The market has undergone a substantial change in character in recent weeks. Shifts in the trade war with China, the relative value of currencies and a sharp drop in interest rates has caused a sharp rise in the number of market pundits predicting a significant market pullback
There has been a contingent of bears fighting the market uptrend ever since it began following the Great Recession of 2008-9 but their confidence level is rising and it is enticing other market participants and causing increased concern. The arguments seem compelling and with the market selling off - even though central banks around the world are cutting interest rates - there is a good reason for concern.
The problem for market participants is the same one that always makes the stock market so challenging - timing. While the confidence levels are growing about where the market is heading there is still no way to time the action with any great precision. The timing problem is particularly difficult in the second half of August when market volume slows dramatically while Wall Street takes summer vacation.
So how do we deal with this issue of timing?
One school of thought that many bears embrace is to simply anticipate the worse, position accordingly and wait for disaster to occur. The problem with that is the same as it has been for years. It carries very high opportunity cost if the timing is wrong and creates the potential to be on the wrong side of the action.
The approach I favor to this difficulty is to stay focused on individual stocks and let them be your guide to whether you are heavily invested or not. If a stock stumbles or breaks key technical levels then cut it. Make sure you do not allow losses to grow. Be selective with buying and only buy those that have the right setups. Don't buy simply because the indices are moving stocks around.
Making big picture arguments about market direction is not hard to do. There are many folks with highly logical and compelling reasons for why doom lies ahead. They may be right but it is the timing that matters more than anything. Focus on reacting to the price action as it develops rather than the formulation of arguments. Our focus should be on our capital. That is the ultimate market tell.
The market will be very thin for the next couple weeks and that is probably the main thing causing a weak open this morning. There are more worries about trade with China and the situation in Hong Kong appears to be growing worse. Oil is weak on global growth concerns. A number of retailers are reporting and there isn't much optimism about what they will say.
It is a tough environment right now but don't be too quick to embrace disaster.