The S&P 500 slipped another -0.3% Wednesday as the index continues struggling with 4,100 resistance.
While everyone is busy arguing about the latest headlines, what’s on the front pages doesn’t impact the economy and thus, is not important to the stock market. Instead, this latest bout of selling is simply an exhale following last week’s big run to multi-month highs.
Lucky for readers, we were ready for this stalling. As I wrote Tuesday:
Stocks move in waves; they always have and always will. After a nice run like that, rather than pat myself on the back for profiting from March’s reversal, I’m getting nervous that too much of a good thing can end poorly for anyone that holds too long.
Now, to be clear, I’m not calling Tuesday’s opening highs a top, but there always comes the point where we have to decide that good enough is good enough.
Risk is a function of height, meaning these are the riskiest levels since early February. And more than that, March’s 300-point rebound consumed a whole lot of near-term upside. Less reward and higher risk equal an unfavorable time to be buying or holding stocks.
Sure, momentum is higher and that means prices can continue drifting to even higher levels, but all good things must come to an end, and the odds are working against March’s rebound at these prices.
Until proven otherwise, this is a choppy, sideways market and we are currently near the upper end of the 3,800/4,200 trading range. Common sense makes this the place to take profits and prepare for the next trade.
And guess what? If the short squeeze continues next week, there is nothing that says we cannot buy back in and enjoy that ride higher. Just because we sell doesn’t mean we have to give up. We are always in the fight, but savvy traders are not naive enough to push their luck when the risk/reward is no longer working in their favor.