Is the Market Ready for a Pullback or Profit Taking?

News or comments that would not have bothered investors six weeks ago are having an effect on the daily activity and sentiment. The overall direction of the market has not changed, but the sensitivity has heightened. As trends mature worry rises. Why? Human nature begins to think or believe things are too good to be true. The analyst start to make comments such as, the market is overbought, the market is ahead of itself, and the market is due for a pullback or test of the move higher. Those comments bring greater attention to the data points and eventually some report, the Fed minutes on Tuesday, hits a nerve and investors react. Thus, my question, is the market ready for a pullback or profit taking?

The answer is not generally found in the charts as much as the sentiment relative to outlook and confidence that the current trend can continue. If the confidence lags or evaporates the buying stops and the doubts begin. Unfortunately, it is not evident until after the fact what and where the turning point occurred. That puts us on guard relative to positions in our portfolio. The timeline of the position will determine how to manage the risk of the position. Thus, we have to take the outlook for the overall market and extrapolate how it will impact each holding relative to our overall objective. That sounds esoteric, but it is the reality of money management. That is why determining the entry point, exit or stop, and target of each position before we enter the position is so important. Deciding after the fact or when emotions are at a peak makes for bad decisions. Now is a good time to review each holding, review the outlook and objective of why you own it and timeline of each position. Confirm your stops and keep moving forward. Attempting to have a crystal ball will only make you crazy.

The reaction by investors to the Fed minutes on Tuesday was from a position of worry, not logic. Yes, we could all make some type of logical sequence as to what it could possibly, maybe mean to the market looking forward, but the reality of the Fed not applying some type of stimulus if the economy stalls is dependent on too many factors to determine from comments in a meeting four weeks ago. Attempting to understand those comments and what the future action might be is all speculation. Thus, my point, step back take a deep breath and keep looking forward with your exit points or stops in place. Nothing more, nothing less. Emotions are the biggest enemy to accomplishing your goals.

The chart below is the S&P 500 index. As you can see there are lines for support and resistance. There are trendlines and moving averages. To some they are targets, stops and entry points, to others, they are just lines on a chart. Find you point of peace relative to your goals and objectives. For me, the key points to watch are 1388, 1375 and 1340. They are support levels for the index short term. The chart is only a eight month window of time and is focused on the 0-13 week timeline for positions. Thus. my stops would be set according to the support level that has the greatest significance to that timeline. For this chart and time a break of 1375 is an exit point. The entry point was 1270 thus protecting the 100 point gain on the index based on the timeline of the trade or position. This all relates to my earlier comments, know where you got in, know where your goal or target was, and knowing your exit points is the key to managing money.

It is also important to address if you have hit your target on the position. Example above with the S&P 500 index, if my target for the play was 1375 relative to the 1270 entry point, taking half the position off could be prudent based on the objective and the current market environment. Managing your money is a science. Each position taken is an experiment and the outcome is determined by the current mixture of elements in the market. The result will never be the same, but what you want from the experiment/position is the determining factor to where the experiment/position is concluded/exited. Remember, investing is about achieving your objective, not beating the market or some other esoteric event. Manage your money by managing your risk relative to each position in your portfolio.

Is the market ready for a pullback or profit taking? Only time will tell. In the meantime manage your money based on your goals, objectives and risk tolerance.