CASH  is  a  Position  Too

Is this market ruining your day?  Are you getting down on yourself with what the market is doing right now? 

Don't think this is the same scenarios as the 1987 October market crash when the DOW dropped down by  - 22%  on that infamous Monday Oct 19th.  I still remember that week because my portfolio eroded by  -40%  by the end of that week.  First order of business for me that week was to take the total control of my retirement portfolio and fire those so called  "Smart Money". 

There were plenty of signals a month before the market crashed in Oct 1987 for retail investors to get out before facing the train wreck.  Institutions were starting to migrate from the stocks almost a month prior in mid September to dividend paying stocks.  The charts were clearly showing that the  $DJI  index had crossed below the  50 day sma.  There were a cluster of  'Distribution Days'  piling up as well.  This was a clear signal to retail investors to scrutinize their positions and start migrating to  CASH.  There were  11  'Distribution Days'   by the time 1st week of October rolled around.  One should have migrated to  CASH  at that time while the  $DJI  was at 2560  instead of waiting after all the dust settled and the  $DJI  was down to 1660.  Institutions can't go into  CASH  like we retail investors can.  It takes them several weeks to completely get out of a position just because of the sheer size of their liquidity.

Institutions account for over  75%  to  80%  of trading volume everyday in the market.  Algorithmic computerized auto trading accounts for more than  50%  of institutional trading in todays high speed trading.  Triggers for trailing stops are set along the way and as such we as retail traders, have no edge with the institutional traders.  Its so critical for retail traders to respect the simple moving averages of 50 day and 200 day sma(simple moving averages).  These are the critical areas of support that institutions have on their radar.  If they don't support at these critical simple moving averages than we as retail traders just don't stand a chance.

Lessons  Learnt

We all have  'Recency'  bias as retail traders and investors.  Memories of the  2000  dot com bubble and the  2008/2009  market crash from the housing bubble are still very fresh on every ones mind.  Current market conditions are nothing like these two recent market crashes.  During these two recent market crashes as well as the one in 1987, the  50  day sma had rolled over the 200 day sma.  One can clearly see the waterfall look of the 50 day sma rolling over precipitously over the  200 day sma.  We don't have anything like that look on our major index charts right now.  Currently the  50/100/200  day sma are all running parallel to each other on a daily/weekly/monthly charts. 

During our regular monthly IBD (Investors Business Daily) meetup on Oct 9th, I shared and pointed out very clearly on the leading Growth Stock index  $QQQ  where it clearly violated the  50 day sma on Thursday Oct 4th.  Trading volume was twice the normal average trading volume that day.  By noon that day (2.5 hours of trading), there was as much trading volume as what one would encounter on a normal average day.  Clearly institutions were bailing out of the Growth Stocks and migrating to dividend paying stocks.  The next day on Friday, we encountered similar high average trading volume and the index dropped down to the 100 day sma.  This was clearly an indication of  'Market in Correction'   territory and a very clear signal to get into  CASH.  $QQQ  has eroded another  -5%  since  Friday Oct 5th.  Important lessons to take away is:

• Learn to read the stock and index charts.
• Learn to identify  'Distribution Days'   and the market pulse.
• Learn to create a Trade plan on any position you take.
• Understand and learn the creative ways of scaling into a position and scaling out of a position with staggered trailing stops.
• Most of all, protect your portfolio by all means and mitigate risk as much as possible. 

     

Stay in CASH and don't take any stock position under current circumstances.  Let the selling by institutions settle down.  Wait until the dust settles and get a confirmation that we are clearly out of the woods. In the mean time, do what I do ... Enjoy the gorgeous sunsets in Florida at this time of the year.  Take time off and enjoy the family.  You will eventually get a  'Follow Thru'  day.  Have patience.  Conserve your portfolio.

Happy Trading!

Amin