How do we evaluate Wednesday’s market activity? Was it just worry relative to the Federal Reserve taking away the stimulus of quantitative easing and the $85 billion dump of cash every month? Was Bernanke that unclear in his statements of commitment to continuing the stimulus? Did the talking heads blow this out of proportion and stir the worry pot enough to offer a catalyst on the downside, at least for the day? Was the FOMC minutes too much in addition to Bernanke? Was Wednesday a Key Reversal Day? Does this validate all the talk and worry about the market being overbought? All of the questions and pontificating over the activity on Wednesday is fun fodder for conversation, but the answer that provides the most sanity is to not read that much into the activity. But, as I have been writing the last week, focus on you, your purpose, your strategy and your discipline.
As an example of this in practice, on Wednesday we hit our stop on XLU, SPDR Utilities ETF at $39.60. Following a test of support last week and a bounce off the 50 day moving average, the renewed selling on Wednesday negated bounce off support, the ETF renewed the break of support and closed below the 50 day moving average, hitting our stop, removing the position from my portfolio. Does this lead me to the belief that the market is going to correct further and I am selling the rest of my positions? Absolutely not! In fact, the reason for being focused on a defined strategy, and having a defined exit point before the selling begins, is to have confidence in where the stop is placed and the need to protect the gains in the position in order to obtain the purpose for which I purchased the asset to begin with. Having and defining the purpose, strategy and discipline for each position puts me in control versus worrying about why the market is selling on any given day. I am free to focus on what matters… finding new opportunities to put money to work.
Yes, all the economic data, fundamental data, technical reports, etc. matter. But, they matter as you are building your positions, they are a confirmation when the position is nearing your exit point. The question in my mind now… does all of the economic, fundamental and technical data still point to the upside? If the answer is yes, I am looking at how I can reenter the position of find a better defined position within the sector. If the answer is no, move on the the next opportunity. In the case of Utilities scanning the stocks within the ETF you will see plenty of rolling tops (PM) (not good), moves to the bottom of the current trading range (PCG) (inconclusive at this point on direction) and confirmation of downside moves (accelerating lower) (ED). I like the stocks that are at the bottom of a trading range to offer upside opportunity if the sector reverses off the current lows. The fact I like the sector still fundamentally gives me reason to build a watch list of the stocks meeting my criteria currently along with tracking XLU. This gives me the opportunity to add the positions that meet my strategy, have a defined discipline for entry, stop and target to measure the risk of the trade, and to execute the trade according to the purpose, if the reversal takes place off the current low. The point here is simple… we do all the research on the position(s) we hold. If we get stopped out, the question becomes validity to the stop, and a defined direction relative to the conclusion. Yes, we build or add it to our watch list. No, we move on to the another opportunity. This defined direction and activity builds confidence in the investment process.
That brings us full circle. Wednesday’s market activity was thought provoking relative to stops hit and what actions to take now. It was informative as to which sectors showed the greatest weakness relative to a potential Fed action going forward. Technically it put more consolidation patterns on my watch list for trading. And, it gave me plenty of points to watch as we start today’s trading day. When you are focused and not worried about what the talking heads are pontificating, but have clarity of thought, you can see the opportunities the market is creating in light of the activity taking place. If you are stressed about what is happening and how it impacts your portfolio, you will miss the pending opportunities to manage your money according to your goals.
Markets build trends one day at a time. We should manage our portfolios the same way, position by position.