Three Summer Scenarios
06/26/2013 6:00 am EST
For those who are still heavily long stocks, the market’s recent action reaffirms the benefits of taking partial profits on strength and having a clear game plan for your portfolio, counsels Joe Fahmy of JoeFahmy.com.
On 5/28/13, I wrote a blog post about how I lightened up my equity exposure. The S&P 500 was at 1660 and proceeded to drop over 60 points. When the S&P 500 found support on its 50-day moving average (around 1600 on 6/6/13), I began to increase my exposure. Since then, the market attempted a run at new highs, but it failed last week, and I got stopped out of my remaining positions. Last week, I moved my clients to 100% cash.
The big question is: Where does the market go from here? I see three possible scenarios:
- The selling stabilizes soon and we move to new highs. This seems unlikely as there is too much near-term technical damage for the market to shoot back to new highs so quickly.
- This could potentially be the beginning of a six-nine-month bear market. While this is also unlikely, it is definitely possible, especially because NO ONE is talking about it. Think about it, have you heard anyone say that the S&P 500 could finish down double digits this year? Now that I’ve depressed everyone, let’s move on to the third scenario.
- The market consolidates for six-12 weeks and sets up for a year-end rally. My instincts tell me that this is the likely scenario. It wouldn’t surprise me to see the Fed and the large institutions take the summer off while the market digests its gains from earlier this year. A healthy consolidation could potentially lead to a strong new uptrend later this year.
Going forward, your course of action should depend on if you are a trader or an investor. As a trader, I highly recommend raising some cash and reducing your position size. My feeling is the market will chop around and destroy the people who try to aggressively trade this summer. Will we see short covering rallies? Of course, but it wouldn’t surprise me to see the S&P 500 eventually correct down to its 200-day moving average.
While I said I am taking a small break from Twitter, my show, and my blog this summer, I am still keeping track of the market on a day-to-day basis and adjusting my investment levels accordingly. I simply need a mental break, especially because I traded the last few months so intensely. Remember, there is nothing wrong with taking a break so you can come back to a better market with a stronger state of mind. Hopefully you made some money during the uptrend earlier this year. The best thing you can do now is play defense and protect your portfolio until the strength presents itself again.
By Joe Fahmy, Trader and Blogger, JoeFahmy.com