Harry Peterson
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Harry Peterson in Investing & more!,

Changed market suggests roller-coaster year

When we last conversed, the setup was clear — either the market would rotate to something besides technology stocks, or the market would sell back down. Rotation didn't happen, and the market finally took a fall last Friday.

Looking back over the past three months, we can definitely see a change of character. No longer are the “V”-shaped rallies littering the landscape, but instead bidirectional moves have become the norm — straight up and straight down. This change of character appears important to take notice of for it says that it is no longer the case that any purchase will eventually be rewarded but that some will actually lose value. It says that to make money, you are going to have to be much better at finding higher-probability trade setups (long and short) and have reasonably good timing for entries and exits.

Since the middle of December, we have seen a steady increase in the aforementioned large bidirectional moves. The S&P 500 offers an excellent visual of that fact no less than eight large-percentage moves have occurred during that period, while price has remained roughly equal to what it was back then.

If you look a little farther back, you will find that the S&P is within 1% of the October highs which were registered a full half year ago. We haven't seen prices stagnate that long since the summer of 2012 — almost three years ago. And if you really want to peel the onion back one more layer, we have not witnessed this sort of up and down sideways volatility since August of 2011 when a bottom was being created prior to the huge four-year run of predictably higher highs.

When considered in this manner, you have to agree that this is indeed a reasonably significant shift in behavior, and it has been recorded for a reasonably significant period of time now — long enough that it can no longer be viewed as a aberration, but instead a longer-term behavioral change.

Fundamentally, we could argue that it's stretched valuations or the lack of organic growth. Others will point to it becoming harder to paint the lipstick on the pig as financial engineering becomes more difficult with the rising dollar. Still others would point to the currency wars or plunging oil prices (although others argue the exact opposite when it comes to cheaper oil). In fact, arguing any of these positions carries some merit and realistically all have something to do with price stagnation, but where does that leave you? How do you understand all the varying positives and negatives, the feedback loops and their various weightings?

It's just not possible, and it's why in neoclassical thought, we simply see how the market sorts out and reacts to all the crosscurrents that are constantly battering the market shores. The market will figure it out and price it in. We just need to focus on those key areas where buyers or sellers should step in, and by analyzing what they actually do, we can adjust to what is likely to happen next.

So, with this change of behavior, you as an investor/trader have to adapt as well. To not do so subjugates you to a likely roller-coaster ride in the coming weeks and months where the ticket you buy takes you up and down and all around, then brings you right back to where you started — less the cost of admission. But how to change?

The key over the coming months is to focus on the two previously mentioned basic tenets of technical analysis — finding higher-probability trade setups (long and short) and having reasonably good timing for entries and exits. If you can't do that, then you are likely to be regulated to a lot of risk and angst while your portfolio goes nowhere in the end but supplies many a twist and turn getting there.

Considering good setups, there are plenty. Over the past half year, for example,oil and and most energy stocks have entered a bear market. That was a very strong trend and a clear-cut neoclassical sell signal on the break of multiple swing-point lows. There are others as well, like currencies. Back in early November, we talked about the Euro moving to par.

Of course, the counter to that trade was to get long the dollar, and there's still more to go.