The S&P 500 started Friday’s session with nice gains, adding to Wednesday’s and Thursday’s big rallies. Unfortunately, the buying enthusiasm peaked in those early hours and the index eventually closed in the red, down a fairly modest 0.1%.
Debt ceiling negotiations broke off without plans to resume. Debt ceiling squabbles haven’t been a problem for this market thus far, but we haven’t been this high either. Higher prices mean higher expectations, which makes it easier for hopeful investors to end up disappointed.
As for what comes next, momentum is still higher, but 400 points later is the wrong time to be jumping aboard this rebound. The big and easy profits came to those of us that had the courage to buy months ago.
I can see this going a little higher, but we are falling into the slower summer season and I don’t see a lot of institutional buying happing until after summer is over. That means this is the time to be taking profits, not adding new money.
We don’t need to sell everything here, but it makes sense to lift our stops and start peeling off some partial profits. It is amazing how good it feels to put some well-deserved profits in our pockets.
Is Friday’s selling the start of the next big pullback? No, of course not. But recent gains flip the risk-reward against us. Higher prices increase the odds of a near-term step back, and that’s exactly what we got Friday.
There is no reason to read anything more serious into Friday’s price action. As expected, we finally challenged and even broke through 4,200 resistance, but now the sideways grind resumes. Friday’s cooling price action is nothing more than that.
We buy when it is hard to buy (low), and we sell when it is hard to sell (high). Follow those simple rules and we will always outperform the average trader buying when it is easy (high) and selling when it is easy (low).
Is this the start of a bigger selloff? No, probably not. But it could be, and I’m not willing to bet this week’s pile of profits on a trade with such a poor risk/reward. (The potential profits left in this move are far smaller than the risks hanging over us.)
This is a choppy market and if we’re not taking profits when we have them, we will be taking losses a few days later. The market is still acting well and we don’t need to run for the hills, but it definitely makes sense to peel off some profits, putting a nice chunk of change in our pocket and lowering the risk if this selling continues next week.
As for Monday’s session, start buying back in if the break above 4,200 resistance turns into a powerful short-squeeze. In the other direction, if the air continues coming out of this week’s rebound, the most confident and aggressive can start shorting the cooling off.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.