Unraveling



Yesterday was one of those days in the market place where, on a global basis, everyone was worried about what everybody else was doing—or not doing. Case in point is a few headlines that I picked up on MarketWatch during the day:

“Dollar adds to gains after Ireland denies aid”

“Crude slides 3% on dollar, China worries”

“LatAm stocks slide on China, Europe worries”

With that much confusion, it’s no surprise that downward momentum reined supreme, while “dip buyers” were conspicuously absent, as they have been for the past week or so.

Commodity prices got hit hard as fears of price controls in China to limit inflation kept buyers at large. Additionally, European debt problems continued to be the center of attention as rescue packages for Ireland were being discussed, while Ireland refuses to acknowledge the need for a bailout. Reading some of these news reports is better than watching a comedy, or so it seems.

Nevertheless, the major indexes closed down, but managed a last minute rebound off the lows for the day.

Looking at the big picture, it appears that the Fed’s QE-2 plan has backfired already. Instead of lowering interest rates in general, they have been heading higher, causing bond prices, with the exception of today, to slip and slide since the announcement. I have talked about the potential of unintended consequences of quantitative easing before; this may very well be one of them.

If you’ve been reading this blog for a while, you should have your plan of exiting positions via our recommended trailing sell stops firmly in place. While none of us likes this market pullback, you need to act when market activity tells you to do so.

Yesterday, I mentioned that we had liquidated PZA. We also unloaded EVV on Tuesday, as it had triggered our sell stop. Currently, I have two positions on the sell menu for today.

I will wait to see how the market opens and watch activity for the first couple of hours. If a big rebound is in the making, I will wait another day with my planned liquidations to avoid a possible whipsaw. If there is more slippage in the market, I will pull the trigger.

Having such a plan in place, despite it not being perfect, takes the emotions out of making a decision and puts you in charge of your own destiny. At this point, the great unknown is whether this pullback is the beginning of further downside activity, or simply a correction.

I for one am not willing to wait and find out when it’s too late; I will continue to liquidate those holdings that are showing weakness. After all, moving slowly to cash, will decrease my downside risk, should we head south in a big way.

If the markets reverse suddenly and head back north, all I miss out on is some upside potential, which reminds me of my favorite saying that “I’d rather live with lost opportunity than with lost money.”

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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