Monday, May 19, 2014

What now? Caution, is the word

You may have noticed it a little quiet around here lately. There is a reason that the recommendations have slowed down. We have good companies on the radar, that is not the problem. Investors over simplify the cycles of the market. We could say there are two cycles, up and down. And for the very long term investor who looks at multi year engagements with their stock ownership, this may be true. For long-mid term investors There is an up and a down but also volatile periods at the top and bottom of the long term ups and downs. As we get closer to a bottom or top of a cycle, the market has a hard time deciding what it wants to commit to. So there is a battle waged between the longs and the shorts. The BUYS and the SELLS. For the most part, I don't mind investing in such an environment. Our charts are designed to give pretty good advice on the in and out strategy for even a volatile period of the market. Let me correct that statement. The charts are pretty good at showing good decisions for the "First two thirds" of the top or bottom, volatile period.
Here we find a third cycle I like to call "No man's Land". As the market gets closer to the slippery slope down, the volatility gets greater and greater. The peaks and valleys get narrower and narrower. I do not want to risk money during this period of the cycle. Yes, you could make some money but do you realize how close you are to the edge of correction? I see the market cycle from an IN perspective. So the cycle goes like this; Yes (market going up) Maybe (early volatility) No (late volatility) Yes (in short ETF's such as SQQQ) Maybe (early volatility, after a correction and switching from SQQQ to owning) and Yes (during the volatile end of a bear)  Yes, I actually do like to be "All In" during that wash at the bottom. I've already saved so much of my worth by being out of the market during a correction that I have money banked and it is much less loss to get in at a "near" bottom than to have been in it all together during the total drop.
I believe there are some falsifications that are propping up this market. Whether it is the Fed pumping cash into the system or political monitoring or whether it be big banks manipulating the markets. This is a bull that is long overdue for a sizable correction. I don't want to be in right now. It's simple to see that a normal, long term return for a year in equities is around 8%. We have already made that with good prudent and concentrated trade decisions. Even if I have to wait a full year for the correction to happen, I feel that I have made my annual quota already.  Why risk losing 15 to 25 percent? I am currently dollar cost averaging into SQQQ which shorts the NASDAQ. I don't know where the top is but I know that we are near it. On some days SQQQ goes down a percent and other days it goes up the same. As I average in my purchases, I am smoothing out the guess work of "when". After the market has a sizable correction I can almost guarantee that it will bottom well below today's values.
Just a word to the wise. After this correction, be very wary of the next big move up. I will probably get sucked into it as usual. But this time I have charts to help me make the decisions. That first leg up must be monitored day by day if not hour by hour. Usually after a correction that first leg up will also correct back down and we want again, to be out of the market. And what we want to pay attention to is the support from the previous bottom. If the second decline does not reach prior lows, we may be climbing out of the bottom. But pay attention that if the second leg down breaks through the prior lows, there may be a deeper correction than what was anticipated. That is why, if you get in on the first leg up, you are facing risk again. I'm not saying to not get in at all. I'm only saying watch it and get out according to the charts. Or at the very least, when you are down a total of 5% on any given stock.

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