A bailout deal was struck this weekend in Cyprus that involves the asset forfeiture of up to 10% of all deposits held in its nation's banks. These were the terms set down by the European Stability Mechanism (ESM) before they would fund the bank bailout.
This is a terrible decision in my opinion. Nothing creates bank runs faster than people fearing for their deposits. Over the last few weeks I have been short-term bullish stating that it would take a non-priced in exogenous event in order to tip the market over into a sustained move lower.
I think it's fair to say that this counts as one of those events! Whether it leads to a full blown rout remains to be seen, and further into this article I go into exactly how you should be positioning yourself in this market.
But, first, allow me to touch upon an issue that has been wreaking havoc in investor's portfolios for centuries. Let me explain….
The desire to understand the un-understandable has led to the ruin of many a trader. "Why does the market do this or why does the market do that?" is the frequent lament of too many traders.
Very often the "why" of a market move is far less important than just making the decision to participate in the market move. I don't have to understand engineering to be a passenger on a transatlantic plane. I don't have to understand why a car works in order to profit from its use.
The same is true when making money in stocks. Very often the reason why a stock or sector makes a move does not become apparent until after the move has happened.
But by then, the knowledge of the "why" is worthless. Paradoxically, that’s when the most people will trade off that now worthless piece of information.
Why is it worthless?
Because much if not all of that news has already been priced in and the pop you see is typically the last gasp of individual traders coming in on the news while the savvy traders unload their shares upon them.
This "why" dance has been enriching smart traders (and impoverishing not so smart ones) since the beginning of organized stock trading centuries ago.
This is why we embrace a technical approach here at ETFWarrior.com. Even when using fundamental analysis and investing for the long term you can use technical analysis to help time your trades.
Right now our indicators tell us that the market is overbought but still has more short-term upside to it (even with the Cyprus news). As such, short term bullish traders can buy weakness but need to take profits quickly and trade with a stop.
Bearish traders need to wait because it is too early to sell short (even with the Cyprus news!). Long term investors also need to sit on the sidelines because it is too late into this bull cycle to be a long term buyer.
Our indicators suggest that this is an exceptionally poor time to put long term money to work. Always remember: The decision to not trade is a trading decision.
Let The Game Come to You!