There is no big mystery about what is driving the market action to start the month of June. Trade wars are dominating the headlines and the problem is that there is no certainty if, when or how the issues may be resolved. President Trump increased the stakes with a move against Mexico on Friday and India became a target late in the day as well.
When the stock market is uncertain as it now, money flows into safer assets. Both gold and bonds are gapping higher here on Monday morning. Expectations of a Federal Reserve rate cut are building, with the odds of several cuts before the year being a good bet.
While there is no question about what is driving the market action, the main issue is how to navigate it. There is very obvious technical damage and a clear downtrend, but conditions are becoming oversold and any positive developments on trade could spark a quick spike. For much of the last few months the expectation of something positive on trade kept a bid under the market, but when negotiations fell apart the technical damage occurred quickly.
Here are six steps to dealing with this market action:
- Embrace the fact that the indices are technically broken and in a downtrend. This is not the time to load up in hope that a bottom will occur soon. Don't try to time a turn
- Be aware that countertrend bounces in a bad market tend to be big and occur quickly. If you have a shorter time frame and are an agile trader then watch for bounce plays as the indices become more oversold. The gap down here on Monday morning is going to cause dip buyers to start thinking about a play
- Keep cash levels high. The main objective in a poor market is to avoid losses. If you keep your accounts as close to highs as possible then you will be able to return your portfolio to all-time highs very fast when market conditions improve.
- Continue to refine a shopping list of individual stocks that you like on a fundamental basis, but don't do much buying until technical conditions improve. The stocks that lead the market back up are very likely to be different than those that led it previously. We won't know what stocks will be leaders until there is some positive price action.
- Stay patient and ignore members of the business media who are more interested in sensationalism and attention than effective strategy and tactics.
- Maintain a positive mind. This is the time to start preparing for the next set of opportunities that will inevitably develop. We don't know when or how, but it is a certainty that we will have some great money-making opportunities as market conditions develop.
We are going to hear plenty from the bears about how this market is doomed. Perhaps they are right, but it doesn't much matter if you are reactive and ready for whatever comes next. The market is just going through a normal cycle, and that is good thing.