Let the bears come out of hibernation and begin to bang the correction drum! Today was the first sign of institutional selling we have seen since the beginning of this rally. The market reversed off its high of the day closing near session lows. Volume jumped day-over-day the indication institutional sellers were selling stocks. Despite decent economic data the market was spooked just before 1pm EDT. Headline at the time was indicating a Syrian airstrike within Iraq. However, the market continued to sell off without much more news indicating the market, at this juncture simply could not hold its highs. Distribution days, even the ones like these will occur from time-to-time and we expect it. We’ll certainly act accordingly, but we aren’t about to panic sell for the sake of selling. How we move forward is anyone’s guess and we’ll need to see confirmation of selling before making any move one way or another.
It is easy to run and hide here selling out of your positions when the market gets its first taste of selling. Many simply will sell too soon only to see the market run higher. One important message is to obey your process and obey trade signals. If your model says to get out, get out. However, don’t simply sell for the sake of selling out of fear. This stock market could very well continue to sell off, but for corrections to occur you’ll see the market rally after an initial decline. Case in point would be the Dubai Stock Market. In the following chart you’ll notice that the first decline was met with a reaction to the upside and then another move lower. The first move lower doesn’t always mean we are going downhill. What you should pay attention to is the initial low and whether or not it holds. Here is the chart:
We are trend followers simply following price trends. There is a belief held by many you can absorb all the information and translate it to buy and sell signals. Those who do this ignore the fact every decision in every trade is baked into the price of the particular security. Follow it with an entry and exit strategy with a positive expectancy and you will come out on top.
Putting our process aside, we do enjoy some analysis revolving around investor sentiment. Investor sentiment is far from perfect and is something we take for a grain of salt. However, ZeroHedge posted a chart this morning that was rather intriguing. We know there is very little volatility and there is a lot of complacency surrounding the market. At some point, in the future you have to wonder are we nearing the end of the party. What we do know is investors simply do not see this party ending:
One day does not make a trend and we are not about to run for the hills. There are a few reversals out there due to today’s action, but we’ll need to see much more evidence prior to switching to neutral and sell mode. Distribution and volatility need to pick up and leading stocks need to break down. Until we witness these we’ll stick to what we know right now and that is we are still in an uptrend.
