The market hitting new lows was seemingly a positive move for the health of the markets. Sentiment is a bit better right now. Just a little bit more optimism that the world isn’t ending. Unfortunately, sentiment can change quickly which is exactly why a bear market is a bear market. We must still accept and respect that the momentum is to the downside. We desperately need positive headlines, something few and far between these days.
With the nice bounce off the new yearly lows created on Tuesday, market players were able to re-position their portfolios. I expect this will continue tomorrow and optimism will be short-lived. If this was a QE rally, I could see us making a V-shaped recovery without pullbacks. Since it is not, I believe the old rules apply and we must look for a pullback after such a strong bounce. Friday is the big jobs data and everyone will have their eyes on that. All we need is a modest beat to see a further rally.
The bounce has forced shorts to cover and bulls are going to have some profits to protect. Shorts are now able to start to re-establish a footing, so I expect more volatility to follow now. I would not be surprised to see a pullback on Thursday as traders protect profits leading into Friday’s data, gambling less on the data. If Friday’s data is positive, I see the markets rallying and if it’s bad, we could test the lows of the year very fast. This is why we need to keep less risk in the market.
I’m hedged both ways with little risk still. My main short is still ProShares UltraShort S&P500 (SDS). I’ve been slowly increasing it per my StockTalks which over 36,000 market players follow for free (shameless promotion!). You can make good money in this volatility, but just a few wrong moves can wipe it all away and then some which deters me from risking much. I don’t know which direction we will move, I just know we will move strongly in a direction, so I’ll peel off longs on green days and peel off shorts on down days. This strategy continues to serve me well, but I’m anxious for the bad blood in this market to get wiped away and the new bull market to appear. Breaking to the new lows helps, but we still have too many negative headlines looming for a bull market to show it’s face right now.
Enjoy the bounce, but expect more downside. Don’t get caught buying longs aggressively just yet, we can’t trust the markets without more proof. Consider re-positioning your portfolio on Thursday to ensure you are ready for the big jobs data Friday.
As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was long SDS but positions may change at any time.
PS. In case you haven’t heard, we lost a great businessman and inventor today in Steve Jobs. His story is incredible, his perseverance through numerous obstacles is admired and his creativity/business skills were among the best. I can only hope my generation learns a great deal from someone like him, the future of our nation and economy depend on it. RIP Steve Jobs.
