The $SPY is down 7% for the last 5 days. The fear is finally back in full force. It is worse than the Flash Crash of May 2010 as back then the drop and the recovery happened too fast for most people to react. The current market action can only be compared to the Fall of 2008. Back then, the only way to survive financially and mentally, was to go to bed with 100% cash every night and trade intra-day as it was not atypical for the market averages to move 5-6% in either direction in one session.
Today’s sell-off was caused by forced liquidation, meaning that institutions are selling not because they want to, but because they have to. Margin calls. The reason behind the decline does not make losses hurt less. A loss is a loss just like a profit is a profit, disregarding the underlying reason.
A few people on my stream asked me what to do here. I can’t tell you what to do, because I don’t know your financial situation. I can tell what I am doing.
It is too late to tell you that you have to sell when you can, not when you have to, because chances are that if you have to do the second, there won’t be enough liquidity to meet the supply. Even if you are a long-term investor, you need to use stops or at the very least stay out of margin, so you don’t become a forced seller. Forget what you know about the company and how bright its future is. Value is what you think you have. Price is what other people are willing to pay for it. If your positions are causing you stress, close them. Life is too short to cause yourself unnecessary headaches.
It was a correlation 1.0 day, during which individual catalysts did not matter and all stocks were hit. Some held better than others and are still trading above their 20-day MA. These are the stocks I am watching for a trade as they are likely to break out first when the market bounces. Some say that just because there are still people talking about a bounce, it won’t happen. Guess what? Today I saw more people panicking and waving the white flag than anything else. The market has never moved in a straight line for a prolonged period of time. Even in the Fall of 2008.
I expect a sizable bounce within the next 5-10 days, which will be shorted as the technical picture is already broken and it will take long time before it heals. My expectations are not based on wishful thinking. They are based on knowing market history and having experience. With that in mind, I realize that trading is a game of probabilities, meaning that anything is possible and no scenario should be excluded. This is why I close all initiated positions at the end of the day. There is no other way I can control risk at this point. My main goal is to preserve capital, so I can take advantage of the intra-day volatility. Live to trade another day.
