Has The Switch Been Flipped? Should You Care?

Random Thoughts

Never confuse taking things one day at a time with “chasing your own tail.” As I preach, each day brings a new clue. A string of positive events becomes an uptrend. A string of negative events becomes a downtrend. And, a mixture of positive and negative events creates a choppy, sideways market.

When a market is range bound, a breakout of the range will look like an all-clear. Conversely, when a market is near the bottom of its range, a breakdown will look very ominous.

With that said, Thursday was a little ominous. The Ps (S&P 500) broke down out of their short-term trading range and begin challenging prior support. For the day, they lost over 1 ½%.

The Quack (Nasdaq) was hit even harder. For the day, it lost nearly 2%. This action has it breaking down out of its shorter-term trading range too. It did stop right at prior support, circa 4450.

The Rusty (IWM) remains ugly. It lost nearly 1 3/4% on the day to close at multi-month lows. For those keeping score, it is now down over 4 ½% for the year. If you’re wondering if its just you having a hard time catching trends this year in small cap stocks then look no further than the Rusty. I’ve seen cleaner patterns in an electrocardiogram.

The sector action isn’t pretty.

Areas that just peeped out to new highs like Chemicals, Drugs, Biotech, and many others have come right back in.

A lot of other areas such as the Semis have stalled at their prior peaks, hinting of double tops.

Some areas that have been sliding such as Energies and Real Estate continued to implode.

Some areas such as Retail  that were resuming their uptrends out of pullbacks are now failing.

Gold & Silver bounced a bit but so far, the bounce only appears to be dead cat-ish in nature. Their slide remains in place.

Has the bull/bear switch been flipped? I dunno. As mentioned above, the market will have to string together a few bad days in order to for a downtrend to begin. If support gets taken out and if sell signals begin setting up, then a more aggressive stance should be taken on the short side. At the moment, it certainly looks like we are headed in that direction.

With the market now flat to lower on a net net basis over the last 3 months, you certainly don’t want to get too aggressive on the buy side.

Predict early and often is what a lot of gurus do. Yes, it’s looking a little iffy but let’s not rush out and call a top until/unless some of the aforementioned things happen.

It’s the market’s job to fool as many people as possible. That’s why it’s dangerous to call a top. This doesn’t mean throw caution to the wind. If your stops are getting hit then exit your longs. Then, on new potential positions, make sure you really really like them. And, if you do, use a liberal entry. It never ceases to amaze me the number of losing trades that can be avoided with this simple technique.

I have some good news (other than just saving a lot of money on my car insurance). You don’t have to get it exactly right. You don’t have to know that the market has topped or is just correcting. All you have to do is honor your stops. If your longs are wrong, the market will kindly take you out. And like Mick and Tosh, all you then have to do is pick yourself up, dust yourself off, and start all over again. He who fights and runs away lives to fight another day.

So what do we do? At the risk of preaching, honor your stops. Let the ebb & flow adjust your portfolio. Again, make sure you really really like a new setup and use a liberal entry. Do keep an eye out for a short or two but remember that since the methodology requires a pullback, the market will actually have to bounce a bit before we see another round of shorts setting up.

Best of luck with your trading today!

Dave