A Rally Will Come – Then What To Do?

Hope is not a strategy – Vince Lombardi, former Packer coaching legend

I was asked by some readers and subscribers the other day what my thoughts were on a potential rally, odds of it and how to be positioned.

I recognize markets are severely oversold according to several metrics and on many timeframes, but that right there is a not a reason to fight a trend.  One thing I have learned over the years is oversold can stay oversold for longer than you think, and once embedded that condition can remain persistent.   Trying to guess and point out where a turn may/may not happen is like trying to predict Albert Pujols hitting a home run at every at bat.  Eventually he will hit one and eventually you’ll be right, but at what cost?

You can be wrong 40 times in a row before he hits one out, and you’re in the hole.  I’m not in the business of making predictions about market turns up or down but when it is under obvious severe institutional distribution I would encourage you to predict less and focus more.  Predictions are fun and entertaining but in my experience they are not big money-makers.

The world has not changed much in the past few years but the sentiment, attitude and perception sure has.  Will a rally come over the near term horizon?  I suppose it will but from what level – SPX 1250?  1200?  1100? – who knows.  If you buy or hold here and just wait for some ‘stick save’ rally to occur then you are likely spinning your wheels.

If you want to ‘think’ like an institution, hedge fund or mutual fund then let me tell you – most successful ones are NOT in the ‘hope and pray’ mode.   Whatever reason or excuse there is for a ‘huge rally’ is not because you predicted it, so let’s get that out of the way right now.

When we find ourselves ‘out of position’ or leaning the wrong way in markets it creates a false perception in our minds that makes us become defiant, stubborn and emotional.  We begin to believe the most unlikely and irrational events need to occur to bring us back to even or slightly ahead.  Is that any way to play this game?  Hardly.  The best thing we can do is pay attention to what is happening around us and embrace the situation, make the adjustments as needed.

So, that big rally comes – then what do you do?  If you are currently long some positions then you may be lucky enough to get back to where you started, and that is usually a sign to exit, right?  Will you buy an up 20 handle start?  I won’t do it, because that could just as easily be faded (and probably will in this market), and if you bought it you’re in the hole.

The smart money would likely be selling that rally on every uptick.  A turn of institutional activity is not a quick one, rather it takes time before it shifts to accumulation, which is when you want to be long (when others are buying).