Splash Zone Weekly Wrap Up: 1/24/16

The week was insanely wild and despite an incredible amount of volatility, we managed to come out on top. For the year, the S&P is down 6.7%, Nasdaq is down 8.5%, Dow Jones Industrial is down 7.6% and the Russell, a whopping 10.2%. 

I sold the majority of my positions on Friday, coming into the day 50% long, raising it to as much as 70% intraday, and by close, pulling it back down to 30% long. Had the market sold off towards the close instead of rallying as it did, I might have even added a little short exposure. Nothing serious though at this point. Now I want to see how high this market is willing to take us. The rally could lose steam very quickly and we resume the selling – there is not doubt plenty of catalysts to spark that heavy selling again; or we can continue to rally into the 1950’s to 2000 range. The point here is to keep one eye open and to be ready for whenever the bulls decide to throw in the towel. 

I am fine with adding some more long exposure this week, but it is going to have to be a “show me” kind of environment, much like WMT was on Friday when it couldn’t keep the bullishness up in the afternoon and I instead sold it rather than risk holding it another day. 

In the past I’ve used the T2108 (% of stocks trading above the 40-day moving average) and it currently is at 14% – even after all the buying that took place Wednesday afternoon through Friday. That is still pretty oversold, so I do think that the bears still have plenty of room to still be squeezed further and for stocks to rise higher. But one interesting development t has happened in the last two sell-offs is the degree of oversold-ness that has been seen out of it when the selling starts to pick up. In August 2015 and just recently here with the current sell-off, there was readings of 5.99% and 3.81% respectively which are readings traditionally given to much, much greater sell-offs. For example the 2011 sell-off which was four weeks of intense selling that dropped the S&P 500 17% saw a low reading 6.51%. In the past, a reading into the teens was almost a near certainty of a market bounce to ensue. However, now it appears that those data points should not be considered trigger points to start playing the bounce. I believe much of this has to do with the rise of high-frequency trading (HFT) comprising more and more volume – currently about 80% of total market volume – that seems to break traditional emotional barriers and levels of fear that would have triggered a bounce from the market much earlier. 

Nonetheless, approaching the week ahead, I have enough exposure to continue to play and profit on the long side, but nimble enough to start playing the resumption of the downtrend if the bulls cannot hold it together.

Flexibility is key here.