Remember, it’s not about being right, it’s about making money. Is it nice to be right? Of course. But it’s even nicer to be profitable. In order to do so, we focus more attention on figuring out where we’re wrong rather than allocating time and resources to fascinating about potential profits. If you want to be on my team, we’re going to play defense. So when we set specific parameters to be long against, we stay disciplined and move on to other opportunities when need be. If you use stop losses, it’s about executing them and then looking elsewhere. If your options expire worthless, just know you limited your loss to the premium you paid. The priority is always on the risk management, not on dreaming about future profits. I encourage everyone to read this post from last year: Knowing Where To Get Out Before Getting In
In today’s market environment I think it’s even more important to reiterate this point. Last week I mentioned that if we started to see cracks in certain levels for specific assets, then a more cautious stance is appropriate for stocks. Well, over the last few days, we’ve started to see that deterioration in Small-caps, Mid-caps, Micro-caps and Transportation Stocks. To add to this, the Energy stocks I discussed last week have resolved lower with a fall in Crude Oil prices. So we wanted to see each of these indexes hold above the levels we discussed and we wanted to see energy stocks resolve higher with Crude Oil making a run to $60 in order to reiterate a bullish stance. But none of those things happened. So now what?
I don’t think it’s the time to be shorting everything and going out of our way to short stocks and buy treasury bonds, etc. No, to the contrary. I think it’s important to recognize that this is still a strong uptrend for stocks. We can be bullish and less aggressive. It doesn’t mean we need to be bearish. The most important point I think is really just to honor stop losses. With every trade idea presented on this platform, I outline specific risk parameters.
You guys who have followed my work for a while know I have no problem being bearish and gloom and doom if I think it’s necessary. But you also know how bullish I can be when the weight of the evidence is pointing in that direction. Currently with the weakness in Deutsche Bank and other European Banks, the failed breakouts in Transports and Smaller-cap indexes has me concerned.
It doesn’t mean stocks need to crash. But a period of further consolidation is not unwarranted. While that my not be a disastrous scenario, it brings with it a ton of opportunity cost. Look at the U.S. Dollar since March of 2015. Yea, it’s within a huge uptrend, but it’s done literally nothing for 2 years. Who said that can’t happen in U.S. Indexes? While I’m not saying it will, both further declines in stock prices and a sideways market are two scenarios we want to avoid.
So I think based on the weight of the evidence, the emphasis today is definitely on honoring stop losses and key levels. If you have any questions in that respect, feel free to message me.
Here are some of the bearish divergences and targets achieved I’m referring to that raise flags.
Transports have been the best leading indicator for stocks going back to the late 2014 highs that led the S&p500 peak by 6 months. Transports were then the first to bottom last January, the month before the S&P500, Europe and Japan finally made their bottoms. So we look to this index as a leading indicator.
Dow Jones Transportation Average $DJT
New York Stock Exchange Composite $NYA
The Russell 3000 represents approximately 98% of all investable assets in the US Stock Market. It has now reached it’s objective. If prices are below 1400, I would argue there is more risk to the downside
Nasdaq Composite $COMPX
Here is the Russell2000 which recently resolved that consolidation from the past few months higher. This is normal behavior. What is not normal is a failure to hold while momentum diverges negatively. There is no reason to be long Small-cap stocks:
Russell Micro-caps $IWC
Dow Jones Composite Index $DJC
Here is a more equally weighted index to show what the entire complex of stocks looks like. It doesn’t look good to me with price failing to hold above the early 2015 highs and momentum diverging negatively. No reason to be bullish stocks if we’re below the 2015 highs:
Value Line Geometric Index $VLG
This is the Arithmetic version of the previous index. This one is also equally-weighted but uses the daily % change of the stocks instead a geometric average used in the prior chart. This broad-based index is showing a similar divergence and failed breakout that we have seen in prior examples:
Value Line Arithmetic Index $VLA
One thing I like to see is the continued strength of the Super-Mega cap index. Remember this is an equally weighted index of the biggest 10 stocks by market cap in America. These are most likely the last ones we’ll lose if stocks are in for a decline, so the relative strength here makes sense. We’re still near highs. If we start to break back below 242, then we can reevaluate. But for now, the strength is clearly in the largest stocks:
All Star Charts Equal-Weighted Super-Mega Cap Index $MONSTER
Finally, I think it makes sense to point out the similar divergence in the FTSE 100 in London, which as you guys know has been a big reason why I’ve been so bullish
We have had a great run in stocks and we’re fortunate to have been on the right side of that move for a long time. But there is a fine line between riding your winners and over-welcoming your stay. While I’m not in the ‘sell everything and get short’ camp, I think we’ve seen enough to throw up some caution signs. The combination of upside objectives met and bearish momentum divergences in so many important index suggests honoring the levels we’ve discussed and worth a reminder to honor stop losses on any long positions in stocks. But they should always be honored, not just today.
If you want to learn more about how I use Momentum to find divergences and confirmations of trends I put this together last year. I also recommend reading this one on Risk Management. If you have any question on specific levels for different stocks and assets, you can message me here.