Even though the benchmark S&P 500 Index has been outperforming the other averages lately, Wednesday’s (August 1) heavy selling was the second day in a row of institutional distribution (higher volume losses). Two days of distribution so close to a bullish follow-through day is usually bad news for the bulls. As such, because of the mixed signals, our rule-based market timing model has just switched to “neutral.” This occurs when the broad market is attempting to form a bottom and we receive a buy signal that doesn’t follow through (false buy signal). Rather than switching back to “sell” mode, we adjust the model to “neutral.” In this mode, we can either go long or short; however, our position size on all positions is light because market conditions are not ideal.
Our current near-term plan is to continue to lay low, just as we have done the past few weeks, patiently waiting for conditions to improve while protecting our capital (cash is king). Despite the challenging and erratic market conditions, we still netted a profit in July from individual stock trades of The Wagner Daily swing trading newsletter, equating to just over 1% of the model portfolio value. While certainly not a killer month, we felt the small gain was pretty good, especially considering how unbelievably choppy the market has been.
Perhaps most importantly, swing traders and short-term investors who have been disciplined enough to follow our swing trading strategy over the past few months should be in good shape mentally. Along with capital preservation, staying mentally sound is always a main concern when trading in a tough market. Unfortunately, many traders have undoubtedly overtraded like crazy in recent few months and are now in a big hole. Conversely, we stayed out of harm’s way, and even made a 1% gain last month, by simply following our market timing model. Many newer traders enter trades just for the “rush,” and have a hard time sitting in cash or trading with reduced share size. But we know from more than 10 years of short-term trading experience that knowing when not to trade may be the hardest skill of all to learn (and carry out) in the stock market.