being on the right side of the trend. You should congratulate yourself for taking positions that have benefited from the country's economic recovery. You should congratulate yourself for letting your winners run.
But don't start thinking you're a trading genius. As stock market expert Humphrey Neill put it, "Never confuse brains with a bull market."
Another great trader, William Eckhardt, echoed Humphrey's idea. Eckhardt is famed trader Richard Dennis' partner in the legendary "Turtles" experiment. (Read more about it right here.)
Jack Schwager interviewed Eckhardt for his excellent book, The New Market Wizards. Eckhardt told Jack:
When you're on a big winning streak, there's a temptation to think that you're doing something special which will allow you to continue to propel yourself upward. You start to think that you can afford to make shoddy decisions. You can imagine what happens next.
As a general rule, losses make you strong. Profits make you weak.
In other words, when the good times are rolling, it's easy to lose discipline... The market doesn't punish you for making bad decisions.
You didn't exit a trade when you hit your stop? No problem! The stock recovered. You put a large portion of your portfolio into a risky position? Great! You just made tens of thousands of dollars. You have all your assets in the market? Well done! The market is soaring...
The thing is, the good times won't roll forever. This bull market is already five years old. It's just a fact of life that it will end... And when it does, it will mete out punishment to those who aren't protecting themselves. Folks will be forced to remember their discipline. Their losses will either make them strong... or destroy them.
I know that idea might put a damper on your celebration. But it doesn't have to...
That day could be a LONG way off – years, even. We can make a LOT of money in the meantime.
But don't forget to manage your risk. Stick to a stop-loss discipline. Use reasonable position sizes. And use sensible asset allocation.
Despite the bull market, we're going to keep our wits about us. We won't let our profits make us weak.
Good trading,
Amber Lee Mason

Further Reading:

Amber's DailyWealth Trader service teaches folks how to "trade for income" by selling puts and covered calls. One S&A reader says: "Selling puts has made me an average of $10,000 per month." Is this really possible? Find out here.
Last month in DailyWealth, Steve Sjuggerud ran a two-part series debunking two of the biggest stock market myths. You'll be a better trader for reading them:

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Market Watch
Symbol Price
S&P 500 1961.72 +0.2% +23.5%
Oil (USO) 39.36 +0.6% +17.0%
Gold (GLD) 126.57 -0.3% +2.4%
Silver (SLV) 20.05 +0.7% +5.7%
U.S. Dollar 80.37 0.0% -1.7%
Euro 1.36 +0.0% +2.9%
Volatility (^VIX) 10.97 +3.3% -46.5%
Gold Stocks (^HUI) 235.11 -1.1% +3.1%
10-Year Yield 2.63 +0.4% +8.7%

From The Crux
World ETFs
Symbol Price
India (IFN) 25.04 -0.1% +44.7%
S. Africa (EZA) 69.78 +0.5% +33.7%
Israel (ISL) 18.12 -0.1% +27.7%
USA (SPY) 195.83 +0.2% +25.9%
S. Korea (EWY) 63.52 -1.6% +25.5%
Taiwan (EWT) 15.50 -1.0% +24.3%
Canada (EWC) 32.03 +0.6% +22.9%
China (FXI) 37.87 -0.2% +21.3%
Russia (TRF) 14.99 -0.9% +13.8%
Japan (EWJ) 12.18 +0.0% +14.8%
Lat.America (ILF) 39.12 +0.1% +14.4%
Singapore (EWS) 13.69 -0.4% +12.3%

Sector ETFs
Symbol Price
Biotech (PBE) 44.15 +0.5% +59.5%
Semis (PSI) 22.58 +0.1% +44.3%
Defense (PPA) 33.00 +0.3% +37.6%
Transportation (IYT) 147.23 +0.1% +35.4%
Alt. Energy (PBW) 6.83 +0.1% +36.7%
Big Tech (QQQ) 92.66 +0.0% +32.9%
Health Care (IYH) 128.28 +0.8% +31.5%
Basic Mat (IYM) 87.74 +0.5% +30.2%
Industrials (IYJ) 105.18 +0.4% +29.1%
Utilities (XLU) 43.55 -0.4% +25.3%
Water (PHO) 27.05 +0.8% +25.5%
Software (PSJ) 36.64 -0.1% +24.3%
Telecom (IYZ) 30.13 -0.2% +23.2%
Consumer Svcs (IYC) 122.86 -0.5% +23.5%
Insurance (IAK) 48.51 +0.1% +22.4%
Financials (IYF) 83.48 +0.1% +21.1%
Media (PBS) 24.49 -0.5% +19.6%
Real Estate (IYR) 71.91 -0.1% +17.5%
Construction (PKB) 22.26 +0.3% +16.7%
Retail (PMR) 33.67 -0.4% +13.1%