Morning Market Thoughts
Good morning. Earlier this morning the Labor Department reported that weekly applications for unemployment benefits fell to levels not seen in 43 years. This little factoid increases the likelihood that the Fed will hike rates this year. This has put big pressure on the futures. The S&P is due to open below support that I discussed in last night’s Strategy Session.This is kind of a big deal, team. Now, the entire free world has a vested interest in stocks remaining at high levels, so don’t expect the bulls to just slink away and let prices fall. We’ll see a fight. But it’s difficult to see how traders can keep pushing stocks higher when NYSE margin debt is within 7% of the all-time high, and the S&P is around 2.5% below its all-time high. When everyone is already on margin, where does new buying power come from? Seems like there is an increased likelihood that we’ll see some selling.
My suggestion is that you put additional focus on capital preservation. Look, there will always be stocks to own, irrespective of market conditions. But that number will dwindle if we start seeing more distribution. Decide how many DOLLARS you are willing to lose on each stock in your portfolio. When you focus on dollars, you will necessarily focus on your position size. If volatility increases, inordinately large positions can cause big swings in your portfolio. There is a higher likelihood that you’ll do the wrong thing at the wrong time. But when your position size is manageable and appropriate, you can be more objective in your trading decisions. And in this environment, a “manageable and appropriate” position size is smaller than you might think.
It’s a lonely feeling to do well when the market is moving higher, only to lose big when the market corrects. Strive to be like a stock in a healthy uptrend. You make pretty good money for a while, then you drift sideways for a while. An uptrend with periods of healthy consolidation. That’s a heck of a lot easier on the emotions than managing a portfolio that sustains huge swings up and down. You go from joy to panic, back to joy, and then ultimate devastation.
Lower your expectations when the market is struggling. Right now, the market is struggling. Don’t ask it for more than it is willing to give. Protect your trading capital and you will be better positioned to pounce when opportunity presents itself.
See you in the forum.
–Dan
Market Update