Monday, August 24, 2015

The $SPY Bloodbath

The $SPY Bloodbath


Watching the market take a nose dive last week was, unfortunately, not a surprise for me.  I raised concerns in a post on July 27th about the lack of demand and then two weeks ago I noticed that $DJX was down -2% year to date.

I was stopped out of a $NKE option debit spread and $FL credit spread option trade this week because the market took a tumble. I placed stop loss orders for all of my trades just in case the market turned against me. 

Most traders I talked to last week were anxious and afraid because of the market performance.  In these times, being in cash make sense.  Switch to virtual trades for a few weeks and let the dust settle!

So far this summer, I've stayed mostly in cash and all of my positions have been small. I used mostly option trades to minimize my exposure to the market which has come in handy during this rough patch. 



Market Outlook Going Forward


My outlook on the market has been cautious ever since July of 2014. Major currencies such as the $FXE, FXA, $FXC, $FXB and $FXY have been dropping while the the US $ ($UUP) has been rising since July of last year. Oil price is also down by 65% ($USO) in the same period. Minerals and metals metals such as $GLD, $SLV and $JJC have also been dropping. Companies that mine the metals, coal and fertilizer components are also on a down trend.  
Major mining equipment manufactures like $CAT gave a very poor guidance which signals a lack of global demand.

If you believe the media, you would have thought that this market turmoil was because of one of a litany of items.  Greece, Ukraine, ISIS, Russia, China, quantitative easing, the culprit changes almost daily!  The truth of the matter is it is simply lack of demand world wide.  When consumers aren't buying up products, the companies that produce them have a lower demand for raw materials.  It's really as basic as that!

In the U.S. alone, $M is down 16% over the last 5 weeks. $WMT is down by 30% since the beginning of the year!  School starts today for my granddaughter and  'back to School' season is one of the most profitable seasons for retailers and yet, retailers are hurting?   



Institutional Behavior Is More Important Than Ever


I know that over 70% of the volume in the US market is the result of Institutional (hedge funds, pension plans, mutual funds) investments. They are the drivers of the stock markets performance every day. They were quick to dump technology ($XLK) and healthcare ($XLV) stocks last week. They took profits and used the cash to invest in defensive sectors such as $XLU or high dividend paying stocks such as $MO, $RAI or $LMT. 


Some of the money went into defensive ETF's like $TLT  I also noticed that they have spread some money into thin stocks (trade less than $100 million daily). This is a safe bet for them because they have the weight to control the price of these stocks.  

I intend to track their footsteps over the next week. Also, there will be a sector rotation in the coming days seeing as how most of the names in technology and health care are extended.

As I have said before, this is no time to be heroic. It is best to be in cash and close out your losing positions.  Conserve your capital and never place a trade until you have a well thought out trade plan in place.

Happy trading!









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