The headlines blame continued trade issues with China for more market weakness Monday morning, but that isn't what is going on. What is going on is that this market has lost its mojo. The weakness of the last couple of months is feeding on itself. Market players are disgusted and weary, and are giving up on trying to catch a market turn.
The easy thing to do in this market is prepare a long list of negatives and argue that they will continue to drive the market lower. China trade is obviously the easy explanation, and now the Huawei issue is adding to the drama. There is the never-ending political drama, worries that the economy is slowing, concern about how long this bull market has lasted, the inverted yield curve, the struggles of Deutsche Bank (DB) in Germany, weak economic news in Japan, the ongoing Brexit debate and so on.
Not only are the news headlines negative ,but so is the price action. Support levels have been falling, distribution is ongoing, bounces are sold, the only leadership is gold, small-caps are lagging and stock picking stinks.
The negative narrative is easy and the predictions that the market is going lower are loud. There is no big mystery about what we should do. We need to stay out of the way, protect capital and wait for better action before we do much.
We don't have to predict how much lower this market might go. There is no value in that. We simply have to not allow our accounts to be run over by the selling. Sooner or later, the action will improve and we can put money to work again and make up losses. The turn will come just like the sun always rise. The cycle endures. Only our timing will vary.
The way to navigate this market is very easy in concept, but many market players sabotage themselves by constantly playing the market timing game. The steps to dealing with this market are simple:
- Embrace the fact that the action is poor. It doesn't matter if you call it a correction or a bear market or something else. Stocks are not going up right now and bounces are not holding. Don't fight those simple facts. Take your losses and protect your capital.
- Don't predict what will happen next. The easiest way to roll up bigger losses is to keep trying to guess when the market will turn. If you are wrong about a trade, take your loss and stand aside until conditions change.
- Wait for individual stock picking to improve. The correction over the last couple of months has been on a rolling basis, with certain stocks correcting at first and different ones causing problems more recently. Small-caps and biotechnology started the rollover. Apple (AAPL) , banks and some big-cap names have provided most of the recent weakness.
- Work on those shopping lists and be ready to act when action improves, but don't try to catch the exact lows. If you do buy bounces, keep those stops very tight.
This is a very poor and dangerous market. Embrace that fact, just like you embrace an uptrend in a strong market. Eventually conditions will change. The one great certainty of the market is change.
Early indications have improved overnight, but we are still on track for a negative open.