"If you can't explain it to a 6-year-old, you don't understand it yourself."
After the best of the day year for the Nasdaq on Monday, the market reversed sharply on Tuesday. Despite the volatility there isn't any major news that is triggering the movement. It was just a random swing.
Continued weakness in oil, nervousness about Brexit, soft action in France, a strong yen and general anxiety are the reasons given for some pressure this morning, but there is the potential for the market to quickly shrug off those worries at any time. Trading this market off of news headlines has been nearly impossible recently.
With the indices still close to all-time highs and the overall uptrend still in place, there is no compelling reason to believe the indices are about to collapse. There are problems with the action, such as the recent weakness in the FAANG names, the relative underperformance by small-caps and negative seasonality, but they haven't mattered too much so far. Yet despite the lack of substantial negatives, I am becoming more bearish.
My goal as a trader is to stay objective and to follow the price action. I try not to let my hopes and desires color my thinking about the market. When the price action is strong I want to be buying stocks, and when the price action is weak I want to sell them. I want to react quickly to what is happening rather than try to anticipate what might happen down the road. I don't try to make big calls. I just want to be fast to react as conditions change.
It is important to define what I mean by "price action." I'm not talking about the indices, but rather the action in the hundreds of stocks that I look at on a daily basis. The indices are of secondary importance. When I find stocks to buy I'm bullish, and when I don't find many then I end up with higher levels of cash and that positions me with a bearish bias. That is where I am right now. I can't find much to buy, therefore I am bearish.
I'm not holding high levels of cash because I am predicting a major downtrend. I am holding high levels of cash because I don't see many stocks I want to buy. That could change and I could start aggressively buying new positions, but my review of hundreds of charts makes me believe that is unlikely.
Many pundits spend their time formulating arguments about why the market is going to form a top. They use a slew of economic, political, fundamental and technical reasons to support a bearish thesis, but the problem is timing. There is always a great bearish argument, but until those arguments impact price action they are worthless.
My view is that individual stocks are the canary in the coal mine. When they are not offering many opportunities then you don't buy, and that makes you bearish by default. You don't need any reason other than that. There are always some stocks that are acting well, but don't let that fool you. Just because a trade works, such as Everspin (MRAM) , my Stock of the Week, that doesn't mean that it is representative of the overall market.
The important thing is to stay objective and open-minded. This lack of positive action in individual stocks can expand further and turn into a major market downtrend or it can be shrugged off fast. Right now it looks like the downside momentum is building a bit, but you'd be a fool to forget how quickly the dip buyers can turn this market.
I'm bearish because I can't find much to buy. It is as simple as that.
