Best of Larry Connors’ Battle Plan: Market Bears Fear “Missing the Move” (SPY, QQQQ)

There was damage done last week and now with the market down again for the year, it starts getting into a game of cat and mouse through the end of the year. Here’s why.

In speaking with a friend on Friday who oversees the trading of a good-sized hedge fund, he mentioned to me that the majority of hedge funds are extremely bearish and are net long near their lowest equity levels of the year (“net long” means long minus shorts).

He said they’ve maintained this type of position for a few months and is the reason why everyone is seeing extended moves from one extreme to another. When the rallies occur, they are being exaggerated by the fear of underperforming and missing a move that everyone else may catch. And when the market then becomes extremely overbought by these moves, the normal selling which usually occurs is amplified because these guys didn’t want to be long to begin with and start aggressively dumping stocks, especially the small cap and Nasdaq stocks.

All this can seen by looking at a 3-4 month period of the 2-period RSI. It’s been moving from one extended extreme to the other over and over again.

SPY Chart

Those of you who know me know that when things like this occur, I say the same thing: It will pass. It always does. After 30 years of trading the markets. I’ve seen that these type of extraordinary behavioral events rarely last too long. And once they pass, the more normal daily movement comes back into the market. When that will occur is unknown, but eventually the market is going to break out in one direction or another and a trend will kick in.

In the meantime, we’ll continue to do what we do and trade the exact same game plan that has worked for us since the inception of the Daily Battle Plan Model Portfolio in 2008 (especially in ^SPY^ and ^QQQQ^).

For today, we’ll wait for the bounce and see where it it ends in relation to the 200-day moving average. From there we’ll take positions.

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Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.