The World’s Worst Teacher

Random Thoughts

The Ps (S&P 500) began to catch up to what’s been happening internally and in the other indices. They lost well over 1% on the day. This action has them unchanged for nearly a month on a net net basis.

The Quack (Nasdaq) lost nearly 1 ½%. This action has it closing back below its March peak and approaching its 50-day moving average, circa 4300. Like the Ps, it hasn’t made any net net forward progress in a month.

The Rusty (IWM) continues to implode, losing just over 1 ½% for the day. Since its July peak, it has lost over 6% and that’s in only 11 trading days! The Bowtie moving averages (10 Simple, 20 exponential, 30 exponential; available in virtually all charting packages and free online) are converging and could signal a sell signal soon. The index has already triggered a First Thrust down on Tuesday.

Transitional (or emerging trend) setups don’t always signal the end of the world. The Rusty dropped only around 4% on the last 2 Bowtie sell signals (FWIW, the March signal one was “sloppy”). However, all market tops will have some sort of an emerging trend signal such as a First Thrust or a Bowtie. These signals can be especially powerful when you combine them with bigger picture classical technical analysis patterns such as a double top. And, yes, unfortunately, the Rusty has also formed a double top.

It’s not the end of the world but we have to pay attention to these signals as they present themselves.

In Investing With The Trend, by Greg Morris, Jud Doherty of Stadion Capital said the following:

“Active management has underperformed since the lows of 2009, but this is to be expected. Anyone who has kept pace with the market the last few years should be questioned, because they likely have not many any moves that would (or will) protect their portfolio when the next inevitable bear market occurs.”

My take on this is that Jud is implying that those who continue to blindly hold on through sell signals will eventually be punished. As I preach, the market is a bad teacher which often rewards bad behavior.

Okay Big Dave, now what?

Well, as usual, don’t make any drastic decisions. Unfortunately, it is not as easy as the flipping of a switch. If it was, everybody would be doing it. Do honor your stops on existing positions. If things worsen, the market will take you out at a modest lost. He who fights and runs away lives to fight another day. Do continue to keep an eye out for potential shorts. The bigger they are, the harder they will likely fall. Areas like the Energies could set up soon. On the long side, make sure you really really like the setup and/or it is in an area like Gold & Silver that can trade contra to the overall market. I’m not a huge fan of ETFs but it does appear that the Gold Juniors (GDXJ) have put in the mother-of-all bottoms. And, finally, regardless of what you do, make sure you wait for entries. That, in and of itself, can often keep you out of new trouble. Let the ebb & flow control your portfolio. Stops will take you out and entries will get you in. And, don’t forget that a good offense is often your best defense. Pick the best and leave the rest.

Best of luck with your trading today!

Dave