The Dow will either rally 600 points or fall 600. For me, I think it’s that simple. Having said that, here is what I would do if markets move higher or lower.
For analysis purposes, I like to use the SPDR S&P 500 ETF (SPY) and a move of 600 Dow points is approximately a 4% shift. If we use the same 4% move in the SPY, it translates to nearly 8 points, trading at $196 (close enough for government work). On the upside, in the event of a 4% move the SPY would test the 204 area and conversely a 4% move would fall to the 188 level on the downside.
These are the things I would do. Please read this article, as I am working with an established position already and it is important to this exercise. Click here.
If you clicked on the link, you will see that you have a 40% position in SPY at near 200. On the upside, I would just continue selling your scale up into any rally. Remember: unemotional trading has to do with price NOT time.
On the downside, I would add 20% to my short into weakness once the markets settled down below 188. This is a difficult trade for many to stomach (selling weakness is always counter intuitive), but in my experience is nearly always the right trade to make.
I would not get caught up in the emotion of why—markets make little sense during volatile uncertain times—you are better off developing a steel conviction and observe unemotionally the market action.
What I Expect to Happen
I expect the market to go down, and I am hoping for an opportunity to activate the scale listed here because I believe the market is heading lower. Click here to read previous. Markets rarely have a cycle beyond 6-7 years and we are so far into this bull-run that it is extended. I think most of the action we have seen over the last 2 years is nothing more than a top.
I also think global equities will reach a level of value for specific sectors in 2016, and I believe the overall market will bottom in 2017 after the inauguration when we get a fresh start with a new leader. I believe FANG (Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) , and Google (GOOG) ) are the few mega-cap stocks that matter (notice Apple (AAPL) is NOT in this group because it is a proxy for the entire market).
I believe the days of closing your eyes and buying stocks are over for this investor cycle, and the trading world will become more mechanized than ever with robo-investors becoming a larger part of day-to-day trading activity. Currently, we have a very large part of daily volume falling into the category of high-frequency trading (HFT). This will only grow and add the robo-trade crowd to these numbers, and it will become humans versus machines until the regulators step in after hyper-volatility.
So there you have it. You heard it here first.
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