After seven straight up weeks the S&P 500 finally took a breather and backed off 0.3% for the week. Is this the pull back we’ve been waiting for or something far more sinister?
The two big bugaboos on everyone’s mind are the Fed minutes, in which the Fed governors discussed the possibility of tapering off QE early, and the looming specter of sequestration.
Remember, perception is reality on Wall Street, so if the market truly believes the Fed will shift its policy stance or that sequestration will ding the economy, stock prices will do down, regardless of whether these events end up happening or not.
The real trick, however, is to be able to divine whether this really is something we should worry about or merely a tradable market pullback that we can buy into. Imagine if there was a way that we could know whether to buy the pullback or to short into the pullback.
I'm happy to report we can.
Over at ETFWarrior.com we employ a trend detection tool that has proven to be incredibly accurate in telling us if we are in an up trend or a downtrend.
The value of this information is incalculable. That sounds like hyperbole, but it's not. If you know the direction of the primary trend, then there are several opportunities from which to profit.
Since last year the primary trend has been up. Armed with that knowledge, one has been able to buy into every major pullback that we’ve seen on the S&P 500. For instance, back during the November 2012 lows I wrote an article for NASDAQ where I said, “So far the indicators that we use at ETFWarrior.com suggest that this sell off is a buying opportunity in an ongoing uptrend.”
I recommended getting long the SPY (S&P 500 SPDR) at $135. Since that time SPY has risen as high as $153 and the actual index is up 162 points! For those of you that trade the S&P 500 e-mini futures that’s a gain of $50 per point or $8,100 per contract!
That’s how valuable knowing the primary trend is.
Now please don’t misunderstand me there is no such thing as a free lunch on Wall Street. Any indicator you use will have times when it fails and that’s normal. No indicator is right 100% of the time. What you are looking for are indicators that are right most of the time.
We mitigate the risk of the indicator being wrong by applying risk management disciplines that govern our position size, stop loss and total exposure. So if the indicator fails the damage to our portfolio is mild.
Right now our indicators suggest that the trend is still up and that this pull back should be bought. The focus should be on strong sector or stocks that are now pulling back. Don’t buy into weak sectors or stocks; you want to own the leaders never the laggards.
Be sure to use a stop loss and make sure that your position size is reasonable. You want to make sure that if you get stopped out that you lose no more than 1%-2% of your total portfolio value on any single trade.
And if the indicator is wrong, you’ll be stopped out for minimal losses and if a bear trend does take over you’ll be in a position to take advantage of it. Long story short:
Trade with the trend, use smart position sizing and always remember:
Let The Game Come to You!
Download Teeka’s 2013 Financial Almanac FREE!