Video Edition: Resist Emotional Buying and Selling

On Wednesday, we talked about the inverted yield curve and why I think we’re setting up for a generational buying opportunity.

Today, we’ll talk more about how to play this kind of market, and several things to keep in mind to keep you in the game and ahead of the crowd.

Check out my video below, or scroll down to read the transcript.

Transcript

One of the greatest things that I found trading in a bear market environment is not trying to make money as stocks fall. You can certainly do that by shorting and buying puts and that sort of stuff.

But really, it’s those rip your face off rallies that are developed out of deeply oversold conditions where you can make 10, 15, 20% on a stock in a matter of days.

The ability to make money in options is even higher, but it’s usually not buying call options. It’s usually by selling uncovered puts. And I’ll address that in another video, perhaps at some point later. But right now with the volatility index so high, I think it closed Monday at 48, it’s very difficult to make money buying call options because the option prices are so expensive.

So even if you do get an unbelievably strong bounce back rally, you may not make any money owning call options because you pay such a high premium to get involved in the trade. So selling uncovered puts is probably my preferable strategy in this environment.

But again, I won’t get into that today. We’ll address that in some other update later on. For today, what I want you to realize is right now, look at these momentum indicators at the bottom of this chart. Look at how deeply in the red the MACD is.

The RSI, the Relative Strength Index, is all the way down to 23. That doesn’t happen a whole lot. In fact, that’s the only time that’s happened in past two years. The CCI, the Commodity Channel Index, more oversold than at any point in the past two years. Now, of course, oversold conditions can get more oversold. mean, obviously, we had deeply oversold conditions last week or last month in the middle of March here. Got a little bit of a bounce, and then we’re even more oversold now.

What’s interesting about this is I think there is enough fuel in the oversold tank to give us a really strong rally over the next several days. Maybe something back up to the 5400, maybe 5500 level. I could make a case that we might be able to come all the way back up to 5800, but I think that’s a long shot. 5400, 5500 I think is the next stop. But that’s only going to be an oversold bounce.

I don’t expect new highs on this move. Don’t expect anything sustainable coming out of this particular condition. What I do expect is an oversold bounce to get us out of these deeply oversold conditions and then a move back down that retests yesterday’s low, which was down around 4800, possibly gets us down to 4600.

And what I’m hoping will happen, if you look at these momentum indicators, and we’ve talked about this many times before, what I like to see on momentum indicators is when the market is falling, I like to see the momentum indicators actually starting to move up.

We’re not having that right now. We don’t have what we call “positive divergence.” As the markets fall into new lows, the MACD hit a new low, the RSI hit a new low, the CCI hit a new low. So we don’t have the conditions in place that I think create kind of a “no brainer” opportunity for a rally.

So what I’d like to see is a nice little rally in the broad stock market that is able to pull these indicators off the bottom, get them high enough so that this next decline that I’m expecting, as we come on back down, these indicators actually hold above the current position, the current low.

And that would create the positive divergence that I think justifies a more sustainable, kind of an intermediate-term rally.

Again, I do think we’re in trouble here. I think that the broad stock market is in trouble, but that trouble spells opportunity later on.

I’ve drawn some other support lines on here. Right now, I’m thinking, again, short term, maybe we get up to 5400, maybe 5500, possibly even 5600. More than that, though, is a really, that’s a tough bet. That’s hard to imagine. Then we get another move lower that takes out or retests yesterday’s 11-year 4800. Maybe it takes it out, drops to 4600.

But ultimately, I think where we’re headed, if this is truly a bear market as I think it is, ultimately, I think we’re headed back down here. I think we’re back down to late 2023 when we were somewhere around the 4150 level or 4100 level.

I think that’s a real possibility. If you’re holding stocks long all the way through that, that could spell a little bit of trouble.

But if you take advantage of opportunities where you get deeply oversold conditions, where you can get into good bounce – play that bounce, but be quick to take your profits off the table and then pull back and allow the market to come back down again and give you another opportunity.

Bottom line is, I think there’s going to be an awful lot of opportunity to trade.

I think the lessons that we can learn from the recent action is, you know, when you have the fear of missing out, which I think was a really big situation back in January, February as the market kept pressing to new highs – despite valuations being in the top 1% of historical valuations and despite sentiment being overwhelmingly bullish and despite all of these other possible economic indicators that were sort of turning and indicating that we might be headed towards a recessionary type of environment – folks were still buying stocks because the market kept moving higher.

And if you had cash, you were underperforming.

When you fall into that fear of missing out mode, you tend to make decisions more on emotion rather than rational. And so even if you sold back in September, back at 5,600 or 5800, right after the Fed lowered interest rates, yeah, you missed out on that final 5 % move in the S&P 500, but you also missed out on this tremendous pulldown that we’ve seen recently.

And right now you have the opportunity to put some money to work at far better prices than what we were looking at in September. Certainly far better than what we were looking back in February. And as this plays out, as this yield curve, go back to that chart, as this yield curve accelerates higher, I think the stock market will in fact drop to lower lows and that will give us a tremendous opportunity to buy later on this year.

We can trade between now and then, but the real opportunity to buy I think is probably going to wind up sometime in October, November.

Like oftentimes happens, you get that final washout in October or November, and that’ll give us a really good opportunity to jump in and put some capital to work at super depressed prices.

 But it only happens if you have cash available to do that.

So anyway, that’s the bottom line to all this. I think ultimately what I’m trying to convey here is there’s an opportunity coming up. I think there are opportunities to trade inside of this market, especially when get deeply oversold conditions like we’re looking at today, but you’ve got to be a little bit nimble.

And you have to be willing to resist the emotion of selling based on fear and panic and buying based on the fear of missing out. So let’s leave it at that for today.

I’ll do a little bit more frequent updates as this market plays out over the next several weeks. But what I’ll say right now today, like in September when I said I was short-term bullish, but intermediate- and long-term bearish.

Today I’m going to say something similar. I’m short-term bullish. I think the market’s got enough fuel in the tank to rally a bit here. But I am intermediate- and longer-term bearish because I do think that this bear market has further to fall. So we’ll end it there.

Have a wonderful trading day and we’ll check back with you hopefully in the next week or two. Take care.

Best regards and good trading,

Jeff Clark
Editor, Market Minute