Gains turned into losses for the Russell 2000 as the small cap index saw sellers ravage the index again. Long-term bond yields continue to race lower too as flight to safety continues. The bond yield inversion has investors and traders alike spooked over a potential recession. Volume was up across the board notching another day of distribution for the market. SPY and QQQ are holding their August lows, but given the price action it would not surprise us to see those lows challenged. Even with stocks pushing lower in higher volume the put/call ration didn’t budge. VIX remains above 20 as option traders are expecting some volatility ahead. We are a broken record at this point, but whatever. August, September, and October are a seasonally weak period for stocks. There are many headwinds to contend with. Most importantly, price action is indicated further downside.
We certainly do not want to see the market crash. Market corrections are typical and a way of life in the stock market. Most just believe we always just move higher and if you began trading after 2008, we can see why you would believe that. However, history certainly tells a different story. This market correction will help weed out weak stocks. Leaders will emerge out of this and we will be the first to be jumping aboard riding the wave higher. Much like the end of December 2018 and when the market turned then. Most thought 2008 was about to happen again. At this point, we do not have any magic ball telling us what the market will do next. What we do know is what we have seen from the market and right now all signs are point to the market heading lower. Do not be a hero.
One thing to do here is to keep a list of stocks who have high relative strength to this market. One way to spot a new winner is relative strength. Big winners usually sport solid price patterns, earnings growth, sales growth, etc. We are always on the hunt for stocks fitting this profile. Right now, it is a bit difficult, but when conditions improve for a new rally be on the lookout. The last thing we want to miss is upside. Our first rule is to limit losses. We do this through sound risk management. Risk management gives us the confidence in our signals. When the time comes, we do not hesitate to strike. Do not get caught flat footed when it comes to this market. Always be prepared.
