Yet another week I can not discuss a specific stock or chart that is showing an edge to capitalize on. Stock picking is irrelevant in a market as such. If the overall market is green, odds are all your stocks are green and vice versa. In a healthy market, just because the market is green doesn’t mean all your stocks are green, which is when it pays off to know how to pick the hot stocks. Right now, fundamentals and charts are mostly useless. The market does not care what any of us think, it will act however it feels like and value stocks cheap with the likelihood they will become cheaper and cheaper. That means sitting on the sidelines in cash preventing losses from piling up is the best strategy for most with limited capital. Individual investors are not large hedge funds, so the style of investing can not be to constantly average down. The markets will stabilize at some point, it is just tiring and boring to wait for those like me who lack patience. Patience will pay off like it has many times before. When you don’t have to make up significant losses in a bear market, you are very quickly profitable when the next bull market comes around. That’s the strategy I prefer.
Pundits on tv have been screaming to buy these “discounted” and “cheap” stocks for weeks now as if you have unlimited capital to continue to average down. Cheap stocks two weeks ago are even cheaper now. In another two weeks, it may be even cheaper as the market is not showing signs of a sustained upward movement that we can trust buying into. If you followed those pundits, you are likely in the red and not feeling too happy about it. I’ve found the better overall strategy is to go to cash and gamble much less in the markets during a downtrend like we see now. Breaking-even in a bear market is just as important as profiting in a bull market.
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Headlines are currently running this market, which makes the waters very shaky. It is impossible to navigate waters that move violently from one unexpected headline to the next. You can not chart a safe path and avoid damage this way. I know I sound gloomy, but I’m really not. At some point in time, the bad news will be desensitized to us, particularly our bad economic news and Europe. We will hear the same stories over and over again, but money will flow back into the markets. That time is not now, but it will happen at some point and that is what we are waiting in cash for, ready to pounce. At that time, the market will be more trustworthy to buy, minimizing risk rather than trying to predict a bottom and being wrong.
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As stated before, a trading range is developing. Right now we are between the highs of August 15th and the lows of August 8th and 9th. This puts us near those lows on most charts, so a bounce is very possible. I’m mostly cash as cash is king, but I have been playing some small trades as long as no major unexpected headline is giving reason to think we rally hard or fall hard. My strategy is simple, if the market is selling off hard near the close and the bears are praising themselves while the bulls cower, I tend to buy some long-side positions such as iShares Russell 2000 Index (IWM) as close to the market close as possible so a sell-off doesn’t have long to continue after I make the purchase. If the opposite happens, I tend to buy some short positions by going long ProShares UltraShort Russell2000 (TWM). This is not a safe trade by any means as any bad headline could mean we are caught in the wrong direction the morning after. To limit this risk, I try to avoid going long if we have economic news coming out the morning after that could be bad and I try not to go short if we don’t have any news coming out. I also keep notice of the current trading ranges, as you can see in the charts below. Lastly, no news has been good news lately and Monday does not have any planned economic news releases hence why I expect we could bounce. I’ll likely keep trading the extremes this week up until Friday though.
IWM CHART
SPY CHART
Tuesday resumes the economic data and Friday is the day of much concern for me as we have GDP figures. Friday is the day I do not plan on betting on as I anticipate GDP figures will be bad, but even a mediocre number could be bullish as we’ve priced in some damage already. No reason to gamble on it, we don’t have an edge, so you will likely see me modestly hedged in both directions. Rumors that the Fed are putting together some emergency meetings are starting to circle and while I don’t give them credibility this early, a bullish rumor is sometimes all the bulls need to start a short-term move. Again, this is why we gamble less in a bear market because even a rumor can sway the markets very fast, not something you can easily predict and capitalize on.
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Tomorrow I’ll post a short article with a video on where this trading range may end up. Long story short, breaking to new lows looks more likely to me before going back up. Don’t panic, just be prepared. Bear markets are a normal part of creating a healthy bull market.
As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was long IWM, but positions may change at any time.
