China trade talks are the soup de jour at the moment and market pundits are heavily focused on any tweet or headline regarding any news to the talks. The S&P 500 and NASDAQ Composite indexes are below their respective 50 day moving averages. It is the first time since January we have seen both fall below this key moving average. Small caps as measured by the Russell 2000 are below both their 50-day and 200-day moving average. The group is certainly under quite a bit of pressure. Bonds continue to rally as investors flee from stocks to the perceived safety in bonds. This past week has proven why it is prudent to have a risk management strategy in place. While you may have taken some losses these would have been contained. We do not want to miss out on the upside, but we definitely do not want to get hosed on the downside. Capital preservation is a key tenet of our overall trading strategy.

We do see sentiment remain a bit elevated. Last week AAII Bulls ended the week above 40% at 43% while Bears ended the week at 23.19%. You can bet you’ll see this change given the week we have had, but to what degree is the question. NAAIM Exposure index is in the low 80s and we certainly expect to see active managers reduce their equity exposure after what we have been witness to this past week. More importantly, we want to make sure we are executing on our strategy and not allowing losses to get away from us. Position sizing is key here along where we cut our losses.

Perhaps in time we’ll look back at this past week as a minor hiccup in this rally we have been under since the end of last December. No one knows the future, but we can trade on what we know. Right now we do have an elevated level of distribution and we did lose a key moving average. We are putting on some hedges for the worst case scenario, but like any position we have a game plan to exit if this market rips higher again. Who knows if a trade deal will happen or not at this point? What we do know is the price action in front of us.

We hope you have a great week of trading ahead of you. This market is not going to make it easy on traders. Keep grinding.