"Trying to pick a top in U.S. equity markets is like picking up pennies in front of a steamroller."
Although the indices continue to hold near all-time highs, there is growing concern among many market players that the market is on the brink of substantial correction. That belief has been out there for years, but it now is embraced by folks who aren't perma-bears.
The bearish argument is not hard to understand. We are now eight years into an uptrend, valuations are aggressive, central banks are turning hawkish and little progress has been made on tax and fiscal reforms. The negative arguments are almost too obvious.
If you believe, like I do, that the bears are correct and that some corrective action is likely to occur soon, what should we do?
The answer is nothing. The bearish arguments need confirmation. There has never been a time in the markets when the bears have not had some great and compelling arguments. It is the nature of markets to have disagreement.
The thing the bears keep missing is that they need some sign that their arguments matter. The market's reaction to political, economic and earnings news must shift. That is the indication that is needed before we can embrace our inner bear.
For some reason, the bears seem to think they must anticipate a change in market character. Maybe it is because they are trying to nail the exact moment that the market tops. The only way to do that is to keep on predicting that "this is it," that this is the very moment the market turns.
The best piece of advice I can give is that you do not need to be that precise in timing. You don't need to nail the exact top in order to navigate a market correction. What you need to do is react as the price action changes. You embrace the power of selling and use money management and stops to protect your capital. You don't need to be some genius market timer. You simply cut losses before they grow.
You could go to cash and start buying puts right now. Many bears have been doing that for a very long time. The problem is that the opportunity cost is tremendous. The gains that are missed more than offset the losses avoided if they had waited.
The action yesterday was a good case in point. While it was quite slow and breadth wasn't that great, there were some huge movers. I was lucky to be in a few strong names such as Weibo Corp. (WB) and The Trade Desk Inc. (TTD) and the profits produced give me a big cushion to use in case a sudden market turn finally does occur.
Frankly, I hope the bears are correct and that there is a nasty correction soon. It would create some good opportunities and provide some interesting trading. Most traders prefer volatility to the one-sided action that has been common for so long.
The best way to navigate this market is to make money while you can but to be ready to shift when the price action changes. Ignore the folks who are so intent on making predictions. The opportunity cost of calling tops outweighs the benefits you might gain.
We have a very quiet start on the way as slow summer trading continues.