After a very ugly intraday reversal on Monday, there is some modest bounce action Tuesday morning. The big-cap technology stocks and the FANG names were pounded Monday before a late bounce stemmed the tide of selling. In the early going the S&P 500 is back to where it was about an hour before Monday's close.
Is the worst over? Has this market found a low and will stocks begin to recover?
It is possible but that is not the sort of prediction you should be trying to make right now.
It can be fun to trade the indices when the volatility is this high. However, if you have a time frame of more than a day or so the focus should be on protecting capital and positioning for more downside. It is far more important to have a strategy that keeps you safe rather than hoping that an optimistic prediction may actually work.
What hurts traders more than anything in this type of market is staying frozen into inaction. It is very easy to do especially when the folks in the media keep trying to anticipate that a turn is about to occur. The same folks that wrongfully predicted a market top for many years are now trying to predict when a bottom will occur.
Don't be sucked into this prediction game. It's largely a product of hope and will encourage you to ignore prudent discipline. Focus on the price action in front of your face and above all else protect your capital. If you focus on keeping your accounts as close to their highs as possible you will survive this market very well.
Back in 2000, when the internet bubble burst, what wiped out so many investors was that they simply sat there and kept hoping that the market would find a low and turn back up. They relied on predictions from a slew of experts that gave them false hope. Instead of cutting stocks that broke down, they just kept wishing they would act better.
I'm not predicting that the current action is going to turn out like it did in 2000. That isn't important. What is important is making you sure you protect capital. It is possible the market finds a low and will go straight back up from here and you would feel foolish for having sold anything -- but it is still the prudent action. You have to focus on a defensive strategy in a poor market.
When I first started trading I put much more faith in the art of prediction. I believed that here were "experts" who could predict market direction with some consistency and precision. Over the years I have learned that most predictions that work are simply luck. Even worse, the risk of substantial loss is much greater when you rely too much on predictions. When you ignore the weakness in stocks and are not disciplined because some guru tells you things are going to bounce back, you put yourself at risk for substantial loss.
It is great for the ego when a prediction works, but a defensive strategy in a poor market is what will really payoff the best. Protect that capital and ignore the fortune tellers that want you to believe they know the future.
The sermon above might sound a bit gloomy but there were some positive signs in small-cap stocks Monday. They are finding support, although they were hidden by the carnage in the Nasdaq 100 (QQQ) . When stock-picking in small-caps starts working better that will be the time to be more bullish.
