Market Cycles to Trading Strategy

rotationThe current cycle for the market is trading… I would almost go to the point of saying day trading. You can look at a chart of the major indexes and see that in the chart. The S&P 500 index is up just over three percent year-to-date… but, the gyration of swings up and down to post that gain over nearly five months is mind numbing. This is why I have been stating to be patient, allow for wider swings on the downside, take smaller positions to manage the risk, etc. Even if you bought on January 1st and held through today… you would be beat around the head and waist dealing with the volatility and uncertainty day to day in this current environment. Depending on your trading style you are either happy or tired of it. I scribbled in my hand written notes this morning at 4 am to understand the strategy that is working in this current cycle… trading. Swing trading is choppy as positions swing higher one day and forfeit it the next. We added a position in SPY on the break to the new high five days ago… it is up 0.36% in the following four days. If there is negative sentiment tomorrow in the index and it swings lower 1%… I end up with a losing position that when markets are trending would have been profitable even with a drop of one percent. Swing trades are struggling to make money in this environment. Therefore… find what is working and use that strategy. Plain and simple… don’t force your strategy on the current environment or cycle.

The Fed minutes were released this afternoon and yes… they discussed the need to hike interest rates in June. “Most” policy members thought it unlikely the economy would improve enough to hike interest rates by the next meeting. “Few” thought it would improve enough to hike rates. Thus, the media spent the day discussing the meaning of “Most” and “Few” God bless them for having the time and inclination to do so, but seriously! Rates fell slightly on the ten year notes and the stocks posted a small rally… which disappeared before the close on Wednesday. Bottom line… plenty of talk and very little in terms of action taken.

It is important to understand that when the markets are aimless and confused the media needs something to talk about and today that was the Fed minutes and meaning of the language used. For me it is simple… they said nothing to lead me to believe they would act in June to raise rates… move on. Practice doing what works and understanding the action and reaction of the market is driven by news and events day to day. The news today was on the Fed minutes… tomorrow it will be something completely different. Separate the news from trend changing events. Today the Fed minutes was news… if everyone jumps on the worry band wagon of hiking interest rates it will turn into an event or even a trend. But for now it is news.

My hand written notes are below from this morning. The red notes are what happened by the end of the day. Hopefully they give you some insight into my thoughts on the market currently.

JimsNotes for May 20th