Listen to the message the market is sending right now: It’s time to change your trading strategy. Heightened fear over multiple uncertainties has shifted sentiment. The bears are now in charge, states Bob Lang of ExplosiveOptions.net.
Sentiment has turned bearish
Last week, some sentiment polls showed that the number of bulls had plunged to their smallest number in years. It will likely remain this way for some time. When sentiment leans too far in one direction, I like to take a contrarian trading stance. This works when the conditions are favorable, and the Fed’s monetary policy is accommodative (or just less hawkish). Unfortunately, we don’t have those conditions right now.
Dip buyers who dare to enter are getting scorched. Liquidity and sentiment are both very poor, and markets are in distribution. I don’t see this changing in the foreseeable future.
So what happened? Why have the markets become so unwelcoming? Since markets rebounded in spring 2020, trades have been easy pickings. If you made a bad step or suffered a loss, you could make it up quickly as markets continued to move upward. With plenty of dollars sloshing around and a zero-interest rate policy, the markets were very forgiving.
Change your trading strategy
As John Maynard Keynes once said, “When the facts change, I change my mind. What do you do, sir?”
The most successful traders give themselves room to maneuver. They’re not married to one strategy; instead, they change their trading style to suit the current environment.
This is the time to be less aggressive, hold elevated levels of cash, buy put protection and keep a short leash on trade ideas. Need to take a break from trading? That’s OK, too.
This market will be less forgiving of mistakes and losses. It will change again someday, but for now, heed the message of the market and proceed carefully.
Learn more about Bob Lang at ExplosiveOptions.net.