“What else can we do with that money?”
That’s the question we always want to ask ourselves.
I get asked all the time, “Hey J.C., I own this stock, it’s down ‘X’ amount and I’m not sure what to do?”
Man, if I had a bitcoin for every time I got asked this question.
Maybe you’re thinking about it with Amazon (Nasdaq: AMZN) or Netflix (Nasdaq: NFLX) dipping today.
To me, the answer is very simple.
If you woke up that morning and you could do anything you wanted with that money, anywhere in the world, with any asset class, is the stock you’re talking about what you would want to buy?
If the answer’s “no,” then you know your answer. Go buy whatever you want to buy.
Transaction costs are nothing these days, so the pennies on that are no excuse to sit in something costing you way more.
To act first and ask questions later is perfectly acceptable in the market.
As my friend and fellow CMT Kim Sokoloff so eloquently said on my podcast, “You could always get back in.”
The reason I bring this up is because volatility happens fast. I think you always need to be prepared for it.
I’ve been incredibly bullish stocks the past few years, particularly since the summer of 2016.
Along the way, however, you should remember how many times I’ve laid out specific circumstances as to what would need to happen for us to get more defensive. (I shared one of these in three simple charts to Breakout Profitssubscribers last week.)
While still bullish, we’ve lived a life of “if then statements.”
More recently, in late September, I noted a list of events that would likely take place if trends in U.S. stocks started to change and what might precipitate a more defensive, or more neutral, approach.
A few of those touched on the major U.S. averages, of course, and some of the most important sectors in the U.S. like consumer discretionary.
Let’s take a look at an example of one of those charts, the Russell 2000 Index (NYSEArca: IWM). The bearish argument was that a failed breakout was possible.
The implications of one would lead to, at least, a longer correction. Obviously it could be worse than just a correction, but at the very least, this is somewhere we don’t want to be long.
The line in the sand was $169. Here’s the chart from September:
Not only would a break below $169 create a failed breakout above the 161.8% extension of the January correction, but also below the summer highs.
It would also confirm a bearish divergence in momentum.
The bullish argument is that we would get back above $172 and rip to new highs, confirming the breakout. That did not happen and we lost $169 in the Russell 2000.
This is what it looks like now:
Brian Shannon taught me that “from failed moves came fast moves in the opposite direction.” IWM is exhibit A, ladies and gentlemen.
We’re now down near the former highs from the beginning of the year. Momentum is in a bearish range, which is absolutely not a characteristic of an uptrend.
And at the very least I think we’re going sideways for a while. Think about it, that support at $169 that couldn’t hold is now overhead supply.
If we ever get back to $169, there’s likely to be trouble. At best, we’re stuck in that range.
Now, if we lose $160 then there are much bigger issues. I don’t see anything wrong with being short the Russell 2000 if we’re below $160.
I’ve got to be more neutral since losing $169, to be fair, and I still feel that way given the lack of stress in credit.
I’m more interested in staying neutral and getting ready to buy than I am trying to be aggressive from the short side, at least from an intermediate-term time horizon.
I look out weeks and months, not minutes and hours and not years either.
Levels broke last week. That’s the bottom line. That’s why we lay them out beforehand.
There are stocks still showing positive momentum and relative strength.
I just sent a trade alert yesterday morning for a railroad stock that’s showing amazing relative strength, and with low risk, if you follow my instructions.
These are the stocks we’re looking to buy. I don’t see enough evidence to suggest that a systematic crisis is on the horizon and we need to short everything.
I do think a more neutral environment is here. Some stocks will go up, some will go down and the averages are likely in a range until they prove otherwise.
It’s the opportunity cost that gets us. I think there are better places to be. That’s how I see it.
To wise investing,
Editor, Big Market Trends