The main reason I discussed being patient in Wednesday’s MidWeek Video (12/15/21) is that there were no stocks setting up. I’ve said this a million times and I will continue to repeat it: The main criteria I use to evaluate the health of the market is the price action of stocks. I screen every night to look for stocks building bases, providing strong entry points, breaking out on volume, and holding their breakouts. The more stocks I find, the healthier the market. Right now, there are very few quality growth ideas, and that is telling me to continue to stay patient and defensive. Of course, there are sectors performing well such as Utilities (XLU), Health Care (XLV), and Consumer Staples (XLP), but those are defensive sectors and that’s not exactly inspiring.
I also want to make sure that we don’t see any distribution days immediately following a Follow Through Day. Although today’s decline occurred on lighter volume, it felt like a distribution day because of all the carnage beneath the surface.
After taking some time to digest this week’s Fed meeting, I feel like Wednesday’s move higher was mostly due to psychology. Many people were lightly invested and/or short the market, and the market found a way to frustrate the majority. When you take a step back and look at the bigger picture, the Fed is expected to raise interest rates three times in 2022. Traditionally, a rising rate cycle is not good for the overall market, especially for the high multiple growth stocks.
From here, I will continue to be patient and maintain a high cash position. Of course, we can have some decent up days and still see some seasonal strength towards the end of the year. However, I’m looking for a SUSTAINED uptrend and my work is telling me that it’s not a high probability situation right now.
If I can offer some words of encouragement, the market can turn around quickly, which is why I stay on top of it every night. When conditions improve, I will pass along that information and provide you with plenty of stocks to trade. If you feel like trading now, lighter positions are still best, or you can take some time off and wait for healthier conditions. Either way, be patient and stay defensive. I will discuss this further in Saturday’s video.