Listen to the message the market is sending right now. What is it exactly? Well, besides the heightened fear and concern over multiple uncertainties (more on those later), it seems a sentiment shift has occurred that needs to be considered.
Last week, some polls showed bulls at their lowest percentages in years. Is that warranted? Yes, it certainly is, and it's likely to remain for some time. But we are told with sentiment leaning too far in one direction we should be contrarian, take the other side of the trade. Sure, that works when the conditions are favorable and the Fed is accommodative with policy, or just less hawkish.
We don't have those conditions currently, hence there is a sense of worry and concern when the dip buyers get scorched on their buy attempts. Liquidity is very poor and is likely to stay that way. Sentiment is poor and likely to stay that way. Markets are in distribution and that is not likely to change for a long while.
But why has the market become the most unfriendly place? The last couple of years it was easy pickings. And if you made a bad step or had a poor result from a trade we could be bailed out quickly but a market move upward. With plenty of dollars sloshing around and a zero interest rate policy, those things can happen.
So what to do? When the conditions change, our tactics need to change. The most successful traders give themselves room to maneuver and modify their trading styles, not married to one tactic. As Keynes once said, 'When the facts change, I change my mind. What do you do, sir?'
It's quite okay to be less aggressive, hold elevated levels of cash, buy put protection and have a short leash on trade ideas. This market is going to be less forgiving of mistakes and losses than ever before. But it will change again some day, but for now heed the message of the market - PROCEED CAREFULLY.
