It goes without saying that stock indexes broke below the technical support levels we outlined last week. Lower lows is the sign of a downtrend, but they normally don’t come in 1000 point increments.
We talked about the cliché that Wall Street hates uncertainty. Another fly flew into the already contaminated, uncertainty ointment with Saudi Arabia and Russia engaging in an oil price war, causing the commodity to drop nearly 10% on the day.
It’s been my experience that oil prices are an indication of where the economy could be headed. Unfortunately, down in this case.
As for oil stocks, despite what you hear from certain politicians, in general, the oil industry works on small profit margins and is highly leveraged.
At oil’s current price, frackers will be under a ton of pressure as it is estimated to cost $50 per barrel to extract. Meanwhile, more traditional drilling is between $30-$40. While lower oil prices are good for the consumer, too low has a domino effect across industries. The most highly leveraged oil companies could default on loans, which can hurt lenders and so on.
Historically low interest rates don’t help old debt on the books; however, expect a ton of refinancing, which is a huge positive in the long run, but does nothing to ease the pain today.
The question becomes what should investors do?
The rule is to buy on dips when the market is in an uptrend until there is no longer an uptrend. The opposite is true, sell into rallies during a downtrend until the downtrend is over. Uncomfortable investors could use inevitable snap backs to move some money to the sidelines.
As an old time mentor shared with me, “It’s better to be out of the market wishing you were in, than in the market wishing you were out.” As the last few years have shown, there are always things to buy in a bull market. So don’t sweat if you put some cash on the sidelines and stocks rebound. There will be many opportunities when the next uptrend begins.
Aggressive, high risk investors could trade these wild moves. A very simple trading strategy is to draw a line across index charts for the high and low prices for the opening hour. After the first hour has passed, wait to see which guardrail is violated first. If prices move higher than the upper line (highest opening hour price) initiate an exchange traded fund (ETF) trade in something like Invesco QQQ Trust (QQQ). If the lower guardrail breaks (first hour low price), then something like ProShares Short QQQ (PSQ) should do well if the market continues to drop. Close out the position before the end of regular trading hours and follow the same steps the next day.
Set your stop losses slightly below the upper guardrail for QQQ and slightly above the lower guardrail for PSQ. With the market moving in chunks, this trading strategy could offer aggressive traders a way to position their trades to try and capitalize on the outsized volatility while attempting to limit downside with stop losses.
And of course, there is a school of thought to do nothing, to sit and wait it out. I am not the biggest fan of this approach. No matter the direction, once it’s declared, there is a way to profit from the market’s direction.
For now, expect volatility to continue with wild swings in both directions. We’ll have more for you in the days ahead.
Stay tuned and may all your trades be profitable.