You can only tease a bear for so long before he finally takes a swipe at you.
Investors have been teasing the bear market all month long…
At the beginning of August, we showed you a potentially bearish setup on the long-term monthly chart of the S&P 500. But investors bought stocks anyway.
Three weeks ago, we showed you a bearish rollover on the S&P 500 bullish percent index – an intermediate-term indicator. But investors bought stocks anyway.
Two weeks ago, we peered into the stock market’s crystal ball and saw a bearish prediction for the short term. But investors bought stocks anyway.
And for almost all of August, the investors were right…
Disregarding the caution signs and buying stocks anyway – in other words, teasing the bear – was paying off. When the closing bell rang last Thursday, the S&P 500 was up about 2% for the month.
That’s obviously not a huge gain. But, it’s a much better return than we got sitting in cash and waiting for lower stock prices.
But caution signs are funny things. They don’t guarantee that there’s trouble ahead. They just warn us that the possibility of trouble is greater than usual.
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For example, the “Slippery When Wet” road sign doesn’t mean your car is going to slide off the roadway if it starts to rain. The warning label posted on the top of a ladder doesn’t mean it can’t hold your weight. And the “may cause drowsiness” warning on your prescription medicine doesn’t necessarily mean you can’t operate heavy machinery.
But those warnings do suggest we should be a little extra careful. Maybe we pay more attention to the risk of an activity rather than to the reward.
That’s the purpose of stock market warning signs as well. When they’re flashing, investors should pay more attention to risk than to the reward because one bad day could wipe out an entire month of gains, and then some.
That’s what happened on Friday… The S&P fell 3.4%. All of the gains for August are gone. The index is now down 1.5% for the month. It’s down 6% from two weeks ago when the “crystal ball” predicted trouble ahead.
Maybe that’s not too big of a deal. Most of us can tolerate a 1.5% monthly loss. We can stomach a 6% loss over two weeks.
But we don’t have to. If we just pay attention to the warning signs, then we can wait for a better opportunity to put money to work.
We might miss out on some of the temporary fun. But, there’s a reason the sign at the zoo reads, “Don’t Poke the Bear.”
The risk is far greater than the reward.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, Earnings Trader member Walter shares his recent gains…
I just wanted to let you know that I got in on the Disney trade. I got out at 100% gain. In this market things can change in a few hours. I’m fine with 100%.
– Walter P.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].