Friday, September 18, 2015

As expected

No surprise this week except the market behavior after the announcement that rates won't be increased. I expected a big rally after 2:30pm yesterday. However, market rallied indeed but closed on red by the end of the day. Not only that but it continued to plunge today. Anyway, I've got rid of my long positions and now I'm mostly in cash and a little bit in bonds.

As I said last week, in my opinion, the reason market plunged in the last 30 days was not due to rumors that Feds may hike the interest rate, it was due mainly the weaknesses seen in the emerging markets, China in particular. 

Here is the paradox, a rate increase, despite the fact that the Wall Street was going to hate it on short term, it would have been signaling that the economy was doing fine. During the 2007-2009 bear market, Wall Street pushed the market up after each rate cut. However, one month later we could see market bellow the level was seen at the time of the rate cut announcement. Exactly the opposite was seen during the 2003-2007 bull market, every rate hike was met by a small plunge but after a few weeks market was eventually above the levels seen at the moment of the announcement.

Today we are in a very weird situation, the Feds are keeping the interest rates close to zero despite the huge stock market gains in the last 6 years. This is actually a very bearish signal, it says that the economy is actually very fragile and can't deal with even a small increase in the interest rates.

These are uncharted territories and one should be very careful at this point. A rate increase today after 6 years into the bull market and SPX gaining 200% since 2009 bottom is not the same as hiking rates 1-2 years into the rally. 

Anyway, let's have a look at the long and intermediate time frames.

On long term what is noticeable is that SPX did not made a lower low this week. Actually it went up a little bit. Not very surprising keeping in mind that SPX did approach a serious support level according to my timing method (SMA 120 on weekly) and it was the week when the Feds decided not to increase the rates. 

Long term bearishness is still in play! We are still in the bull market but we need to be very cautious at this moment. 

On intermediate time frame it's easy to notice that SPX went briefly outside the trading range. However, by the end of the day SPX was still in the 1915-1990 range. 

In conclusion, market remains volatile on short/intermediate time frames but bearish on longer time frames. We are still technically in a bull market but  keep in mind that this kind of bearishness was not seen in 4 years. Remember that you don't need to be invested in the stock market all the time.
Your first worry should not be how to make more money but what should you do to NOT to lose money. One way is diversification (including cash and bonds), other option is having STOPS in place. There are pros and cons in favor or against using Stop-Loss or Stop-Limit orders. I am going to touch this subject next week. My favorite way to protect my longs or my shorts is to buy options. This is a pretty complicated subject for those with little experience in the market but I'll do my best to simplify the issue. 

See you next week!
Once again, don't be a hero, be conservative with your investment at times like these ones!

Safe trading!


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