May 4th, 2010

Let The Market Itself Be Your Guide

It was so close today. The market found support exactly at the 50-DMA as identified in the chart of just a couple of days ago;

If there’s a break of that support tomorrow, my strategy calls for a sale of about 5-10% of the total portfolio in an effort to become somewhat more risk averse.

The logical question is why that small amount and why not some other level like 25% or 50%. It’s because the only thing we’re sure about is that the market is bound to surprise us. With all the pessimism abounding today from the foreign debt crises and the environmental and economic effects of the Gulf oil spill, any good news from nearly any corner might just provide the spark for a sharp bounce. That’s why I let the market itself be my guide and take from it the cues as to it’s collective wisdom.

It’s been one of the toughest market recoveries I’ve ever experienced so what to do and how to do it shouldn’t be new to us by now. We’ve had lots of frustrating practice before with the correction this past January-February and the churning within the narrow range of last September-October. It’s unpleasant gut-churning and each time causes some more participants to jump ship and vow never to return.

We wish we had an easy bull market but perhaps it’s so difficult because we fell so deeply and, since the recovery began, have always been looking out for that elusive 10-20% correction which just never came. That’s either a testament to the market’s strength or a warning of how deep the correction will be when it does finally arrive.

By the way, subscribers to Instant Alerts see how I navigate these turbulent waters with my own personal portfolio almost immediately after I do it.

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  • DG

    Hi Joe – Earlier, I had asked you where the S&P might be at mid-April's new moon. Based on the cycles I use, that was 'an' end, if not 'the' end of the bull run that began Feb 5th.

    As we noted earlier, turns out we peaked ON THE DAY of the new moon! Remarkable.

    Even more fascinating, when we all were thinking the market would go higher and we all (even I) were thinking of new symbols (stocks/ETFs) to buy, we really should have been contrarian, and should have been thinking about which symbols/sectors to short – WHICH WERE WEAKEST?!?! Investor psychology is becoming increasingly more fascinating to me. For the last few months, I've been studying how the contrarian mentality can be rewarding. But even when it came to making a DECISION to investment based upon my technical knowledge, I did not. Even with all 20 of my indicators telling me to short on that date, I let my fear control me …

    This is a new skill, I believe, that I must develop. Controlling emotions. Acting confidently and boldly, amidst distractions and even in the face of past failures

    I think it's the 'past failures' that caused me to miss my technical call of April 14th. I had missed the previous tops, so after losing modestly in 2 short trades, I said "oh well, maybe I shouldn't short in bull markets". But this is so far from the truth! Particularly if the Bull will pause for a while, or if we're at the end of a 5 wave EW pattern, or _____ (fill in the blank). Point is, I missed it, and I wish I hadn't. I have to train myself to more quickly turn failures into lessons.

    DPK, EDZ… they are moving up, and I missed my swing trade entry…  I have got to get better…

  • Joe

    My only advice for honing your skills is to select a time horizon and stick to it.

  • Anonymous

    Guru,
    Do you think this correction is going to be more like the correction in June, 2009 or November, 2009?

    thx!

  • Joe

    Unfortunately, I'm afraid June 2009 looks more likely … But on the positive side, it will be a great buying opportunity if you have cash at that point.