August 2011 Redux?
Navigating the Highest Selling Volume in Over a Decade
Yesterday, I shared some closing thoughts in my Week Ahead preview (included below) on a market environment that is beginning to mirror some of the most volatile periods in recent history.
With the S&P 500 breaching its 200-day SMA on volume we haven’t seen since the 2011 credit downgrade, the technical picture has shifted significantly. 6,500 is clearly an important level for the SPX, and reclamation of the 200-day SMA needs to happen sooner rather than later. Otherwise, we know that nothing good happens below the 200-day moving average, and we may be seeing a "Markets in Turmoil" episode soon!
I recommend reading the excerpt below from yesterday's post:
Bad news is easier to trade than uncertainty and so less is more in this environment. The conflict in the Middle East continues to escalate and there remains huge uncertainty on many fronts plus the ramifications of this war will be felt for years still, I feel.
Regarding the macro setup, we face a stagflationary backdrop, a weakening labour market, and elevated energy prices that are likely to remain so. Geopolitical uncertainty from the war adds further pressure. While other factors are undoubtedly at play, these currently represent the primary risks to the market.
On a market level, the major indices have breached and closed below their respective 200-day SMAs for the first time since last March. This is not bullish, and if these levels are not reclaimed, there is potential for things to get very ugly.
Furthermore, the volume on the S&P this past Friday exceeded 7 billion, the highest on a red day since “Black Monday” on August 8, 2011. The U.S. credit downgrade was the catalyst then, sending the Dow down 5.5%, the SPX down 6.6%, and the Nasdaq down 6.9%.
So, how should one approach this?
When trading, I feel in this environment one has to shorten the time horizon to intraday as opposed to swing trading. Yes, there is a select group of stocks that has been showing RS, so you can swing trade those too, but overall it is not easy for swing trading.
On the other hand, for the long term, one can either selectively buy into focus names in smaller position sizes now or wait for the tape to improve and buy strength after the dip. In either case, remaining selective, sizing down, and utilising stops will be essential. A healthy cash position is also a must. Identifying entry levels in advance remains the most sensible approach, especially as we start to see attractive levels.
It is not the time to aggressively press risk yet but we do have many attractive opportunities on the other side of this to look forward to, whenever that may be. I intend to be a net buyer this year.
Read the full post below:
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