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Rout Today, Rally Tomorrow, Rout Next Day, And So On

S&P 500  2,581.88 -58.99 (-2.23%)  Dow 30  23,644.19 -458.92 (-1.90%)  Nasdaq  6,870.12 -193.33 (-2.74%)
 

S&P PanicAnother rout in the markets today. The markets lost 88 points during the day, so it was quite encouraging to see that it recovered by the end of the day and we only lost 59 points. That means, that so far, this market behaves as expected.

What are the expectations for the market? What this market may do?

 

 
Many say that this market is heading towards bear market and some even consider this a beginning of one.

So, how do you define a bear market?

An old method (devised about a 100 years ago, by the way) says that the bear market is when the stocks drop by 20%

But why 20%? Why not 21%? Or why not 19%?

What constitutes a bear market?

If the stock market drops on Monday by 30% and ends at all time high on Friday, will you consider this a bear market? Why yes and why not? If not why when the market fell more than commonly agreed 20%?

I would not consider this a bear market at all but a mere significant correction.

In 2015 the market dropped by 19.3% and investors and trades considered it not a bear market although it stayed down for 5 months! If you however used the initial day high price and the final day low price in 2015 bear market, the stocks fell by 21%. Yet talking heads considered this as not a bear market.

 
S&P500
 

So, what constitutes a bear market and what should you do?

It is time and depth of selling waves what constitutes the bear market. We have to have a large pessimism among investors and traders, constantly falling prices for at least a year when the market creates new lower highs and lower lows and every rally is sold off and the market falls by 40% – 50% in that prolonged period of time. A one day drop (to simplify it) doesn’t make it a bear market.

Are we there yet? I still think this is not a bear market nor its beginning but mere correction (a minor correction) and we are just retesting the previous lows (and closing below 200 DMA) from which we begin a recovery.

In my previous posts I mentioned that it would take 2 to 3 months before this market goes to new all time highs again. We are past 2 months of this window frame and still on track to recovery. But this may change fairly quickly and it may develop to a bear market. No one knows the future and no one can predict it.

So what is the best approach to do now?
 

Two things:
 

1) stay aside and do nothing
2) short the market
 

If you are in cash, stay in cash. If you have open bullish trades manage them to get them closed or rolled into bearish trades but make sure you are short term or close them.

If you are in stocks for long term, do nothing. Stay invested and keep cash. You will be able to buy in later.

If you know how to short the market (if you are in this group I guess you do know), short it by selling calls or buying put debit spreads (or single puts). If you are not confident riding the waves (be careful as they are very dangerous) then stay away.
 

We are now well below 200 DMA. Technical analysis says we should re-test the lows and close below 200 DMA for the recovery to start.

 

 · Trading activity today

 

A summary of opening and closing trades.
(premiums received / paid: – $754.00)

Note: This is a cash flow of credits, not profits!
 

Today, I was adjusting a few trades such as Amazon (AMZN) and SPX. I also opened a few trades with today’s expiration. I had to close a few trades as the market went up in the last 40 minutes which I didn’t expect (and wanted). A few trades had to be reversed from calls to puts. Also my debit put spread had to be closed as the market rallied. I closed it for a profit (opened for 570 debit, closed for 765 credit, a nice $195 profit for the day). Overall balance or received/paid premiums were negative today.

 
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Definitely, this market is still a test of my nerves. Will the selloff continue next week or are we finally on a path of recovery?

 

 · Dividend stocks to buy

 

Out of our watch list of 37 dividend stocks the following ones are a good buy at today’s prices (04/02/2018):

 
S&P500
 


Disclaimer: The list above is based on calculated fair value and 52wk high offset valuation. The values are subjective to our calculations and opinion and may differ from your own. If you decide to trade or buy these stocks, do so on your own risk and do your own homework. The list is not our recommendation to you.

 





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