After the brutal selling that took place on Monday, some sort of reflexive bounce is likely. So far, buyers are tentative, and breadth is running slightly negative, but the longer the indexes stay in positive territory, the more it will attract buyers that don't want to miss any upside.
The problem is that with the Fed interest rate decision coming on Wednesday afternoon, there is likely to be plenty of shoving and pushing as traders position for the reaction to the news. Not only do traders have to guess what action the Fed may take but then they have to weigh market expectations and the likely reaction.
The greatest difficulty the market faces right now is that with the Fed aggressively raising interest rates and starting its quantitative easing program, there is a deficit of liquidity. Traders have been very confident buying dips and anticipating V-shaped bounces because they always had the Fed providing a strong tailwind. That is not the case now, with the Fed debating if they are going to raise rates 0.75% or more Wednesday.
The easiest mistake to make in this environment is to be too anxious to try to predict a low. It is a very hard game to resist, and many traders end up being too aggressive trying to pursue very small counter-trend bounces that don't gain momentum.
My game plan is to stay patient, track names I like, and not be too anxious to try to buy bottoms. We are very likely to see a good counter-trend bounce again at some point after the Fed rate hike, but I don't see any reason to bet on it at this point.
One new buy we have made today is small oil play Houston American Energy (HUSA) , which is developing well. Last week I mentioned Veru (VERU) as a favorite biotechnology name. It has dropped in the market weakness, and I'm watching to see if it can hold around the $12 area before making substantial additions.
I see absolutely no reason to rush in and buy this market right now. It is better to be late to the party rather than arrive before it even starts.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider HUSA to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
