I’m trading in bear-market mode

Positives:

Sentiment — While fear levels are quite to the point that extreme, some
measures of sentiment are starting to show signs of excessive bearishness. The
slide of the last few weeks has spooked some investors. Overall, this is a
mildly bullish development.

Negatives:

Foreign Markets — In the “Taller They Are The Harder They Fall” category foreign
markets have taken a beating. Some areas like India and Eastern Europe have come
down so hard that accounts in those areas may take months or years to make back
losses. Money being lost overseas is not a positive for the US.

My shrunken watch list — It’s been over three years since my watch list has
been this small. I am not finding anything with intermediate-term potential.
Bases have been destroyed and it will be some time before most of them can be
rebuilt.

Accumulation/Distribution — The market has been selling off on higher volume
and rallying on lower volume fairly consistently in recent weeks. This will need
to change if there is going to be a sustainable rally.

Breadth — Breadth statistics have been weakening for months. I showed many
charts in this column over the last few months which illustrated this. This is
what tipped me off in the first place that an imminent decline was likely. It
will likely take some time before many measures of breadth are able to
strengthen to a bullish posture. This is still a negative.

UUWNHI (Unofficial, Unscientific, Working/Not working Hanna Indicator) — What’s
been working? Shorts! Long-side breakouts are rare and many pullback strategies
were steamrolled with the recent relentless selling. The easiest way to play the
market right now seems to be shorting into bounces.

Overall I believe the market has now entered a corrective phase. The negatives
I’m seeing are unlikely to reverse in short order. I feel there will be more
downside to come before the market bottoms and a new bull rally begins. I am now
trading in bear-market mode.

As a quick follow-up on the ETF trades I mentioned in my last couple of columns,
all positions are now closed. About 60% of them were sold when the market
bounced last Thursday, and the remaining near the close on Friday. Overall,
these trades were losers, but by limiting my exposure, methodically continuing
to scale in, and selling once the bounce occurred even though I wasn’t back to
breakeven, the losses ended up very small. It’s about making money when you are
right, and keeping losses small when you aren’t. I’ll talk more about these
trades in upcoming columns, since I believe there is a lot that can be learned
from them.

Best of luck with your trading,

Rob