Panic

The sell off intensified on Wall St. yesterday. Traders were so panicked most stocks in uptrends couldn’t so much as attempt to rally off what are now multiday pullbacks to their 20 and 50 MA’s. Many stocks have severed their 50 MA’s and appear to be headed into significant corrections. This kind of hysterical exiting of stocks will lead us to a bounce sooner than later, but we think even frequent traders are best off on the sidelines.

Why? First, it’s difficult to time the coming bounce with a significant enough portion of your assets to make it a worthwhile exercise. Second, traders so insistent on catching “the turn” will likely take sufficient losses on multiple failed attempts to seriously mitigate the gains they might reap catching the bounce successfully.

But there’s a far more important reason. Given the destructive nature of the recent sell off, the bounce, when it comes, isn’t going to lead to sustained gains. It will likely come on lighter volume than the sell off, sufficient to relieve oversold tensions.

The best play in our minds is to gauge the caliber of the coming bounce. If it is feckless and low volume as we expect your time is probably best spent targeting stocks that rise back to key levels for short sales. Given the pattern that is developing on the indices it is almost assured that there will be another leg lower than can be quite profitable for short selling.

If you do play the long side on a bounce bear in mind the market psychology is different now. You cannot expect the same gains out of a long setup that you would just last week. And news will now work to your advantage because the market will find a way to consider all but spectacular news as bad.

Should the time come we’ll try to post some short sale ideas on our sister blog. Until then we intend to keep our powder dry, waiting for the opportunity of higher odds plays.