July 24th, 2012

How to remain unemotional in a volatile market

I look back at my last post and think, based on the market’s action over the past several days, what must I have been thinking?  How could I possibly gone so far out on a limb as to call for a market rise to 1575?  And how dispiriting is it when the market proceeds to decline by 1.6% over the next five trading days?  Well, I’ll tell you that it feels horrible.

In the same way that last Thursday we began to see some blue skies and some progress towards shoring up portfolios, today’s market is just as equally dejecting by pulling the rug out from under.  Fortunately, we have a ballast [anything that gives mental, moral, or political stability or steadiness] as market traders through the Market Momentum Meter.  This objective, unblinking, unemotional barometer of what has happened to the market in similar situations over the past sixty years steers our course and guides us through these turbulent emotional markets.

Last week, the market failed to touch the upper boundary of a channel giving the first hint of a potential problem.  For the rest of this week, the support provided by the zone demarcated by the two converging trendlines will have to hold or else we’ll have to rewrite the game plan.

For the time being, the Market Momentum Meter continues to ship a bright Bullish Green because the Index is above all its moving averages, only the 50-dma is out of sequence; however, only two of the moving averages are heading higher (200- and 300-dma’s) while two are heading lower (50- and 100-dma’s).  But the situation changes with each day’s trading activity.

Similar situation like this in the past became stabilized and trading confidence returned when the Index remained above the 50-dma so that it pulled the two laggard averages higher into a more proper alignment.  It’s not to say that the moving averages dictate the future.  What the statistics indicate is that investor confidence reflected in market prices is a progressively reinforcing loop.  The Index’s ability to advance will bring in more buyers waiting on the sidelines; price pressure will turn the remaining equity holders into sellers.

I have a long list of more than 100 stocks any of which I would have bought a week ago because of the strength of their chart actions.  The recent market action has put a definite questionable dent into their otherwise favorable prospects.

The past week has proven again that “50% of a stock’s price movement can be attributed to the overall market, 30% to its industry sector and only 20% to its own fundamentals.”  It doesn’t matter how strong the charts of stocks already in the portfolio or those in a watchlist look, they’re all trumped by the market’s action.  This is never more true than today since so many of the forces driving the market come from overseas.

Subscribe below or click here to learn more about help for navigating turbulent markets.