"The four most dangerous words in investing are 'This time it's different.'"
--Sir John Templeton
Another quick correction or the start of the long-awaited correction? That is the question we face this morning after brutal day of selling on Thursday.
The market has been here before and the bulls have won just about every time. Despite a long list of negatives, the bears never seem to be able to close the deal. The dip buyers quickly show up and overwhelm all the arguments about how the market is turning on Trump, valuations are too high, central bankers are no longer supportive and so on.
The problem for the bears is that the computer algorithms are programmed to buy into action like this. Over and over, they have been rewarded when they buy into clear technical breakdowns such as what developed yesterday. Quite often, these bounces turn into V-shaped moves; at a minimum, they catch the bears that are pressing by surprise. Downside momentum just doesn't occur in this market.
But despite the lack of downside follow-through, it does not relieve the prudent trader from playing defense. Our No. 1 job is to protect our precious capital above all else. When risks are high, we have no choice but to make sure we are positioned to minimize losses just in case the market doesn't come roaring back
The necessity of playing defense in a market that seldom requires it for long has been the source of great frustration for traders. It is the primary reason that so many hedge funds and market timers have underperformed badly so often since this uptrend began way back in 2009.
Our job as traders isn't to constantly make big, risky bets. Our job is to look for situations when the odds are in our favor and then make our moves. Over time, we will outperform if we minimize downside and focus on picking off opportunities in a favorable environment.
The action yesterday demanded that we cut losses in places before they become too large. Some of those stocks likely will come back quickly and we will be disappointed by our poor timing, but that is the nature of the game. We never will sell or buy at the optimal moment. We simply must formulate a plan and do our best to protect capital and build it when we can.
Days such as yesterday always make me excited about the potential for new opportunities. When stocks sell off across the board, it is a certainty that some are being unfairly tarnished. We suddenly are given the chance of sorting through the wreckage to find the gems that have been dumped in the midst of the chaos. This is what stock pickers live for, and the more things sell off the better the opportunities will become.
In the early going the action is close to flat. If you already have made your defensive moves and are taking stops there isn't much to do until the action develops further. The thing that will be most interesting is to see how well a bounce attempt holds up at this point.
Normally an oversold bounce at this juncture should not be trusted, but that has been dead wrong so many times in this market it is hard to believe it ever was the standard technical response.
Is it different this time? We have no choice but to be ready just in case, but don't be too fast to believe that the pattern of recovery won't occur again.