Are Worries Turning to Fear?

I am not one to jump on the bandwagon of yelling the sky is falling, but reading the headlines and analyst reports today you would fully understand doing so. The challenge with all this banter relative in the markets and the “FIVE DAYS OF SELLING” headlines is it is pushing the emotional meter towards FEAR. Weworry_words all know the result of fear creeping into the markets… irrational selling which leads to a climax bottom. That said, I am more inclined to look for a bottom near term to trade than I am jumping on the sell the market campaign currently under way. The buy on the rumor (December 16th bottom all is well with the market) and sell on the news (Fed rate hikes, global weakness, US economic data, etc, etc.) is the theme I like currently. How bad is the news really? We are in the midst of finding out and to this point (the last five days) investors and traders don’t like what they are hearing, or think they are hearing… true or not.

Again, today’s email question of choice was do we short now? I am not saying don’t short the market, I am simply stating you need to follow a defined strategy for being short the market. Getting short just because we have five days of selling in a row… is not a disciplined strategy. Like most of Wall Street the last two days are not exactly what was expected to start the new year. Thus, giving some leeway to the process is understandable. But, if you are running scans and following technical indicators you are already short and have a defined process for being so. As we discussed in the trading notes this morning, I published the short S&P 500 ETF (SDS) as a trade, but we gapped above our entry on Monday and missed the trade. Today we tested back near the $22.60 level of support and could have used the intraday reversal for an entry near the $22.90 mark. The stop would be $22.50 or about 2% risk on the trade, if we were so inclined to take the trade setup in the morning. There is always an opportunity in the markets if you are looking with a defined strategy. Missing some of them isn’t life threatening.

If I took that trade today the move would fill my email box with more questions of why didn’t you buy it on Monday? If you trade on a specific discipline relative to your strategy for entry, stop and target… you follow the discipline even when hindsight says you missed the trade. Of course because we missed the trade we will add the word “stupid” at the end of the sentence. I will be the first to say it is easy to call yourself stupid for following a discipline. It brings questions about the strategy and how should I change it going forward, etc. The reality is sometimes you will miss trades and sometimes you will make them… the key is to be disciplined in the approach and don’t change your strategy in the heat of the battle. I am okay with missing trades now… there was time when it bugged the crap out of me, but you have to believe in what you are doing or else you will become a neurotic about trading and investing your money. When the noise settles and things go back to normal, I will go back and look at the process, evaluate and decide if I could have improved on the process for entry, and do I need to make any adjustments going forward.

All of that said, is fear really creeping into the investor psyche? That is a bigger question currently in my view than what happened on Monday. Technically we can see the development of fear in the process, but I don’t believe we are there at this point. Crude oil is one driving factor, but the bigger question revolves around the fundamental data relating to the economic picture in the US as well as the global outlook. The ISM manufacturing and services data for December were not impressive at all. There was some decline expected, but the results were not as expected, the were lower. The jobs report on Friday will hold some more answers along with the sales reports for the holidays. Jobs and the consumer are the driving factors of our economy and if those numbers disappoint as the ISM data did it could accelerate the fear campaign. The next five days will unfold more data and more insight… if it is weaker than expected the fear factor may very well become more real than we want.

It is uncertain periods like now that we emphasize stops, stop management, risk management and position management. When the market sells and your predefined stops are hit, you are relieved of having to make emotional decisions in the heat of the battle. That creates peace of mind relative to those issues, but you still have to deal with the emotional issues of losses or what happens as we go forward. I know the thoughts of what happens if the market bounces and goes higher are ever present! The simple answer to your questioning mind is to have a strategy for buying the position back or taking the next opportunity that fits your strategy going forward. Worrying as we see can turn to fear and fear to bad decision making.  All we can do is take it one day at a time and accept the opportunities the market presents implemented with a disciplined approach.

Watch and let the market tell you where it is going from hear versus trying to tell it where to go!