Ever since the market made a temporary low last week, we have been in a highly volatile consolidation zone just under the 200 day moving average on the S&P 500. Naturally, you would think that just about all traders would be fearful of another sharp leg down, and thus would be reticent to put on any long positions in the past few days. That assumption would be wrong.
One of the most capital destructive fears that traders have is the fear of being left behind in the dust, if the market suddenly sprints higher on a new bull run. It should be obvious as to the reason why this fear of being left behind is far more destructive than a fear of a downturn: The money you allocate to buying longs in anticipation of a move higher can easily be wiped out, versus a risk averse strategy in anticipation of a pull back of sitting in cash or putting on hedges.
The setups that I proffered last night looked enticing and actionable, when seen through a vacuum. Unfortunately, most stocks in the market do not trade in a vacuum. They are subject to the machinations of the broad market in such a way that you had better respect the movements and trends of the senior indices, before you become aggressive with any individual issue. Thus, I felt compelled to note that we needed to wait and see confirmation before allocating capital. Indeed, we have seen anything but confirmation to the upside today, given the huge selloff.
With the continued news driven price action to the downside, the market has yet to convincingly given us swing traders a reason to get involved. As frustrating as it may seem to sit in high levels of cash right now, it would be wise, instead, to think about the better opportunities that we will see down the road, once the market firms up and is done shaking out the weak hands. When things are going well, the market seems like the easiest game in town.
However, it is the patience and discipline shown in markets such as the current one, that truly distinguishes the traders that have lasting power in this business.
NOTE: Bear vs. Bull today:[youtube:http://www.youtube.com/watch?v=rm81LSKJC2k 450 300] Twitter