Market Strategy's Fork in the Road

Image Showing Market Strategys Fork

Knowing when to buy, hold or sell is the tricky part of investments. I’m an awful debater.

Not because I don’t like a good back-and-forth battle of wits. I do.

But I’m naturally inclined to see the value in others’ viewpoints, when merited of course, even when they’re diametrically opposed to mine.

This means I have trouble defending a my-way-or-the-highway type of argument. And, instead of debating with others, I usually just hold debates in my own head… until the weight of evidence begins to favor one side or the other.

My wife, at times, thinks I’m “disturbed” because of this. But I think this trait helps me stay open-minded and flexible when it comes to market analysis and investing.

Currently, I’m of two minds about the market’s next move. I could make, in my head, a compelling case for both higher and lower prices over the next couple of months.

And while this lack of clear conviction may seem bothersome, it’s not… because I’ve figured out how to build well-balanced and smartly-hedged portfolios that can weather times of uncertainty. And, I’ve also learnrned that when the market’s future path is highly unclear, it’s usually best to just sit on your hands… watch it all unfold… and only act when a clearer picture of the market’s trend is revealed.

And that’s essentially where we are today.

Be Patient

This is historically a strong time of the year for stocks and bullish momentum is on the side of higher prices. That said, prices are fairly stretched in the short-term and a number of warnrning signs are still keeping me cautious.

Here are two charts that I shared with Cycle 9 Alert subscribers this week. They paint somewhat contradictory pictures…although with time, a clearer image should emerge.

First, I won’t be surprised to see continued weakness in stocks in the short-term. That’s because the S&P 500 has yet to retest the psychologically-important 2,000 level. Take a look…

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There’s a saying that goes: “Resistance, once broken, becomes support.”

The 2,000 level resisted bullish price advances in September, but then the level was ultimately broken (i.e. a bullish breakout) by the end of October. Now, I’m expecting prices to drift lower as the bears will likely make at least one concerted effort to push prices back below 2,000.

Whether the 2,000 level holds as support or not will be an important tell of the bulls’ resolve.

Meanwhile, I’m also watching small-cap stocks like a hawk. The small-cap focused Russell 2000 index (IWM) has lagged the market all year, as investors have shown a preference for large-cap issues instead. And this is a sentiment indicator, suggesting investors are only mildly bullish and a bit afraid to take on the added risk of small-cap stocks.

Simply put: for the broad bull market rally to continue much into next year, I think we’ll need to see a bullish recovery from small-cap stocks.

As this chart of the Russell 2000 (IWM) shows, a bullish breakout may be in the works.

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With mixed signals all around, it’s best to stay put and avoid the temptation to make hasty decisions.

I think a clearer picture will emerge in the coming weeks — particularly once the S&P 500 has tested the 2,000 level… and once small-cap stocks show us whether bullish investors have a renewed appetite for risk or not.

Stay tuned… and if you’re interested in learnrning which positions Cycle 9 Alert subscribers are in, click here.

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Adam