The great actor James Coburn, himself a martial arts student of Bruce Lee, once said that the best way to avoid a fight is to not go to places where ego and alcohol are mixed.
The toll that a corrective stock market takes on traders is magnified in this day and age of real-time social media. The uptrend of the first quarter of this year did its best to suck in as many hold-outs as possible, only to see it turn on a dime and drip lower with no sympathy for the latecomer converts to the bull camp. For over a week now, the market has failed to bounce when it logically *should* have done so. As such, emotions are running hot as streaks of luck run cold.
Moreover, there is far from a consensus that shorting here is the easy and correct trade. Thus, further weakness would not surprise me one bit, and I have little interest in positioning against it until I see some real buyers show up for more than an hour or so of a bounce.
While the bearish developments in the Russell 2000 that I pointed out earlier in my video recap for Monday may seem too obvious to be true, trying to be a contrarian and fading the retail masses with every single trade amounts to picking too many fights for your own good. Just as you would not walk down the sidewalks in New York City staring down every passerby, fists clenched and looking for a fight without eventually finding more trouble than you can handle, being a constant contrarian will be just as harmful to your portfolio balance over the long run as buying euphoria and selling fear.
While some stocks, sectors, and ETFs are becoming wildly oversold, such as the emerging markets ETF, EEM, closing entirely below its lower daily chart Bollinger Band after a steep move lower, I also see a slew of former momentum leaders that could just be getting started rolling down the mountain. Below, ISRG is a pretty good example of what I am talking about. The stock has been churning just above its 50 day moving average after an initial high volume sell-off. The stock looks ripe as a short below $548 with a stop-loss above $565 in a weak tape.
At the end of the day, this is not the type of market for me to be that guy walking down the sidewalk picking fights. This is the type of market where it has been correct to, as Coburn alludes to above, mostly avoid it via a heavy cash position. Eventually, there will be a time to go back out and take on all comers. For now, though, keep choosing those battles wisely until this mess of a market cleans up a bit.
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Nice post Chess and this just solidifies the trader as those that are willing to be patient should be rewarded. Trading heavily during these times will more than likely create frustration over everything else. But for some, not trading everyday is like telling the person that loves his job that he is not needed today. It is hard to do but one has ask “is it worth it”, IMO stand aside, monitor, or just trade small or with daytrades.
James Coburn, fine actor, one of my favorites. Highly underrated, IMO.
Good comments about the ongoing correction. Peter Brandt, in yesterday’s post, sees a head and shoulders top in the Russell 2000, but it sounds like he doesn’t think shorting is a high probability trade here.
And ISRG is on Eddy Elfenbein’s list of stocks that are way overpriced. Since he is a fundamental driven analyst, that’s two strikes (technical and fundamental) against highly popular ISRG.
Sorry, should have provided the links:
http://peterlbrandt.com/major-top-completed-today-in-russell-2000-nyse-composite/
http://www.crossingwallstreet.com/archives/2012/05/13-stocks-to-avoid.html