Weekly Market update # 3
As I posted in my first Weekly Market update on Jan. 11 in this thread:
thread-52801.html
As far as stock individual trading, I've been on a sell signal since about December 11th (meaning sitting in cash ) Lately, the amount of distribution seems to be picking up.
This is a very dangerous environment to be long in. You don’t know how far a correction or bear market is going to go and we are certainly at least in a correction if not a potential bear market.
Bear in mind, most of my advice applies to investors who trade individual stocks. Those buying mutual funds for the long term are most likely fine holding through periods like this an adding to funds. However, holding individual stocks through periods like this ( let's say you own an average of 5 to 10 stocks in your trading account) can wipe out, for all intents and purposes, your account value.
Case in point: During the bear market correction of the 70s, those who held on to Xerox and other blue chip names ( the Facebooks and Googles of their day) saw anywhere from 14 to 24 years pass before they were even break even again. That's anywhere from over one to two decades of dead money. If the thought of that repulses you as it does me, I'd advise studying how to properly identify corrections, bottoms and new advances, when they start.
During the 2000's, the bluest of the blue chips like Citi Bank and other very well known blue chip 'conservative' stocks were down 90%. They still haven't even come close to recovering their value as we enter 2016.
Even when we bottom, it’s a very volatile period and very difficult to trade, so even if the market does bottom, you shouldn’t just start buying stocks. In fact, there's no way to tell it's bottomed until the next advance has begun and we are off the lows. If you follow this method are you getting the best prices? No. Are you, however, following a much safer, capital preservation type strategy with a much higher degree of certainty that the stock won't collapse again from where you're buying? Yes.
It’s usually safer to buy after the bottoming process has occurred, which can often take months or longer and the market has begun a discernible uptrend.
In December, the Nasdaq was over 6150 and now it’s at 4570. The average stock, so far, is off 25 to 30 percent, and this is why I, as an individual stock trader, go to cash in these periods.
We are undercutting lows from last year on S&P 500:
http://finance.yahoo.com/echarts?s=%5Egspc+interactive#
On Monday this week, we undercut the recent lows from last year on the Nasdaq chart as well.
There’s too much technical damage and distribution taking place for the market just to start going up from here.
At the very least, it’s going to take a bottoming process and base building to create a new advance of any appreciable return.
In addition to the ECRI weekly leading index forecasting tough economic times as I alluded to in both of my previous Market Updates in this thread, we’re seeing a low in the 10 year treasury yield that never portends well for the stock market.
In addition to these bad omens, we have the Fed mismanagement. Instead of the Fed initiating tightening when we had 4 to 5 % GDP growth, which would have been the best time to begin it, they waited to begin tightening once the economy was on the slowdown, making it worse. No surprise there, they’ve been making bad choices virtually since their inception.
We had a "Follow Through Day" last week but it was quickly crushed on subsequent trading days by heavy distribution. A Follow Through Day (FTD) is a trading day where the market is up significantly and on higher trading volume than the day before. You need Follow Through Days in rapid succession, over the course of one to two weeks typically, to achieve a new uptrend.
In summary:
1. Every bull trend starts with FTD but not every FTD starts a new bull trend.
2 A FTD alone is not confirmation, it is simply needed to begin a confirmation that a new uptrend may be happening.
3. Distribution ( down days on heavier trading volume than the day before) rears its head AGAIN.
Going from a macro viewpoint to a micro viewpoint, by looking at some individual names, many so called 'blue chip' and large cap stocks have been getting hammered.
Examples of these bad actors:
*AMZN fell apart on earnings.
* Face Book broke out to new highs on earnings but quickly corrected to the downside.
* Linked In (LNKD) dropped from over 200 a few days ago, to around 110 now. Absolutely getting crushed.
I could go on with many other examples. The hits keep coming.
Cash is king now. It allows the stock trader to preserve not only his financial capital, but also his psychological capital. The trader who stays invested through times like this, often gets so browbeat and frightened, that when a new uptrend actually does start to occur, he's too scared to pull the trigger on stocks that are breaking out.
New industry leaders will emerge once this correction is over and the new upturn begins. Stocks you’ve never heard of will be the next wave of great winners.
The time for this to occur, I believe, is still down the road.