Unfortunately, today was a day owned entirely by the bears. This is the first time the bulls have been pushed around all day long since August of last year. The good news is we are still in an uptrend but, we must be clear minded to identify a change of trend.
While most are fearful of a one day collapse, it is far more likely that an uptrend turns into a downtrend over time. The key is to not be holding overly large long positions during this transitional time. One day doesn’t identify a downtrend starting and with options expiring this week, it may just be a contributor to the red day. We must not jump to conclusions though and must continue to watch closely, particularly at key support levels.
Key support resides at the 1275 and 1270 levels in the S&P 500 (SPX). We did not breach these levels today but, we nearly did during the end of the day. Market breadth started out poor around 3 to 1 negative and quickly turned 4 to 1 negative the rest of the day. The bulls seemed to be on vacation today or simply hiding under the bed while the bears roamed freely.
Looking at the Dow Jones Industrial Average, you wouldn’t think we saw much damage to concern us. The reason you should not use the Dow Jones is because it uses a price-weighted system. This means that a high priced stock like IBM (IBM) can make or break the Dow versus a lower priced stock that has minimal impact. I am unsure why the Dow continues to use this system.
Today was a warning flare and if it continues tomorrow, we need to be careful not to turn long positions into costly mistakes. The more losses we incur from holding too long, the longer it takes just to turn a profit again. Risk management is the key to long-term success. Lets look for more clarity on Thursday but, the fact that I have to start writing these articles once again is slightly concerning. I’d much rather send you great stock picks than market sentiment articles based around reducing risk in case of a trend change.
I am still sticking with commodity related stocks mixed in with some biotechs. I believe most commodity prices will continue to rise and biotech stocks many times can ignore the indices by move to their own beat. That is my strategy for the time being and I will continually analyze and adjust as necessary.
As always, do your own homework to see if you agree. Get some sleep and I’ll see you in the morning. Good luck out there,
Mike
At the time of publication, Kudrna held no positions in the mentioned stocks.
