On Tuesday night (5/28/13), I wrote a blog post about how I lightened up my stock positions and reduced my market exposure. At the time, the S&P 500 was at 1660 and proceeded to drop over 60 points into last Thursday (6/6/13). I began to increase my exposure around these levels for the following reasons:
1) The 10-week moving average has been an area of strong support for the market all year so far. This level is important because it’s an area of institutional support. In other words, as long as the institutions continue to support the market, I will continue to stick with the uptrend.
2) There were 2 types of stocks I bought: 1) The ones that showed strong relative strength, meaning they barely budged during this recent pullback and 2) Stocks that went down to their 10-week lines and bounced on strong volume. I especially like these stocks because they tend to shake out “weaker hands” before heading higher.
3) As I mentioned in my blog post, I was not turning into a bear. My trading instincts were telling me that we might get a pullback and that’s how I played it. Some people may say that thinking is too short-term, but keep in mind that after my strong run in May, I didn’t want to give anything back. Also, everyone should do what works for them and fits their overall investing/trading timeframe. What I do involves time and not everyone has the time (or is willing to put in the time) to manage their positions in the same manner.
4) Many money managers are underperforming this year. They are lightly invested and DYING for this market to come down so they can catch up and pick up some alpha. My gut tells me the market won’t let them off that easy.
5) Do I think we’re out of the woods? Of course not. However, the way the market responded to this recent pullback tells me we are likely going higher over the next 3-6 months. Perhaps it will be after we continue to digest this year’s earlier gains in a summer range, and then breakout higher. Again, I’ll simply take it one day at a time. If we break down, I can always reduce exposure again and if the market continues to firm up, I can always increase exposure.
Overall, I was very impressed by the market’s resilience last week and the number of stocks that put in such strong technical weeks. Good luck trading!