With indices breaking out to new highs yesterday, the main question for traders is, what now? Do I just join the winners and start buying? Do I try to fade the move as cross-market indicators and internals don’t look strong? Do I sit on my hands?
I have been bearish for the past couple weeks, and I’ve been proven wrong. In my experience, it’s best to step back a bit rather than force the issue. Maybe that’s because I’ve had many prior failed attempts at forcing the issue. Rather than try and surmise the market’s next move after a bad run, what I prefer to do in these situations is focus on single name setups that still make sense. My DFS trade yesterday lined up well both technically and fundamentally, and it’s a directionally neutral trade on a stock that has not been very correlated to the broader market.
Of course, none of that changes the fact that I have a few losing put spreads on my hands. I still see many macro warning signs that make me skeptical about the nature of the current rally. But I don’t want to throw good money after bad, so I’m not keen on adding any premium on the bearish side. However, for my current losers, I am willing to be more patient rather than cut them in a panic since the warning signs still exist. Moreover, the premium has been reduced quite a bit, to the point where when I weigh the risk/reward of holding vs. cutting here, I prefer to hold.
For now, patience is my watch word.
- Asia followed the U.S. into the green, with every major market higher, once again led by Japan, up 2%.
- European stocks higher as well, with the German DAX and French CAC hitting multiyear highs. Notable though that European banks continue to lag.
- SPX futures 0.25% higher, the dollar flat, and bonds and commodities a bit lower.
- ADP Employment Change at 8:15 am EST, with expectations for 170k after 192k last month. Fed Beige Book released at 2:00 pm.