Yes, The Market Needs More Cowbell But Don’t Fear The Reaper

Will Ferrell as Gene Frenkle. Source: NBC-SNL

Will Ferrell as Gene Frenkle. SNL Cowbell sketch. Original source: NBC.

Random Thoughts

Fear is a necessary emotion. Without it, we’d all be dead within a week—likely sooner. So, it’s human nature to want to avoid pain. Unfortunately, Beatrice, when it comes to markets “That’s not how it works—that’s not how any of this works.” You have to be willing to put capital in harm’s way—and leave it there. This is not saying throw caution to the wind. You have a plan (you do have a plan, don’t you?). And, following that plan means that you stay invested until proven otherwise. But, Big Dave, what if this is “THE” top. It might be but so what. Stops will take us out if it is and stops will keep us in if it isn’t. Don’t let a market hiccup have you Frozen, just “let it go…let it go” (i.e. keep positions until stopped). Also, let’s not forget that a good offense is your best defense. Pick the best stocks to begin with and things will often take care of themselves. If you’re winning then many of the psychological problems associated with this game will be solved automatically.

We won’t know if this is “THE” top but, like Justice Potter Stewart, I’m pretty sure that we’ll know it when we see it. Corrections and consolidations are healthy for a market they shake out the Nervous Nellies and help a market to digest its gains respectively. So how do you know if what appears to be a correction or consolidation is the start of something bigger? Again, you don’t. As I wrote back on March 9th, no one rings a bell when a market has topped. Follow the plan until proven otherwise.

Now, make no bones about it, Friday was pretty ugly-how’s that, an oxymoron from a Trend Following Moron? And, yes, this market needs more cowbell but don’t fear the reaper.

Let’s look at the carnage.

The Ps (S&P 500) dropped a percent and change. They did manage to end off their worst levels but still, down over a percent nonetheless. This action puts them right smack dab in the middle of their sideways trading range (aka the Ry Cooder pattern)—which is pretty much were they were last Thanksgiving.

The Quack (Nasdaq) got whacked. It lost just over 1 ½% on the day. This action has it probing its 50-day moving average. There’s nothing magical about moving averages but their slope and daylight (often discussed in my Week In Charts–see my YouTube Channel) can help to keep you on the right side of a market.

The Rusty (IWM) also got hit hard. It also lost over 1 ½% for the day. This action has dropping back into its prior trading range. This scores at a bummer because just last Wednesday it was at all-time highs.

Drugs were rejected right at their prior highs. Although they did manage to close well off their worst levels. You know me though, ideally, I’d like to see new highs sooner rather than later. The

Biotech subsector here got hit fairly hard, losing nearly 2% for the day. This action has it stalling in its retrace rally.

Quite a few areas like Insurance (down around 1 ¾%) were also rejected at or near their prior highs.

Retail scores as a major bummer. Unless it can mount the mother-of-all rallies, it appears that a top might be in place here.

China (FXI) got whacked but the uptrend remains intact here. I’m still seeing some interesting stocks here, especially in the lower tier stocks that have been previously beat up. Keep an eye out for Bowties coming off of major lows here. A recent example would be JMEI (full disclosure—JMEI is in the model portfolio—see below).

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Energies pulled back a bit but so far, a bottom still appears to remain in place here. I’m seeing quite a few setups coming into today.

Latin America basis the EWZ is set up as a Bowtie coming off of 6-year plus lows. I’m seeing a few interesting stocks here.

So what do we do? In spite of all the carnage, I am seeing some potential long side opportunities coming into today. It’s never safe but it does appear that those aforementioned bottoming areas (e.g. Bowties coming off of major lows) might be safer than those areas that are losing steam in their longer-term uptrends. For example, we could actually see shorting opportunities in Retail soon. As usual, take things one day at a time. Let the portfolio ebb and flow keep you in the winners and take you out of the losers and winners whose trend may have come to an end. And, of course, pick the best stocks to begin with and make sure you wait for entries on those.

Best of luck with your trading today!

Dave