Have We Hit the Bottom?
Wednesday, April 8, 2009 | Teeka TiwariRating:
What a difference a few weeks make. The first two trading days of this week aside, the world’s equity markets have been having a grand old time of it, and by all appearances the rally appears to be broadening out.
Now that most people have the illusion that stocks are a buy again, we are well on our way into what I call the “Johnny Come Lately” period of the move.
This is the time when all the people who were afraid to buy 4-6 weeks ago when the market was tanking come piling back into the market for their “share”.
We never know how long the “Johnny Come Lately” period lasts. So it’s not an immediate cue to start dumping stock, but it is a great time to move into profit protection mode.
Every article I've read recently is proselytizing the beginning of “the recovery”. All the talking heads are asking over and over again whether we've hit bottom. And while neither I nor anybody else can answer this question definitively, I can look to history for clues ...
I’ve seen a few major market bottoms in my time, in 1991, 1998 and 2003, and not one of them was seen beforehand by the popular press. More importantly, each bottom was preceded by a pervading sense of utter doom, and the ensuing rally was doubted and discounted by all for an extended period of time.
The ugly reality is that the chances are good that we will revisit 6500 on the DOW and 700 on the S&P.
We’re striking a note of caution here, because after getting us long stocks two weeks before the market took off, our Sector Hunter System is now flashing multiple warning signals. While not flipping to outright bearishness, we’re seeing enough yellow lights to take the warnings seriously. These warnings are called Rotation Alerts, and they notify us when a sector is fast approaching a level where it’s reversed lower in the past.
For those of you who were buying stocks 4-6 weeks ago, chances are that you are sitting on some nice fat profits. Nothing is more scarring to one's trader psyche than watching profits turn into losses. That’s why you want to employ a trailing stop loss on your winners; simply incrementally raise your stop as your stock rises.
You will never catch the entire up move, but having a trailing stop loss will make sure that you are always getting a piece of any profitable trade you have on. In bull markets, stocks can stay overbought for a long time, but we are in a bear market, and in bear markets the upside moves are temporary and the oversold moves last much longer. Remember that: the bull market hasn’t started yet. So far as we know, this is nothing more than a bear market rally.
If the rally does continue, our trailing stops should still keep us in for most of the move.
What we are really excited about at Sector Hunter is the next round of short sale trade alerts. Because if the rally does keep going, we will have a slew of new short positions to put on. We’re not there yet, but I certainly hope that this rally continues, because the profits on the short side are generally quicker than on the long side, especially when in a bear market.
So the message here is, don’t be a “Johnny Come Lately”. If you missed the buying opportunity of a month ago, so what! You think that’s the last trading opportunity that you’ll ever see? The safest place for your money is your wallet until you see the next series of no-brainer trades shape up. Chasers get squashed ... so don’t chase this market!
What I teach my students is that the market is like a massive pendulum, constantly swinging from overbought to oversold. You want to put that manic depressiveness to work for you. The next big money making opportunity is going to come from either the short side, should this rally continue, or the long side should we do a quick about face. Either way, now is not the optimum time to be buying or shorting stocks.
What we look for are the extremes. We want to be buying when pessimism is at its extreme point, and we want to be shorting when optimism is at its extreme point. That’s not to say a million traders aren’t making money every day in this market -- I’m sure they are.
But we only want to trade when the odds of being successful are highest, and so should you.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
