Equities are under distribution. Period.
You have three choices. First, you can look at this pullback as an opportunity to buy stocks (it isn't). Second, you can stand aside and let the market do what it will do (that's what I'm doing). Third, you can short stocks and watch the market implode (I'm not doing this now).
While this might seem contrary to my comments relating to the first two choices -- not buying stocks, and standing aside -- it is entirely consistent. At some point, we'll see a snapback -- perhaps later today, perhaps tomorrow. The indices don't just go down without brief rallies. With the S&P 500 now at the 200-day moving average, do you expect the index to just knife right through it and continue to fall? I doubt it. We'll see a bounce. But if the prevalent pattern persists, the bounce will be short-lived.
So I'm not doing much at all. Some stops have been hit. I've closed out other positions for a slight profit, or for a slight loss. But I just don't want to play. But I have a choice; I don't have to play. I don't have a gambling mentality, and I don't feel the need to get in on the action every day. I feel the need to protect my money.
And I feel the need to protect my performance for the year -- which hasn't been the greatest, nor has it been the worst. But I'm protecting it, and waiting for a time when the market is more "Dan-friendly." At that point, I'll exploit the opportunities I see and grow my portfolio. The longer I am in this business, the more selective I become. I don't see more opportunities; I wait for better opportunities.
I'm just not putting my trading capital at risk now because I don't have to. And neither do you -- though you really want to keep trading, don't you? You really do. You can't help it, can you? You've just gotta buy something!
But I don't think this pullback is an opportunity to buy stocks. I mentioned that this is yet another test of the 200-day moving average by the S&P 500, which has been slowly drifting lower with narrowing breadth (i.e., fewer stocks moving higher). That's the sign of a weak market.
With the range so tight, why buy? What do you think you're going to accomplish buying right now? Do you think you're getting in on the ground floor of an upcoming blast-off? Get a great deal on a stock that you won't be able to get later? Perhaps, perhaps not. What's the potential upside?
Perhaps Disney (DIS) will bounce off the 200-day moving average. It probably will. Perhaps you'll catch a point or two on an oversold bounce. But the media stocks are under big distribution due to the issue of cable bundling. Maybe we're getting to a point where we don't have to pay for all those channels we never watch anyway. I'll tell you this: I pay a big cable bill every month, and I watch only a handful of stations. If you're conservative, do you really watch MSNBC, CNN and the like? Do you want to subsidize those stations? (Maybe you do, but the whole point of this issue is that the viewer is given a choice). If you're liberal, do you really even want the option of watching Fox News? (Doesn't it hit you on a visceral level that you are subsidizing a station you hate?) If you have no kids, do you really want to pay for Nickelodeon? If you don't like Oprah, then do you really want to subsidize OWN? So there are just so many stations that we pay for and only exist because we pay for them, even though we don't watch them. This is a question of choice, and technology is finally getting to a point where viewers have choices that were previously only theoretical. We're not quite there, but it's getting close. And this is what injects a great deal of uncertainty into the sector.
AMC Networks (AMCX) beat earnings estimates, but its international revenue dropped for the first time in nine quarters. The stock is down today. I sincerely hope you use stop losses on your positions. It's always a bummer when a trade doesn't work out. But the bummer should not equate to more than 8% to 10% of your position. You should not take a big loss ever. From a practical standpoint, the only time you risk taking a big loss is if you are holding a stock over earnings. If there is a severe, adverse reaction, then the stock gaps down and you have no chance to get out without taking a big loss. Disney provides the best example of this.
I'm using the media sector as an example of the universal concept of risk management.
Risk can be mitigated through position size, not just stop losses. The most important weapon you have in trading is the size of your portfolio in total. If you hold a very large position over earnings, and the "trade" (if you insist on calling it a trade rather than a bet) goes against you, the size of your entire portfolio suffers in a big way.
It doesn't have to be that way. Manage your risk through proper risk management. Look at the risk that each individual position poses to your entire portfolio. Of course, consider them in the aggregate. But look at each one? Example: Are you still in Apple (AAPL)? LOL. Why? Because you think the market is wrong about it. Memo to you: You're wrong. The stock is rolling over and it's going to keep rolling for a while. The only folks who are saying it's a buy are those who would love to sell you some of theirs. What would you rather own: shares of AAPL or U.S. dollar bills? Guess what's moving higher: AAPL or the dollar?
This is the choice you can make on each position you have. I'm not suggesting that you be in cash (though that is also your choice). I'm just suggesting that you do have options, and good traders always consider their options.
Make sure that you're comfortable with each position you hold. Don't use the "hope" strategy. (Know what rhymes with hope? Dope. Don't be that guy.)
If your position gives you a bad feeling, ditch it. You can always buy it back if you regret selling it. If you are reading this, the odds are high that you don't pay long-term capital gains. You pay short-term capital gains because your holding period tends to be less than a year.
To reiterate, I am not suggesting that you just go to cash because the market is going to zero. Thanks to all the fine folks at the various central banks on this planet, there are few places to put your money other than the equity markets. That fact alone will cushion any slide. So stick with stocks that are working -- though that number is constantly shrinking. But don't sit there waiting to get whacked again.
Manage your risk and make your own decisions. And decide to act when the market is rewarding action. When there is no reward, why take the risk?