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Markets CAN Pull Back - It's Quite OKAY!

Published 08/12/2018, 04:51 AM
Updated 07/09/2023, 06:31 AM

There are a million reasons to sell, but only ONE reason to buy. We can find any excuse in the book for markets to sell off, any would be convenient enough to justify taking some money off the table. The trick of course is not being the last one out the door before it slams shut, and trying to time your exit perfectly so you can remove yourself unscathed.

But timing the market is truly an exercise in futility, a guessing game that only finds you successful if you're lucky. While luck is sometimes needed in trading, it is certainly something we should not rely upon as a general rule or everyday practice. When the odds and probabilities stack up in favor of selling, then that is the best time to prepare.

Luck is what happens when preparation meets opportunity. How do you prepare for a market ready to sell, or better yet position yourself where you get 'less hurt'? I like to preach that we are in the moving business and not the storage business.

If you are constantly moving capital around, selling some when you have profits, cutting losers, and holding lots of cash at all times then the little 'surprises' that come around that we have no control over won't hurt us too badly. You know, like those little tweets out of left field, or some shocking news out of China or Europe that puts stock buyers in a foul mood.

Our own mood tends to dominate our actions, too. Ever found yourself on the wrong side of a market trend, wondering what you were thinking? Sure you have, we have all been there at some point. The key challenge is changing that behavior, accepting the markets fluctuate (we KNOW they do, but our portfolios are not always set up for it).

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Markets don't go up everyday forever, but sometimes when the markets trend for an extended period of time we are lulled into that way of thinking. This is complacency, we feel it and visually see it in indicators such as the VIX, put/call ratio and TRIN. We can also note when oscillators get overbought and the indices are stretched further than the moving averages, or when volume trends retreat as the markets rise (divergences).

These are all mechanisms that tell us a pullback is likely to come, but not necessarily a change in the big picture trend. We should always be prepared for any pullback for any reason, as the opportunity to pick up stocks on the cheap is a great way to continue building wealth during a rising market trend.

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