After months of record highs, red flags in the stock market have appeared. Last week, the American Association of Individual Investors (AAII) released bearish sentiment numbers. Their sentiment survey hasn’t been this bearish in over a year. That’s something, especially with markets near all time highs.
Caution! Red flags in the stock market
This is a massive red flag. On top of that, new lows are starting to make their way into the picture and breadth is also a concern.
We haven’t had a correction of 5% since November 2020. That’s a span of well over 200 days, something the financial media have been discussing a lot. While corrections are a normal part of market action, they are never fun. Traders and investors who are long and don’t have index puts working to protect their portfolio and/or plenty of cash are rightfully worried.
While the markets continue to confound even the most logical of traders and investors, price action has held steady. This could change at any point. We just experienced a modest 2% pullback and heightened volatility, which rose to around 20%.
Many traders are trying to ride out September, one of the most dismal of months for trading. However, October is not promising, at least by historic standards. Sometimes, it’s the month of crashes, but sometimes, it’s a bear killer.
How to trade right now
What would you do if you went back-country camping in a remote area with zero cell phone reception? You’d prepare and be ready for anything – any type of weather, minor injury, animal encounter, etc. And while camping, you’d be aware of your surroundings. It’s no different in trading markets.
Awareness and preparation will see you through an unstable market like the one we are currently in.
For now, take a cautious approach. Reduce the number and size of your positions. Add more put protection so you can sleep well at night. Keep plenty of cash on hand.
And keep following the lead of the markets! You’ll know when it’s time to be more aggressive.