Morning Market Thoughts
Good morning. The market remains in a choppy, sloppy uptrend that can be difficult to embrace. If you sat the rally out, you might be slowly and silently capitulating…making small purchases of stocks that you wish you had bought at lower levels, and hoping that the rally continues and doesn’t instead reverse and make you feel foolish. If you own stocks that have done well, you aren’t sure whether to sell them now, or just hold on for a while more because, after all, the indexes are still in uptrends. They just look tired.These are the kind of things that go through a trader’s mind when a rally gets long in the tooth. (Random thought: As we get older, do our teeth really get longer, or do our gums just recede and give the impression that our teeth are longer? Frankly, I’m just hoping that I still have teeth when I am very old. The length won’t matter.)
The headlines and news stories don’t really help much because they are all over the board. And financial news is ALWAYS all over the board; it’s just that we are more sensitive to the news when a rally seems tired because we are starting to watch for any little sign that the trend is ending. We’re looking for anything to confirm our concern and prompt us to act…or not act.
I’m looking at Yahoo! Finance. Here are a few articles that jump out at me:
1. “The $1 trillion short underlying U.S. stocks’ spring awakening.” It notes that the the short interest in the market is the highest since 2008. You do remember what happened in 2008, don’t you? It was actually 2009, when a massive selloff and powerful downtrend reversed and started a bull market that is now up more than 200%. The article goes on to say that retail investors (avid trend followers) are about to start moving in and pushing stocks even higher.
Sounds good (and plausible) to me. That would make me happy.
2. “RECESSION?! Here’s new proof the US economy is stronger than you think” This piece discusses the ISM services index, which was at 54.5, up from 53.4 in February. Any reading above 50 indicates growth in the services sector. So that’s bullish. The employment index climbed to 50.3. That’s good too. The gist of this article is that we are slowly but definitively climbing out of a recession.
3. “Trump’s not wrong about a ‘massive recession'”. Donald Trump recently made headlines by predicting a massive recession. Just massive! This article supports that view be discussing the disillusioned state of many Americans who feel that their living standards are permanently in decline. OK, fine. But to be honest, I will tell you that Donald Trump has no edge here. The economy could just as easily expand as it could collapse. There are factors that support both outcomes. I’m not addressing the merits of his comment. It’s a political comment and certainly an inflammatory and dramatic one. It is a statement about the changing domestic economy — opportunities are in different fields than they used to be. People are getting left behind.
But a massive recession? Sure, why not? People have been predicting that for many years, but it hasn’t happened yet. I’m sure that we will ultimately fall into a massive recession. The Fed has mucked things up to monumental proportions. They view themselves as saviors. But savvy financial people with good memories recall that the things that Bernanke said were essential to vindicate the Fed’s grand experiment have simply not happened. I’m not going for a walk down Memory Lane here. Just suffice it to say that the Fed’s free money campaign has made the rich richer, and left everyone else wishing that they were on the inside and benefiting from all that free money.
So this Armageddonistic rhetoric is alarming to many investors, but it expresses nothing new. It’s just being expressed by someone new.
So you can see that headlines confirm both bullish and bearish views. And they can keep you uneasy and queasy. That’s why it’s said that “bull markets climb a Wall of Worry.” Things are never really clear. The water is always muddy. That’s the nature of investing. If you want to make money, you’ve got to get a little mud on you.
My suggestion is to realize that the market is indeed chopping around right now and could really use a rest. Hopefully it is a sideways rest. But your best approach should simply be to protect your capital by never having a big position that can hurt you. You should have a position size and a stop that, combined, would risk no more than 1% of your trading capital. 2%? Fine. Whatever! Just have a percent that works for you. But the percent risk is NOT the entire position size. Rather, your risk is defined as follows:
Dollar difference between cost basis and stop loss level = X. Number of shares = Y. “X x Y = Dollar risk to your portfolio.” Make sure that risk is no more than a small percentage of your portfolio.
If you can have the discipline to do this, you will have a better chance of cutting through the headlines and focusing on your individual positions. You’ll be able to manage them. You’ll get the patience to wait for the proper entry because you will always be requiring yourself to impose a stop loss. And you won’t want to have a really wide stop on your position because you’ll only be able to buy a very few shares. You’ll want to have a fairly tight stop so that you can own more shares. But you’ll also learn that the only way of having a tight stop is to wait for a very good, high probability entry that gets you in very close to support.
Here is an example — Look at CSX Corp (CSX). I mentioned this railroad stock last night. It was testing its 50-day moving average, though not yet bouncing.
Look at the daily chart.
Had you bought yesterday, you would have justified the purchase by putting a stop just beneath the 50-day moving average. Your stop was both tight…and logical. So now, as CSX is down 1.2% and testing the 50-day moving average, you are sitting on your hands and letting the stock do what it’s going to do. If you get stopped out? Too bad, so sad. Let’s move on. Good trade, small loss. If the stock bounces, then you’ll have an opportunity to make some money because your entry was good.
See what I mean? You are using the charts to help you with your risk management. Frankly, I cannot imagine trading any other way.
And that’s my headline this morning — Be patient, draw your lines in the sand based on what you are seeing in the charts. If you can do that, then you’ll have money if Donald Trump’s great recession ever materializes.
See you in the forum.
Dan
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