Stay Prudent; Contain the Risk
With the DOW now down for the year, the psychology (the sentiment) of the market has quickly shifted. For the past two days I pointed out the recent deterioration in so many of the stocks and yesterday saw a complete breakdown of nearly all stocks.
Today’s oversold readings are at yearly extremes and they come ahead of the monthly jobs reports. As I’m writing this at 6:15 am ET the consensus from all on CNBC is that no matter what the report shows, it means lower prices for equities today. The DOW futures are down another 110 points and bond prices are lower, a combination the market has not seen in quite some time.
The urge here for most people will be to add to positions, especially those who are trading on a short-term basis. If you have cash (meaning you are underweighted) doing some selective buying will offer god risk/reward scenarios. If you are already full, meaning you’ve reached your max dollar risk point for this pullback, adding more is simply adding more risk.
In trading, we view each pullback as a stand-alone event. Once full, adding additional risk increases the potential that the trade turns into something worse than what was intended. Therefore stay prudent; those who are underweighted may consider the opportunity, those who are already in, should consider the potential risk. At the end of the day, trading is a risk management game; contain the risk and you will win in the long-term.
This weekend I will provide a deep analysis of the state of the market ahead of Monday mornings open.
Today’s Potential Opportunities on Further Pullbacks:
Stocks: Any S&P stock which has a ConnorsRSI reading under 2.
ETFs: IWM