After the pounding the market suffered on Tuesday, the logical question is, "What's next"?
Traders want to know whether this is just a nasty pullback after a big run that will be quickly overcome, or does it signal a major change in trend that will result in prolonged struggles?
In view of the price action and the economic headwinds, I would give the bears some room to drive this market lower. The action in January became downright frothy, and to a very large degree, it was driven more by positioning, fear of missing out, and other structural issues that had little to do with valuations or fundamentals.
In my personal account, I'm not making any major purchases right now. I have added to two positions that I consider to be defensive. The first is Dole PLC (DOLE) , which recently sold off a money-losing division and is now focused primarily on fruit. There is currently a fruit shortage in the U.K., and I expect demand to remain high.
The other name is Atria Group (MO) , which is primarily a tobacco play. The main attraction is a dividend of about 7.8% and a PE on trailing earnings of 10. The company recently raised it's 2023 adjusted eps slightly and has a business that tends to be recession-resistant.
But the most important issue for traders to consider in a market that is down-trending is time frames. It is imperative that traders have clear time frames when they make a buy and have disciplined trade management.
The most common mistake that is made in a poor market is averaging into positions too quickly and then, when the position becomes uncomfortably large, making an emotional decision to sell. This is the single biggest cause of losses in bad market conditions.
The main reason that this happens is that there is too much focus on trying to buy at the exact market low. You can only catch the low if you buy into weakness, and there really is no good way to know how low a stock may go. The better approach is to buy strength and use recent lows as a very clear stop-out point. That defines your risk and helps to avoid emotional selling.
At this point, I consider the market to be undergoing a correction and will remain cautious under the price action shows another change in character.
