Put simply, the benchmark S&P 500 has erased more than two-thirds of its preceding five years of gains in just one year. Shockingly, half of that loss has occurred in just the past three weeks!
Recently, we said that a confirmed violation of the 61.8% retracement levels could easily lead to a retracement all the way down to the year 2002 lows. Given the losses of the past few days, that indeed is a very realistic scenario. Though we didn't expect a complete retracement to happen so quickly, it may ultimately be positive for the market if the drop happens sooner, rather than later. The faster and more violently a market sells off, the greater the eventual bounce will be. Though it may seem difficult to keep in context at the moment, please remember that, just as markets don't rally higher in a straight line forever, they also don't fall straight down without substantial, tradeable bounces occurring along the way.
Given that I began my trading career in 1998, this isn't the first bear market I've participated in. Nevertheless, it is indeed the most volatile, erratic market I've seen. But since the entire financial world is changing before our eyes, this is not surprising. Because there is never a reward without some degree of controlled risk, we've admittedly taken a few shots at the long side of the market in recent weeks, but only after seeing clear technical signs of a potential bullish reversal. Although these plays have generally not worked out, our losses have been small in comparison to the gains we've realized so far this year. This, of course, is much different than aggressively gambling to call a bottom, which would have quickly led to surrendering years of gains in just a few months.
In hindsight, we're not afraid to admit we could have played the short side of the market a little more than we did. Now, however, the reward/risk ratio of getting short at such depressed levels is not very good. Also, we know that downward moves in most markets are short-lived, and often followed by fast and furious reversals that are not fun to be caught in. Being mostly in cash is safer, as it allows us to stay nimble and capture gains from the countertrend bounce that will inevitably follow. Patience pays big dividends in the stock market, so let's continue keeping our powder dry, with minimal risk, until the time is right to strike like a ninja waiting in the woods!
Open ETF positions:
Long - FXY
Short - (none)
