The market has been under severe pressure for over two weeks now -- and that is exciting many market pundits that are anxious to tell us what is going to happen next. The long-time bears are happy to see some of the carnage they have been predicting for years and many believe that a full-fledged bear market is developing. The optimistic bulls shrug and say that they have heard it before, but the economy is strong and stocks are not expensive. Some corrective action is what is needed to set up the next big upside move.
The bullish and bearish arguments are not that hard to understand. We have been hearing the same things from both sides for a very long time. The big question is whether we should embrace one side or the other. Should we stay positive and anticipate that the trend will turn back up fairly fast or should we be preparing for a nasty bear market that is going to cause even more pain?
The answer is that we don't need to decide. The only thing we really need to know right now is that the market is in a downtrend and many stocks are falling sharply. We don't need to know if this is a major bear market or not. We simply need to take action to protect our capital and then wait to see what happens next.
The folks in the business media overcomplicate things in a market like this. There are always some 'experts' that are happy to explain to us what is happening and why. They claim to understand the dynamics that are driving the action and are happy to predict what will happen next. They have never been very accurate in the past -- but this time they are quite certain where things are head.
It isn't necessary to understand anything about Italian bonds, stimulus measures in China, the fate of interest rates in Japan or how the trade war issues will be resolved. You don't need to analyze economic data or try to predict what the Fed will do at its next meeting.
What you need to do is look at what stocks are doing and admit that they are acting poorly. If you are losing money, then cut your losses and protect your capital. Nothing is more important than preserving your capital. Forget all the arguments and theories about what the market will do next.
The most important thing to recognize is that making up losses in the future is extremely unproductive. If you lose 30% then you need a gain of around 43% to just get back to even. Don't dig that sort of hole for yourself. The opportunities will always be their if you have the capital.
Your ultimate goal is not to predict what the market will do next, but to keep your capital as close to highs as possible. That should be your focus. Don't worry about the headlines or whether this is a bull market or bear market. Just focus on that capital and keeping it safe. If you do that, you will be able to navigate this market with minimal stress or worry.
We have a tepid bounce shaping up in the early going. Officials in China made some promises to prop up the stock market, which has pushed a bounce in that market, but European stocks are worried about the Italian budget and market players in the U.S. are growing weary of the price action.
What I know is that the price action is poor and I want to hold a high level of cash. When conditions change, then so will I.