"The best preparation for good work tomorrow is to do good work today."
--Elbert Hubbard.
The headline writers are blaming weakness in the premarket on jitters over several things: a "Brexit," which is scheduled for a vote on June 23; the Fed, which meets next week; slowing global growth; a bounce in the dollar; and a pullback in oil.
None of these issues is new but we have a technically extended market that needs a rest. Every time we have this sort of dip action it is almost immediately bought, and the bears fail to generate any real downside momentum. Market players never become very fearful these days. They are confident that there will be dip buyers and many of the bulls celebrate the opportunity to buy favorite stocks at lower prices.
Time and again this market has punished those who are too quick to play aggressive defense. For disciplined traders there is little choice but to take stops and cut inventory into weakness, but it is extremely difficult to jump back in, which is why we always seem to have so many underinvested bulls. The pullbacks are too brief to allow easy rebuilding of positions recently sold.
Of course when we have an open like this, the bears are quick to proclaim that the "top" that they have been calling for years is finally here. That tends to be the signal for the dip buyers to show up and do their thing.
I'm convinced that we will see an ugly correction this summer, but I refuse to be sucked into the game of trying to predict when it will occur. I want the price action to guide me. When we have a pullback like we are seeing this morning, it is important to consider the possibility that the topping process is underway but the bears still have the burden of proof. This market has been repeatedly saved from action like this and it has been extremely costly to be too negative too quickly.
When we have this sort of ugly open, the main thing I want to do is to have a good list of stocks that I want to buy on weakness. Things that I have sold into strength such as Acacia Communications (ACIA), Yirendai (YRD), Five9 (FIVN) and Teck Resources (TCK) are what I will be looking at as they pull back and find support.
It often confuses me why traders are fearful of this sort of weakness and don't celebrate the opportunities it creates. The best way for traders to outperform overall is by producing superior results in difficult markets. Loading up and riding a trend is nice but to really beat the market you have to be able to handle the ups and downs effectively.
On 10 of the last 12 days, this market has seen its lows of the day at the open. We have consistently gained strength after early weakness. A weak close will change that pattern and that is what we will have to watch for but market players are well trained to buy the dip and that is what I'm watching for.
