Stepping Aside Because I Can Always Buy Back In

Includes: DIA, QQQ, SPY
by: Leigh Drogen

I sold out of everything this morning, for a few reasons.

Either I’ve been in the wrong names or just caught a bad tape there, either way my long exposure was not performing the way it should have been. One after another I’ve seen gains get torn away from me by stocks gapping down overnight on news or whatever it may be. Frankly, it doesn’t matter, the only thing that does is the bottom line. It’s ok to be wrong in this business, in fact my trading style is wrong almost half the time, the key is to take your stops and move on, because at the end of the day the winners, if you play them right, will far and away make up for the half of your trades that don’t work. Breakouts don’t always work and momentum stocks have a habit of ending their trends abruptly.

Second, I can always step back in, I don’t run 5 billion dollars, I don’t move stocks, I can buy back in this afternoon if I change my mind (not likely). I see more risk to the downside here than I do to the upside. Short term the market doesn’t look bad, we are still above a rising 5 day moving average and pushing up against a big resistance level going back to June. But, in the larger scheme of things I don’t think we crack this level on the first shot, I think we need a pullback here to regroup and gain more energy. As well, on the intermediate term time frame, the market is showing a rising wedge technical pattern, a bearish pattern. No, I’m not calling here for a complete roll over as I did back in early April, I’m just saying that the risk here is to the downside and with my underperformance as of late I’m just not confident enough to be pushing the pedal to the floor at these levels.

Third, the jobs number tomorrow scares me. No, it doesn’t matter what the number is, we all know it’s going to be bad, what matters is how the market reacts, and I have the feel it’s not going to be good.

Fourth, many of my oscillators are overbought here.

And finally, I don’t like the fact that this rally has primarily taken place on the back of the most beaten down sectors. We haven’t seen tech, the leader, make a big move. The oil service names, steel names, agriculture names, and transports have fueled this rally. They were very very oversold in early July and needed to bounce, now that they have reverted back to the mean so to speak, what now? Where is the next leadership, I still don’t see rotation back into tech, the semis are still stuck in the mud and breakouts in momentum names are failing.

It all just doesn’t pass the smell test for me. I’ve been successful at this not because I’m always right, but because I know when I’m wrong and I’m willing to change course or step aside. Right now, I’ll step aside.