Attempting to short this market prior to any significant breakdown is the equivalent of financial suicide. Taking profits occasionally, moving into cash, and awaiting entry on a new position is fine. But shorting this uptrend with hopes of a big reversal just makes no sense. Since January 27th, take a look at the poor economic/geopolitical news that's surfaced:
(1) durable goods orders missed by 4 percentage points (mostly due to transports
(2) preliminary 4th quarter GDP came up short, 3.2% actual vs. 3.7% estimates
(3) personal income came in a tad light
(4) construction spending in December was abysmal
(5) ADP employment change in January beat by 40,000, but there was a 50,000 downward revision in December
(6) January's nonfarm payrolls fell by 85,000 jobs from the revised December number and it was 112,000 short of January consensus estimates
(7) Middle East crisis escalates in Egypt
There have been plenty of reasons to take the stock market lower yet the resiliency of the bulls shines through every time. How can you short this type of market behavior? The answer: You can't.
I have to say one thing about CNBC and the "experts" covering the jobs data each month. Why do they project big job gains, then immediately make excuses for poor reports by blaming it on the weather? Don't they have The Weather Channel? If you knew there were a lot of weather-related problems across various parts of the country, wouldn't you include this in your projection? Why does it always come up AFTER the shortfall is reported? I don't get it.
The market sends constant reminders to us that it's not about the reports. It's about the market's reaction to the reports. That's what matters. And the market keeps going higher. How can a market like this be traded? Well, quite carefully for one. And on the long side. I've been suggesting smaller position sizes for short-term traders. I've also been trying to avoid stocks with slowing momentum, as evidenced by weakening MACDs and lower volume on up moves.
Here are a couple of recent setups that I liked with annotations on the chart to help explain the positives I saw:
Both of these trades benefitted from exercising patience to allow entry on those 20 day EMA tests. At the time of the pullbacks, both MACDs were solid providing us some comfort that the bulls remained in control of the action. Both stocks hit our short-term profit targets, but have since weakened technically, printing long-term negative divergences on attempted breakouts. The risks appear too great to trade them now, but they did their jobs. That's why it makes sense to take your profit, move to the sidelines and await a solid setup. Every week, we highlight at least one trade that we've suggested, breaking down the rationale for the trade and our strategy at the time of entry. To view this weekend's Anatomy of a Trade and to view performance of recent setups, CLICK HERE.
Happy trading!
