For the last couple of weeks now, the entire Tycoon Research team has been urging caution.
When the value guy (Dylan), the options guy (Chris) and the technician/hedge fund guy (yours truly!) are all advocating caution, do yourself a favor - listen to the voice of over 50 years of market experience. Our strategy, given the current state of the market, is to manage our current positions first, look for new ideas second. We’re taking profits where we have them and using options to play new ideas instead of putting up scads of cash in the actual stocks themselves at these levels.
Options allow us to predefine our risk (the most we can lose is the premium) and if by some miracle the market goes vertical in the short run on us, we’ll have all of that leverage working in our favor.
What can I say? Those of you who are as devoted to the market as we are can see the writing on the wall. More weakness this week, and forget the indices. They’re ALWAYS the last to move up and the LAST to move down.
In fact, expect the indices to trade higher here while the rest of the broad market starts to sell off. It’s rare for markets to just fall off a cliff. What you typically see is a “narrowing” of the market where fewer and fewer sectors participate in the up moves. With seven sectors moving to sell signals last week, this is exactly what is happening now.
One way to picture the market is like walking down a wide hallway strewn with gold coins. Your job is to progress down the hallway AND PICK UP AS MANY GOLD COINS AS YOU CAN.
When the markets are in a nice up trend, that’s easy to do; you just stroll along and scoop up the cash. But in a deteriorating market (which we are in right now, at least over the short term), instead of a large hallway where you leisurely shovel up gold coins by the bushel, you are now sprinting down a narrow passageway trying to pick up a coin or two while at a full bore run!!
Why are you running? You’re running because the walls are closing in on you, and if you’re not quick enough, you will get SQUISHED!!!
What do we mean? Every move in a market goes through very predictable cycles. Right now, we are correcting from an overbought situation stemming from a very strong rally that was created from the oversold levels of April. Now here’s the rub: there’s no way to tell yet if this is going to be a short-lived pullback on the way to much higher prices or if it’s going to be a full-fledged mauling.
Just about every short term technical indicator we follow has gone negative, BUT our biggest gun, our go to bull/bear indicator is still positive. So until our “Big Boy” indicator goes negative, experience tells us we’ve got to maintain exposure to equities. But make no mistake; we can see those walls closing in!!
Chief Investment Officer
ETF Master Trader