Yesterday, I was giving a lecture on efficient vs. inefficient markets. Click here to watch. During the speech I explained that just because a market is efficient and lower in volatility, it doesn’t mean that something bad can’t still happen. Ironically, the Swiss gave me exhibit A. They unpegged the Franc from the Euro. My point is that something bad can happen, regardless of the volatility of the market. This is why I tend to trade more volatile markets to begin with—better the devil you know. I simply compensate by trading fewer shares.
This move also reminds me of what Mark Douglas once said “All it takes is one a-hole to screw up a perfectly good trade.” It doesn’t has to be a catastrophe such as a terrorist attack. It can be an overleveraged hedge fund forced to deleverage, a fat finger on a trading desk, or a government making an abrupt policy change. Know that you have no control over the markets. Use stops and regardless of how great a trade looked, there’s always some unforeseen risk that might be lurking.
Hey Dave, I thought you ignore all news? I do but I occasionally get some through osmosis. During my presentation someone pointed out that the Swiss had decoupled the Franc. This dovetailed nicely into my something bad can still happen-regardless of the market—speech.
Speaking of markets, let’s get to the markets.
Whether the Swiss get blamed or not, Thursday wasn’t very pretty.
In markets, it’s not how you start but where you finish. The Ps (S&P 500) started strong but soon found its high. It ended the day on it buttocks, losing nearly 1%. This action has it approaching its recent lows, circa 1975 which also corresponds roughly with its 200-day moving average. It is important for these support levels to hold.
The Quack (Nasdaq) put in a similar performance but was hit a little harder, losing nearly 1 ½% on the day. This action has it approaching its recent lows. It is important for these lows to hold, circa 4540-4550. For those keeping score, the 200-day moving average is at 4400.
The Rusty (IWM) was hit the hardest. After a failed rally, it lost nearly 1 ¾%. This action has it sitting at the bottom of its shorter-term trading range/support/200-day moving average. It’s important for these levels, circa 114 in the IWM to hold.
Bonds hit new highs. The 10-year yield is approaching all-time lows.
The sector action is an oxymoron-pretty ugly.
Banks continue to break down. If you back the chart way out, you’ll see that they have a long ways to drop should they not stabilize soon.
A lot of areas—too many to mention—are like the market itself, looking somewhat dubious sitting right on support.
Real Estate remains at new highs likely fueled by continued low rates. I just can’t get that excited about trading this low volatility area.
About the only good news is that Gold & Silver still appear to be putting in a bottom. Continue to look for opportunities here.
So what do we do? Whenever things get a little questionable I turn to my database for answers. And right now, it’s not producing many meaningful setups. This means that little or no new action should be taken. That’s okay—notice the lack of forward progress in the indices. I wish someone would have told me 20-something years ago that’s it’s okay to wait. If you stay out of the market in less-than-ideal conditions then all that’s left is ideal conditions. Write that down. Waiting is far more important than many realize. In the meantime, honor your stops on existing positions. If the recent weakness turns into the real deal, then we’ll get stopped out of remaining longs, dust ourselves off, and start establishing positions on the short side.
Best of luck with your trading today!
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