Wednesday’s seesaw session threw us for a loop, with a -1.2% opening loss bounced into the green an hour later. The intraday reversal even rallied as high as +1% before settling back near breakeven by the close.
I really, really liked the morning reversal. Selling evaporated moments after the open as buyers rushed in to prop up the market. And everything looked amazing when the intraday rally crested +1%.
That was a 2% gain from the open and everything was going swimmingly, that is until a late slump erased all of those midday gains.
S&P 500 Index, Daily Chart
In the news, Powell testified to Congress that the Fed is still planning on aggressively raising rates and that risks pushing the economy into a recession. But as bad as those soundbites seem, the market was actually received well and investors were relieved those comments were not even worse.
Sometimes bad news can be good news when it isn’t as bad as feared and that’s the scenario we found ourselves in around lunchtime. Our economic environment is far from great, but at least it is not getting worse. Or at least that’s how the midday logic went.
And with stocks at 52-week lows, the path of least resistance seemed to be higher. At least until a wave of second-guessing overcame the market in the final hour of the day.
As I often remind readers, it’s not how we start but how we finished that matters most. And by that measure, it was both a good day that we bounced off of the early lows and an inconclusive day in that we skidded into the close.
I loved how stocks ricocheted off of the opening lows. But the lethargic close showed a real lack of conviction by institutional investors in the final hours of the day.
I started buying the bounce Friday afternoon, added more Tuesday, and was loading up on additional positions Wednesday morning. But that late slump gave me second thoughts.
As easy as buying back in is, it made sense to take some risk off the table. If stocks continue higher Thursday, I can always buy back in. But if the market retests last week’s lows, the best place to be is cash.
Since I was sitting on a modest profit, I decided the bigger crime would be allowing that to turn into a loss if the second-guessing continued Thursday. It seemed prudent to take some risk off the table and close some positions proactively.
In trading, defense always comes first, especially when doing something as risky as trying to catch a bounce. When these things work, they tend to really work.
And Wednesday afternoon didn’t feel like the bounce was working. That’s all I needed to pull the plug while my trade was still above breakeven.
As the saying goes, it is better to be out of the market wishing you were in than in the market wishing you were out.
But as soon as I’m out, I’m already looking to get back in and will happily buy a bounce Thursday morning. And if that bounce doesn’t happen Thursday, then I’ll be waiting for it on Friday or Monday.
Just because Wednesday’s close was indecisive doesn’t mean I’m giving up on this trade. I just didn’t like the risk/reward at that particular moment in time.
A lot can change in a few hours so I’m already looking forward to what Thursday’s price action will bring us.