What’s Next and Why a Little Perspective Will Be Very Profitable
I’ve been involved in several high intensity meetings in the past few days as you might imagine because the selling probably isn’t over.
Normally, I’d be very concerned – but in this case I’m not – because the onslaught is entirely driven by technical trading, as opposed to the more important underlying fundamental picture that leads to clear, sustainable profits over time.
Q: Is the Selling Over?
That depends entirely on two things: a) the computerized programs that drove the Dow down more than 1,500+ points in the worst single day fall in market history have to stop selling; and, b) the Fed has to stay out of it.
The former is pretty straight forward. The markets were selling off in relatively orderly fashion until the last hour when computers took over and sent the major averages into freefall. I don’t have all the data just yet but this is usually consistent with risk arbitrage programs reaching pre-programmed limits or some complex balancing between positions. Either way, it’s so fast a human can’t keep up… or stop it.
The latter is all about the Fed. Last week Team Yellen noted that inflation was on the uptick, noting that average hourly earnings rose 2.9% in January. That prompted “position” traders to reassess the Fed’s next move as more hawkish and to get ahead of that by selling, which added significantly to the computerized pressure already building.
In the scheme of things, the markets are still up an average of 17.5% over the past 12 months as I write this – so this really only took about 5% off the top. It’s also worth noting that trading desks didn’t report any major snafus which means the markets themselves took this in stride.
The real damage, as usual, is to investors’ psyche – present company excluded.
Q: Could it Get Worse?
Perhaps, but that too depends on the finely tuned balancing act I’ve just described. The computers will recover pretty quickly because they’re programmed to buy and sell on extremes. In fact, we already saw some of that in late trading action Tuesday.
The Fed – you would think – has learned to keep its collective mouth shut by now but the temptation to offer “words of wisdom” is too extreme. I believe various Fed officials will not be able to resist making a few observations despite the fact that most have no idea how real money works let alone how their commentary roils the markets.
Q: Do We Need to Do Anything Differently?
The investment recommendations I’ve brought to your attention both here and in our sister services are well positioned and well protected.
They will come under pressure, of course, but that’s to be expected and very different from getting carried out “feet first” like a lot of people are at the moment. Besides, we knew this was coming for reasons I’ve laid out in my Money Map Report 2018 Annual Outlook and discussed here in Total Wealth many times. Further, over the past few weeks I have encouraged you to tighten up your trailing stops and to tread lightly.
The single biggest and most expensive mistake you could make is to try to second guess the markets right now.
Instead, what I want you to do is to keep a very close disciplined eye on your own trailing stops – Chances are good that if you’ve followed along with the Total Wealth Tactics and Unstoppable Trends, you’ll be seeing your fair share of profits in the days ahead.
It’s important to remember that the underlying fundamentals we track so closely are not changing as fast as prices are dropping. In fact, they’re going in the opposite direction which means that profits are never far behind.
This kind of gut-wrenching drop is simply a technical market recalibration, albeit one that’s pretty darn scary.
Q: When Do We Buy?
We’ve been increasingly cautious in recent weeks and at the risk of sounding like a broken record, I’ve been encouraging you to tighten your trailing stops as a means of protecting your profits and raising cash.
There’s no reason to rush in.
Big selloffs like this rarely happen in isolation which means that we may get a second white-knuckle day or even a third. As frightening as that may be, both will create some juicy buying opportunities in the highest quality, fastest growing companies at prices you haven’t seen in a year.
I’ll let you know, as always, when it’s time to make your move.
Watch the Ten Year Treasury note for clues just like I am. Yields rose last Friday on wage data but actually came back down in Monday and Tuesday’s trading which suggests we may be closer to a bottom than we think, even if it’s not THE bottom.
In closing, I am watching the situation very carefully and will be in touch the moment I see something that merits your immediate attention.
For now, as tough as it sounds, hang in there.
I can’t emphasize this enough… quadruple check your trailing stops.
Then, after you’ve done that, take a deep breath, go for a lovely walk with your spouse or give somebody in your life a hug – those are all very important grounding reflexes during challenging times.
As my grandfather would say, this isn’t our first rodeo!
We will get through this successfully together.
Until next time,
PS – During the Dow’s largest single-day 1,500+ point drop in its history on Monday, millions of investors are continuing to scramble as you’ve probably seen. Members of our sister research service, The Money Map Report, had only one position trade through its protective stop… and for a profit to boot. I spoke to my team, and we can edge out subscriptions for three years at a fraction of the retail price… but for this week only – so you need to get on board fast. Click here for more information.