This may not be a good market for investors but its a fine one for traders. Over the past months we have maintained a cautious tone with the expectation of a potential April top for US equities. While we don’t expect anything dramatic in terms of a sell-off, the selling could be substantial at times as the markets begin to flush out newbie momentum investors or those who need a refresher course in market risk.
As for this being a fine time for nimble traders, this has been the case especially in the Nasdaq and small cap sectors as identified by symbols QQQ and IWM, both of which have rolled over and are leading on the downside. We’ve been able (so far) to capitalize on the the weakness by trading the SQQQ and the TZA as both markets appear to be in a “two steps down and one step up” mode.
Eventually this period will pass and fear will be reinstated as a common investor emotion which will probably lead to a strong second half of 2014. At present, we see no signs of recession and weak markets within growing economies can happen but they’re typically shallower and briefer than recession based bear markets. So, assuming the markets remain with a downward bias into the Summer, this will likely lead to an excellent entry point later this year.
Notice the divergence between the stodgy S&P 500 and the NASDAQ and IWM. This kind of behavior leads me to suspect that the outpeformance in the small caps may potentially be over which is one why we’re expecting to lean heavily on Mid Caps when we eventually move to fully invested.
So far we have avoided shorting the SPY via inverse exchanged traded funds, we’re respecting the market strength.
We continue to opportunistically trade the SQQQ, the inverse QQQ ETF as this market shows a bearish trend. I’d expect to sell the SQQQ in the event the QQQ revisits $84.
We are trading the TZA which is an inverse exchange traded fund that mirrors the IWM which is a proxy for the small cap stock market. We expect to sell the TZA if the IWM moves below $111.
To sum it up: For the time being, this is not a market for investors but for traders. This too shall pass.
Brad Pappas
Long TZA and SQQQ