The market is full of opportunity.
Stocks are taking off left and right. Countless others are starting to climb out of multi-year bases.
Heck, even crypto is on fire.
And yet, some traders are choosing to make life way harder than it needs to be.
Instead of buying stocks that are going up, they’re buying ones in downtrends.
The hope is that they can catch the bottom. But that’s much harder than it sounds.
Trends in motion tend to stay in motion.
Sure, V-shaped bottoms can happen. But they’re rare.
Also, it’s not like the bull market just started. It’s two years old at this point!
If a stock is in a downtrend in this environment, something is WRONG with it.
Its sales could be slowing down. Maybe it’s losing market share. It could even be an outright fraud.
Ever heard of Super Micro Computer (SMCI)?
SMCI is a computer hardware company.
Not long ago, it was one of the hottest stocks in the entire market. It surged more than 300% between the start of the year and mid-March.
We even traded it four separate times in RiskHedge Live, including once for a quick profit of 130%.
But SMCI hasn’t been a Wall Street darling in months.
Since topping in March, SMCI shares have retreated quite a bit. This alone isn’t anything to be alarmed by. Stocks pull back all the time, especially ones that have gone parabolic.
But this wasn’t a regular pullback. Unlike other artificial intelligence stocks, SMCI never found its footing again. It kept bleeding out.
And yet, countless rookie traders kept buying SMCI… despite there being much better stocks to own.
Why is this? Well, there are a couple reasons.
For starters, SMCI still had the reputation of being a monster stock. Remember, it more than quadrupled in under four months. The idea of buying a huge winner like SMCI at a deep discount can be quite tempting. Who doesn’t love a sale?
But most people who buy stocks in downtrends don’t just do so to make money.
They want to look smart. It’s about bragging rights.
SMCI kept finding potential buyers because pride often gets the best of people. How’d that turn out?
Well, SMCI is trading 82% off its highs. It’s also down 26% on the year… after being up more than 300% year to date in March!
But SMCI isn’t just in a death spiral, technically speaking. It’s also being accused of fraud. Last week, Ernst & Young resigned as its auditor. SMCI also delayed important financial reporting documents.
It’s one of the sketchiest stocks on the planet. And there are still rookie traders out there trying to snipe its bottom because it looks “cheap.” It’s complete insanity.
Look, there are over 5,000 stocks out there, meaning there’s no reason to get married to any one of them—no matter how great their reputation might have been in the past.
The lesson is this: It’s easier to go with the tide than try to swim upstream.
If you buy a stock in a brutal downtrend, expect to get burned.
It’s much better to trade the winners.
Justin Spittler
Chief Trader, RiskHedge
