A few months ago we posted an article entitled, “Trading the Recession.” Now it is time to post one entitled, “Trading the Recovery.” With the recent market surges one needs to ask if we are halfway through the recession or are people jumping the gun?

The innate cynicism of the short-term trader will serve you well during the coming months.

As we have stated before the so-called “half way rule” says that you can expect other traders to discount a recovery in their trading half way through a recession. So, with a couple of market rallies, is it time to start going long across the board? The wise cynic tells me to be watchful. That is watchful, not careful. There will be money to be made as the markets put themselves together again.

There is still a lot of money on the sidelines, whether it got out early and intact or late and in fragments. Long-term investors will be looking for deals on strong companies that have weathered the storm and are in a position to solidify their industry positions coming out or the recession.

The question is when and on what cues will big money reenter the markets? The answer is probably in two parts. The smart investors will pick their stocks and market sectors. The smart investors may to totally overseas and not in the USA looking for deals. The rest of the herd will follow herd mentality and feed off of comments by the Federal Reserve and others.

For the short-term trader these two groups of investors and their response to anticipated recovery provide two distinct opportunities. The first group can be traded successfully by having an appreciation of the thinking of the big name successful investors of the world and their belief that recovery is eminent in some sectors. Being there on time and with your trading strategy in place before these folks make their very public moves to profit from the recovery will allow you to ride a day of two of heavy trading volume and scalp some nice profits.

The other part is trickier and involves understanding mass psychology about a market recovery while not letting it get into your head. This, as we all know, is the fear and greed part.

In this case anticipation of public reaction to news about a possible recovery is the watchword. The better “recovery strategy” will probably be one of reaction to the herd. Chairman Bernanke will say something before congress about recovery, or not, and the market will overreact. Be ready for the correction afterwards whether it be going long or short.

In each of the above recovery scenarios being there at the right time and trading only at the right time are key.

There is nothing wrong with having your trading program up and running as you follow the news, market and otherwise for signs of a market recovery or misleading news that might lead others to think there will be a market recovery. There is nothing wrong with daily simulation trading until something of note happens.

As always, develop your plan, improve your plan, and execute your plan. And, don’t get sucked into groupthink about a market recovery by fear and greed. Stick to the plan!

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