The market has sold off hard the last few days and has now gotten into our EXTREME short term oversold zone. As with all selling there is a point where all those that want to sell at a certain price will have sold and prices will begin to rise until a new level where sellers will sell is found. It is the basic laws of supply and demand that rule the market, along with a lot of emotional bias (fear and greed), in the short term.
The bigger picture is still in tact – we are on a weekly SELL signal and will most likely stay that way until there is some clarity about where the support for the economy, and ultimately corporate profits, will come from next. However, in the meantime it is important that you do not panic…that is an emotional response that leads to poor trading decisions.
A Bounce To Nowhere
As I stated on the show last night, the markets are oversold enough now to give us a fairly sharp reflexive bounce to the 1330 area (don’t focus on the specific number as it changes daily – just the neighborhood that it is in) which will most likely provided significant resistance to any bounce and will be a good area to lighten up exposure to risk based assets such as commodities and equities.
On April 25th we started to recommend lightening up on risk based exposure and moving money into cash and fixed income for the summer. This is still the action that we want to take on a bounce.
IMPORTANT NOTE: This is a guess on what should happen based on statistical evidence and historical patterns. However, it does NOT mean that this will happen with an absolute certainty. So don’t stop paying attention to what is going on and we will try to keep you updated as frequently as possible.
What Will Change Our Mind
This is where it gets difficult. In order for the market to go back on a bullish “buy” signal it will need to move back above the recent highs around 1350. At this point we will begin eliminating fixed income holdings and adding equity exposure back into the portfolio. This could potentially mean that you raise cash in the 1330 area and then turn around and buy back in at 1360. That is okay.
What we are trying to protect here is the permanent impairment of your investment capital if the market should go, as we expect at this moment barring no Fed intervention, to 1330 and then break down to ultimately closer to 1200 before the end of summer. At this point we should be sufficiently oversold on a weekly basis to begin adding exposure back to “risk” based assets at a much more rewarding level.
You Are Not An Investor
If you do not realize this already – you need to learn this quickly. You are not an investor. An investor is someone who can invest into a company, hold it literally forever and inject control over the direction of business. We are, me included, speculators. We are hoping that within a given time frame, usually 15 years or much less, we can buy some pieces of paper at one price and hopefully sell them at a higher price. We have no impact on the direction of the company or how they perform – we are effectively just “on for the ride”. Therefore, understanding this, the best thing we can do is understand the risks we are taking with our hard earned investment dollars at any given time and try and minimize the risk of loss while maximizing the potential for gain. Remember, a really good poker player knows one thing for sure – when to “fold”.