4 Key Things Investors Should Do Now as Market Flashes Warning Signs
With the risk of a downturn building, here are the steps you need to prepare for a challenging market environment.
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The market is choppy on Thursday following a surprise selloff Wednesday as interest rates spiked higher on a poor bond auction. Breadth is running solidly negative, but the major indexes are seeing small gains due to relative strength in the Magnificent Seven and some big-cap technology stocks.
Technically, the S&P 500 is starting to roll over after a huge rally that started in early April as some concerns about tariffs were lifted. The rally picked up steam on a Monday morning gap-up open when tariffs on China were cut for a 90-day period. That gap is now the key support level. Bears anticipate that it will be filled on any spark of bad news.
If there is a "China gap," there will be some significant pullbacks, and the danger of a deeper pullback will increase. Will that happen? I don’t know. I avoid making predictions. I focus on the price action and react to it as it develops. Currently, the price action is flashing some warning signs, so I’m increasing my caution.
Here are four steps for dealing with this uncertain market environment.
1. Decide what sort of trader or investor you are. What is the style that you are going to employ if there is a market pullback? Are you a long-term investor who will use the opportunity to lower your cost basis in favorite names? Are you an aggressive trader that will try to catch moves as volatility increases? Are you a stock picker who will be watching for opportunities to jump into some good stocks?
2. Review existing positions and decide how you will handle them if they start to weaken. Do you have a stop level in mind for positions that look okay currently but are vulnerable to sharp drops in a weak market environment? Do you want to adjust your risk exposure to certain names? What is the technical condition of the positions you hold, and what stocks have the strongest fundamentals?
3. Selling and rebuying is your best form of insurance. There is no better hedge than selling. Forget puts and other forms of hedging. If you want to be safe, then hit the sell button, but where most investors make a mistake is that they are not prepared to rebuy. If you have to rebuy a stock higher, you have simply paid an insurance premium that has kept you safe. I’ll have more on this in a future column.
4. Increase vigilance and be ready to act. The most common cause of losses in a bad market is freezing and thinking that it is too late to act. It is important to break the inertia and be ready to act when market conditions deteriorate. You can always buy back something you sold.
The market is starting to slip a bit more as I write, and I’m going to review all my positions one by one and decide if I want to adjust my risk exposure. I want to have plenty of cash on hand to take advantage of deeper pullbacks.
At the time of publication, Rev Shark had no positions in any securities mentioned.
