It's The Opportunity Cost That Also Gets You
To act first and ask questions later is perfectly acceptable in the market. As my friend Kim Sokoloff so eloquently said on my podcast last month, "You could always get back in".
The reason I bring this up is because volatility happens fast. I think you always need to be prepared for it. As many of you know, I've been incredibly bullish stocks the past few years, particularly since the summer of 2016. Along the way, however, you should remember how many times I laid out specific circumstances as to what would need to happen for us to get more defensive. While still bullish, we lived a life of if then statements.
More recently in late September, I laid out for Premium Members a list of events that would likely take place if trends in US Stocks started to change. A few of those were the major U.S. Averages, of course, and some of the most important sectors in the U.S. like Consumer Discretionary for example. A more defensive approach would be best, meaning more neutral.
Here is an example of one of those charts, the Russell2000. The bearish argument was that a failed breakout was possible. The implications of one would lead to, at least, a longer correction. Obviously it could be worse than just a correction, but at the very least, somewhere we do not want to be long. The line in the sand was 169. Here is the chart from September:
Not only would a break below 169 create a failed breakout above the 161.8% extension of the January correction, but also below the summer highs. In addition, it would confirm a bearish divergence in momentum.
The bullish argument is that we would get back above 172 and rip to new highs, confirming the breakout. That did not happen and we lost 169 in Russell2000.
This is what it looks like now:
It was Brian Shannon who taught me that from failed moves came fast moves in the opposite direction. $IWM is exhibit A ladies & gentlemen.
We're now down near the former highs from the beginning of the year. Momentum is now in a bearish range, which is absolutely not a characteristic of an uptrend. And at the very least I think we're going sideways for a while. Think about it, that support at 169 that could not hold is now overhead supply. $169, if we ever get back there, is likely to be trouble. At best, I think we're stuck in that range.
Now, if we lose 160 then there are much bigger issues here. I don't see anything wrong with being short the Russell2000 if we're below 160. I've been neutral vs short since losing 169, to be fair, and I still feel that way given the lack of stress in credit. I'm more interested in staying neutral and getting ready to buy than I am trying to be aggressive from the short side, at least from an intermediate-term time horizon. I look out weeks and months, not minutes and hours and not years either.
Levels broke last week. That's the bottom line. That's why we lay them out before hand (Premium).
There are stocks still showing positive momentum and relative strength. Those are the ones we're looking to buy. I don't see enough evidence to suggest that a systematic crisis is on the horizon and we need to short everything. I do think a more neutral environment is here. Some stocks will go up, some will go down and the averages are likely in a range until they prove otherwise.
It's the opportunity cost that gets us. I think there are better places to be. That's how I see it.
JC