There are Two Things that Concern Me
Yesterday I wrote “Pretty much textbook behavior yesterday (Monday) and the key will be a follow-through today. A reversal back down will not be a good sign”. Well the reversal back down did occur and it’s not a good sign.
There are two things that concern me:
1. The sell-off is hitting the safer larger stocks as hard as it’s hitting what many consider junk companies. The larger players play in the larger names which means that this is institutional selling coming globally.
2. No one can give a good reason for the sell-off. Markets don’t plunge intra-day as they did yesterday because of “concerns about economic data”. Headlines like that are written by people with journalism degrees. It’s nonsense. Even Bill Gross mentioned the other day that the selling appears to be coming in such as a way that it appears something bigger is out there. Bill Gross is often correct.
I’ll add a third. Very few stocks are very oversold today. In fact, only 1 S&P 500 stock has a ConnorsRSI reading under 5. Monday’s rally brought a number of stocks to neutral and the yesterday’s sell-off brought stocks to a marginal level of being oversold. So they can become a lot more oversold here and still be normal.
So, what do you do?
If you have cash, you’re in a good place. Potentially scaling into the market at lower levels may prove to be opportune. The risk-reward at lower prices will be there, especially if you use R (fixed dollar risk per position).
If you already are already invested, the urge is there to “add more”. I’ll caution that loading up in a declining market with volatility spiking six years into a bull market while no one can explain why it’s going down is not a prudent move. Again, this is a risk-reward scenario. This is not the time to get leveraged. Loading up here may possibly pay off but the smarter route is to let the market play itself out. These type of pullbacks occur a few times a year. Some are small, some are like August/September 2011, and once every 6-7 years they turn into 1987, 2000-2002, and 2008. Respecting this through proper position sizing and risk management is always the best long-term plan.
Please use caution here over the next few days.