After the indices were slammed lower on Tuesday, conditions were good for some sort of bounce after Chinese officials made positive comments about progress on trade with the U.S. It was a mild bounce to start but the opportunity for it to develop further looked good.
Hopes for a recovery were dashed when news hit that the daughter of the founder of Chinese tech giant, Huawei, was arrested in Canada and held for possible extradition to the U.S. for violation of trade sanctions. Huawei has been targeted by U.S. officials for a while but this escalation, and surprise timing, stunned the market.
European stocks are trading down over 2% this morning after steep losses yesterday and are at their lowest levels in two years. Early indications in the U.S. show that a retest of the recent lows will develop early while small caps ( (IWM) ) and many individual stocks are set to breach recent support.
Unsurprisingly the headlines are filled with doom and gloom and talk of bear markets is rampant. The hope that a combination of a more dovish Fed and progress on trade would fuel a bounce in the market through the end of the year has been quickly forgotten.
There is no question this is dramatic and ugly action. The big question is what do we do at this point?
If you have been listening to the recent price action you should already have large cash holdings. I've been complaining for weeks about the lack of good setups in individual stocks which is frustrating but has provided good defense. It is going to take even longer now for better chart patterns to develop.
The folks that are in a panic this morning are those that are still heavily long. It is unusual for large mutual funds to hold more than 10% or so in cash so they will obviously suffer some real pain when the market drops another 2-3%. They have little choice but to stay with their holdings and try to navigate the best they can. Unfortunately, if you are 90% of so invested, you will not have much flexibility.
With the business media and many pundits running around in panic this morning it can be difficult to appreciate the positive opportunities that this action will eventually create. When markets sell off in this manner, nothing is left untouched. Everything is dumped and that happens to an even great degree these days due to the influence of ETFs and algorithmic trading. Stocks are sold in large baskets and many that are undeserving of punishment go along for the ride.
The key to this market is patience. If you haven't already taken defensive action don't be afraid to sell but don't panic. You can always repurchase and you shouldn't worry too much about selling at the bottom tick.
Once you have an adequate cash level the important thing is patience. I've been writing about how I want to see individual stock picking develop before I become more bullish. That is not going to happen when the market is going through drama like it is this morning. Stock picking will develop after there is support and some positive action first.
Don't try to buy into the teeth of a decline in hopes of catching the exact low. That is the game too many pundits play in order to attract attention. The goal is to build positions when the market starts to trend back up. You don't have to call the exact bottom to do that.
The most productive thing you can do while this drama plays out is work on some shopping lists of stocks that are being unfairly punished by this market. Identify them and track them but don't start buying until they exhibit positive action.
Don't let the business media impact your mindset. This market action is bad for big funds that are heavily long but it will produce great opportunities for the small investor with lots of cash that can move fast. Think positive.