October was not a kind to stocks especially small cap stocks. The entire market was hit hard by selling. Most who haven’t seen a real correction like 2000 and 2008 thought what we saw in October was devastating. Things can get a lot worse. For those who followed Big Wave Trading were already prepared through the use of proper position sizing as well as stop losses. For many, losses piled up because they were not willing to adhere to a proper risk management strategy. No matter what your opinion of the market you must have a plan to maximizing gains while capping losses. Without a solid plan when month like October happen you are sunk. Now the question remains: has the market bottomed?
Thursday’s market action was day 3 of an attempted rally. Confirmation of a rally can occur on Day 3 in very rare occasions. However, yesterday was no follow-through day as volume came well under Wednesday’s level. A positive sign was the relative outperformance by the Russell 2000. The index has been lagging very badly and led the market decline. We’ll need to see the outperformance continue. This market is not out of the woods by any stretch of the imagination. It would be wise to trade with extreme caution and have proper exits, stops in place to protect yourself from losses. We need dry powder when the market does turn!
Last night AAPL reported earnings and the reaction has not been positive. AAPL was the last lone FANG member to hold up against the October market sell-off. It appears today will be the day we see it stumble. The obvious here is a positive reversal finishing the day back above its 200-day moving average. We are not going to hold our collective breath counting on AAPL staging a positive reversal from here.
An indication the current market bounce here is not going to last is sentiment readings. For one, AAII bulls jumped back above 30% to 38% while bears sit around 34%. Despite the market sell-off AAII investors are expecting the market to move higher. NAAIM exposure index rose week over week. Not what you would expect to see in a market that is in decline. A reduction in exposure as well as fears regarding a market sell-off deepening would indicate a bottom is near. We did not see any of this play out. It would not surprise us if the market has yet to find a bottom. Of course we’ll let price dictate our moves and let the market pundits battle out their opinions.
We are on the lookout for a confirmation day from this market. Trade with caution and have a fantastic weekend!
