They have been called the four most dangerous words in investing.  Beware whenever you see the words “its going to be different this time” used to justify why it is worthwhile to join in the latest investment mania.  The mania will probably last longer than you think it will but it always ends in the same way – by not being different this time.

Professional traders who are very disciplined and accustomed to using stop-losses are the ones who truly profit from speculative bubbles & manias because they are the ones who hang onto their winnings and do not end up by giving all their winnings back again cometh the downturn.  The true professionals follow the trend up, get out & then switch to the bear tack and profit on the way back down too.

From a practical investing standpoint and no matter how compelling the argument du jour used to justify why it is going to be different this time, just don’t fall for it.  The market may sustain the latest investment mania for longer than speculators betting against it can stay solvent but, rest assured, it won’t be different this time.  As an investor you don’t have to bet against the mania, you can simply choose to protect your capital by not participating in it.

What are Secondary Highs and Secondary Lows?  Secondary Lows are more common – what often happens is the stockmarket will post a low and then, a few days or weeks later, it will re-test this low.  A “Secondary Low” is created if this retest takes the form of breaching the prior low briefly during the day but the market subsequently rebounds and closes above the prior low.  This type of price action is associated with flushing out weak longs (who often place their stop loss orders just below the prior low) and the market often embarks upon a sustained rally without the weak longs being on board for the ride higher. 

A good example of a Secondary Low can be seen on the S&P earlier this year : The first low was created on 23 Jan 2008 (intra-day low of 1,270.05).  The market then rallied up to 1,396 on 1st Feb and then worked its way lower once again, breaking the 23 Jan low on the 17th March.  On this day the S&P traded as low as 1,257 intra-day before rallying and closing at 1,276.60 (still net down on the day but crucially above the prior 23 Jan 1,270.05 low).  This marked the start of a sustained two month rally which took the S&P above the 1 Feb 1,396 high to a high of 1,440 on 19th May.

There is an example of a Secondary High on the Dow earlier this year too (the first high is on the 2nd May & the Secondary High is on the 19th May) but this example is less clear-cut as the second high only broke the prior high by a few Dow points – both days were failed attempts by the Dow to break above its 200-dma (daily moving average).