Below is an updated post from earlier this year, but it certainly applies today -- or at any time.
There are a million reasons to sell, but there is only one reason to buy. As investors/traders we don't need to know the reasons for the selling, nor do we care. After all, there are too many to count. Just acknowledge and embrace it. Europe? China? Slowdown? Politics? News? No matter. Our job, therefore, is to best identify when it is coming at a feverish pitch -- and either to step out of the way or to profit from it. The evidence is heavily weighted toward market distribution, and it has been for quite some time. My Real Money colleague and friend Ken Shreve has been talking about the institutional distribution signals since September. I would actually go back a bit further to when the distribution started -- just after Labor Day.
That is where we saw the first big signs of institutional selling. Oh, there were some decent price moves following that low, but they were without any conviction. All paths lead to the institutions, which make up 80% of the market action. I look for strong volume on the up days as the best way to measure institutional participation. Turnover has been absent, so buying levels are missing. Support is tenuous.
Who is doing all the selling? Maybe a better question is: Who isn't selling? Bear raids are not fun, but they are a fact of life. What goes up eventually comes down (and then goes back up, and so forth). What goes up eventually comes down -- and goes back up, and so on.We will ride the trend until it doesn't work.
Is it OK to sell here? Anytime it's OK to sell. We as options traders cannot hold onto market plays for very long. Calls and puts are wasting assets -- we need to move quickly.
As Jim Cramer pointed out on his Mad Money show the other day, it is much more fun being bullish. Still, we must accept and embrace the conditions that are in front of us. Some bulls have dug themselves a hole as they have bought all the way down, and some very deeply down. That is just not the best activity at this juncture. Warren Buffett once said that, in order to get out of a hole, you need to stop digging first.
I don't care what is being flaunted out there about "great buying opportunities" here or "cheap valuations" there. When the selling exercise commences, you need to stand back and let it finish. There are strategies and tactics to navigate through choppy waters, and I suggest you use them. Now is not the time for complacency. It is a time for action. This excerpt from my early Friday Real Money post:
"This is a time to be defensive -- buy some put protection, sell some longs if you can, sell calls and take in the nice premium if you want to hold. Now is the right moment to be active and not sit around to get run over."
The chart up above tells the story. One argument of late has been whether technicals are a better predictor of price action than fundamentals. I can tell you this much: There are no fundamentals that tell you anything about what is happening to this market. The most accomplished bear market serves to trap hopeful investors into the market, only to spin them around and make them so sick they can barely move. I've been there -- and if you have played the markets for a while, so have you. Legends are made by making a correct timing call. After all, you get many chances to get it right once. That's all good and well for the ego, but does it make money for you?
That's all I care about. I measure success strictly by the bottom line. Am I making money for clients (or at least not losing them money, since cash is a decision and a position? Are we positioned correctly, flexible and ready to move our feet when the winds change? Can we accept losses and turn it around? Our beliefs are embedded in our minds and make it very difficult to shift gears.
With a market that moves at hyper speed, from up to down and back again, we must let go of our beliefs and just move with the market. Is my focus on the charts and what is happening today and likely to occur in the future? Or am I lamenting my losing positions in the market? A bear market can be the most humbling experience -- yet, as we continue to fight it the fatigue sets in.
Jim "Rev Shark" DePorre says it right: "A bear market will wear you out, not scare you out." We have just finished the worst quarter in quite some time driven by some of the worst global policy decisions in history. What to expect in the fourth quarter? You won't get that from me. Rather, we'll play the market in front of us.