The US stock market had its biggest sell-off on Monday since last November, and Ken Shreve of ExplosiveOptions.net notes that when the market is in correction mode, gains can evaporate quickly and small losses can turn into big ones in no time.
It wasn’t an easy decision to cut ties with several growth names last week, but after the market’s performance on Monday, it looks like it was the right thing to do. A market under distribution—like now—is fraught with risk.
We’ll see occasional rallies—like Friday—but with the market now in correction mode, the selling will take time to run its course.
At this point, it’s reasonable to expect the S&P 500 and Nasdaq Composite to at least pay a visit to their last breakout areas. For the Nasdaq, that would be around 3,062. It could even try to fill its gap from January 2.
For the S&P 500, we’re talking 1,448.
It makes sense to look for short opportunities now, whether it’s an index-short ETF or an individual stock.
Proshares Ultrashort S&P 500 ETF (SDS) delivers twice the inverse performance of the S&P 500. So when the S&P 500 is down 1%, the fund will be up 2%. Note that SDS still hasn’t broken out the upside yet. Notice how its descending trend line lines up exactly with its 50-day moving average at 50.46. Buying now wouldn’t be bad strategy but I’d rather wait for SDS to clear resistance before buying.
The portfolio is a lot smaller than it was a week ago, but that’s the way it should be during periods of intense selling. Gains can evaporate quickly and small losses can turn into big ones in no time. While it’s generally good strategy to let your winners run, it’s easier said than done sometimes. We had a big cushion in LinkedIn (LNKD), for example, but I decided to play it safe and take remaining profits. Taking remaining profits in Salesforce.com (CRM) last week was sound strategy as well. The stock crashed 4.1% Monday in very heavy volume.
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