The recent excessive volatility is typically symptomatic of a topping market. Additionally, more and more leaders have been consistently breaking down over the last few weeks: SWKS, AVGO, and NXPI are examples. But a market top does not occur in one day; it takes several weeks, even months to build, as institutions do their best to liquidate their large positions without being overt.

 

Currently, the major indices are approaching their respective 200-day moving average lines, which can be long-term support levels. While it wouldn’t be a surprise for the market to bounce here, odds are that we are facing the likelihood of additional downside. Remember that the market has been in a general uptrend for a number of years without a significant correction.

 

MarketSmith President Scott O’Neil is hopeful that a positive earnings season will serve as the necessary catalyst for a new market uptrend, but even he has to admit that, at this point, it doesn’t seem too likely. The majority of growth stocks announce earnings in 2-3 weeks, which can feel like an eternity in a tumultuous market. Still many investors will try to ride through this volatility in hopes of a bounce on positive earnings releases.

 


Even if you’re still up on the year, you’ve probably had a significant drawdown already, and holding on further could potentially cause you to give back the entire year’s gain. It’s great to have conviction as long as the stock is going up. But you need to have sell rules in place if things don’t work out as planned. Given that the end of the year is rapidly approaching, your focus should be on preserving those hard-earned returns. 



Best Returns,

The MarketSmith Team