Decision Time

This is another market commentary following my post on March 23rd, A Correction May Be Upon Us; and 29th, Lightly Held Opinions. The prediction was a drop then bounce in April, then a deeper drop in May that could potentially last into July. The bounce in April was flagged to have the potential to make a new high in the 2nd post. So what has happened so far?

The chart is of the S&P where the low of 2322 was reached on the 27th. There was a retest of the low on Apr 13th as concerns with North Korea reached a fevered pitch. The bounce up to 2398 was just shy of the 2400 peak on March 1st. The other indices behaved slightly differently: the DOW made a lower low whereas both Nasdaq and Russell 2000 made new highs on the bounce. Overall, I’d say things played out as predicted. The bigger question is, will the deeper correction come?

I’m leaning towards “yes” on that one, although I would temper the probability for the most severe scenarios — retesting of the election or even the Brexit lows. If you take a look at the Fibonacci levels in the first post, 2280 would be the first target, the breaking of which will put into question the 2240 level which is also the current 200 DMA. I would expect the next support at 2200 to hold in most cases. In terms of near term catalysts there is plenty: the FOMC meeting, April employment report and the French election all within a week’s time, not to mention North Korea. That said I always view external events as excuses for releasing the internal pressure: in this case there being too many people along for the ride, and the market never makes it easy for everyone to make money.

What I’ve done in the mean time

I added to a couple names on weakness. I sold puts on Apr 13th when there was well over 1% premium on 2-week OTM puts. They have expired worthless. I also sold some covered calls and 1 stock in the last two days. Not a whole lot different if I was just DCA in the absence of any directional views. The biggest portfolio change was deciding to trim my emergency fund allocation. I sold a CD and moved that money to the active accounts such that its cash position is now 14%.

What if I’m wrong and the market goes straight up from here?

First of all, I don’t see a bear market developing, and if that’s your view you should examine your information sources and your logic. If the correction doesn’t come, I’ll continue to DCA into the names I already picked out. Fortunately we should know the answer soon. One thing is for sure: I’ll not leave cash on the sidelines when this bull market takes off.

So why pay so much attention to this particular intermediate low when my stated approach to market timing is to avoid the real nasty bear markets and hold through the shorter gyrations? First, to constantly validate our hypothesis against the market is how we learn and improve. Second, there are leveraged bets that require a margin of safety that comes when “there’s blood on the street”. The flip side to avoiding the bear market is to fully take advantage of the bull market, both require accurate reading of the situation.