Despite news the Federal Reserve was going to expand its balance sheet stocks finished near the lows of the session. IWM led the major market ETFs lower finishing the day down 1.63%. Volume picked up across the board from Monday’s session. Headline risk remains a real thing for this stock market and much of it surrounds the Chinese and US trade talks. Now, they are not set to begin to the 10th of October, yet we have the market reacting to news headlines. We can blame the moves on algo trading on electronic exchanges as most would but how would complaining change anything? It would not change a thing and why we prefer to focus on what we can control and what matters. We control our risk and we follow price. This formula is simple and one we did not invent. However, if followed will yield you plenty in the stock market. We expect a bit more volatility as we proceed this week and will adjust as warranted. Stay disciplined as we expect the level of difficulty to increase.
Perhaps a surprise to a few was the fact the market didn’t react more positively to the Federal Reserve expanding their balance sheet. We can argue the merits of the action, but it is the reaction we are most concerned with and so should you. Likely we will see the market have support as the Fed pumps more liquidity into the primary markets. We have seen this before since 2008 when the Fed initially stepped in to stop an all-out panic attack by stock market participants. Recently, the Fed’s balance sheet has been shrinking and this stopped when the Repo market began to go haywire. For us, our actions are determined by the price action of this market. If we see the Fed follow-through with expanding their balance sheet as they suggested on Tuesday a stock market floor will likely be in place. We will certainly have to keep an open mind and follow the stock market where it wants to take us.
At this point in time, it would be a wise move to look at stocks outperforming the general market. Does this mean we think we are on the cusp of a new market rally here? No. A trader should always have a list of stocks ready to go to take advantage of fresh new buy points. Today could be the day we see a strong reversal. On the flip side, this stock market has the potential to accelerate lower. To combat the risk of heading lower is through a solid risk management process. First and foremost, we do not chase stocks higher. This means we do not chase beyond a proper buy point. Next, we have a proper position size inline with our overall risk tolerance. Finally, we have an exit plan and follow it without hesitation. This formula will yield great success.
Expect more headlines to surface regarding the upcoming trade meeting between Chinese and US officials. We have no knowledge nor an opinion on the outcome. Volatility is expected and we are prepared. Good luck with your trading today!
