Well that was an interesting month and quarter. I’m writing the second in what I expect will be a long series of weekend emails after one of the weakest months we’ve seen in a long time (in stocks), and a quarter that points to struggling macro factors in many global economies.
The only question that really matters for traders and investors is “what’s next?”, but timeframe is supremely important. I’ll just bullet point what we have been expecting from the market (which has proven correct, so far), and what we look for in the future:
- In the very short term (days to a few weeks), we are a little overextended to the downside. Our MSI is now in the panic zone, and this is an area from which we’ve seen many rallies in the past. We also see a number of other factors, such as the number of S&P 500 stocks near significant lows (see chart). All of these point to a potentially overextended market—a bounce is the most likely near-term outlook.
- However, in the intermediate term (weeks to months), we think this is a market headed for much more stress. It’s disturbing how many friends and family members are looking for every excuse to buy the market. It’s ridiculous how many people sharing market stats and perspectives are stuck in perma-bull mode. This is the danger, I suppose, of having some skill with excel but no sense of price action. Bottom line: anything is possible, but probabilities clearly favor more downside.
There’s always two-way potential in any market, so we have to stay humble and flexible. However, in this case the probabilities have been (and continue to be) pretty clearly tilted in these directions. One of the things we are watching is for the short-term bounce tendency to fail—if so, the downside could be sharp and extreme. We are certainly nowhere near any real capitulation.
A trade idea
Some of the best trades occur when probabilities diverge from public expectation. For those of you reading this carefully, here’s a little lagniappe: We see some great short setups in individual Energy names. While we’re sharing best, specific setups with our MarketLife members (and you could be in that group! Check us out with a $7 trial for your first month.), take a look at the XLE chart below:
If you find individual energy names with similar patterns, they are worth short entries with relatively small profit targets and short holding patterns. Should the market see further weakness, we expect these names could be hit hardest.
The week ahead
One of the things we will try to do in these weekend emails is to give you a look at the important datapoints in the week ahead. These are not all of the economic releases by any means, but most of them are insignificant. We’ll share a quick calendar here that highlights the data releases we will be watching closely for market-moving impact.
- Mon 10/3: First day of quarter, ISM Manufacturing
- Tues 10/4: JOLTS
- Wed 10/5: ADP Employment, ISM Non-manufacturing, EIA Crude Oil
- Thurs 10/6: Jobless numbers
- Fri 10/7: Nonfarm payrolls and Unemployment rate