By Jeff Clark – the editor of the Jeff Clark Trader
The stock market is a cruel, heartless mistress. And she loves to play practical jokes.
Two weeks ago, our mistress was coaxing everyone to buy stocks. She spent the first two weeks of the year pushing stocks higher almost every day. She rewarded traders who were jumping over one another to buy call options. If you weren’t 100% invested in stocks, then you were missing the boat.
Then, once everyone had rushed over to the “bullish” side of the cruise ship, she tipped the boat over.
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The stock market has given up all of its gains for the year. The S&P 500 has fallen more than 100 points since making a new all-time high on January 21. That’s a 3.2% loss in just two weeks.
On paper, a 3% loss is really no big deal. Heck, it’s just a small giveback of the big gains made last year. But, if you were rushing to put every last penny into the market two weeks ago, the loss probably feels like a big deal today.
And it’s a good reminder that there is no reason – ever – to buy stocks into overbought conditions.
The market does not move in one direction. It may feel like it does at times – like during the first two weeks of January. But overbought conditions aren’t sustainable (neither are oversold conditions, for that matter). The proverbial rubber band always snaps back.
It is sometimes hard to be patient – especially when all the financial television talking heads are telling you to climb on board or else risk missing the boat.
What they don’t tell you is that there’s more than one boat. If you miss this one, the market will give you a chance to catch the next one.
Two weeks ago, the stock market was overbought. It was overextended. And, investor sentiment – a contrary indicator – was far too bullish. That was the wrong time to be buying stocks.
Today, most technical indicators are now in oversold territory. The stock market’s rubber band has snapped back. And, investor sentiment is leaning bearish.
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I can’t say for sure if we’re near the end of this correction phase (though, I think we are). I can’t tell you the market won’t decline farther from here. But, what I can say with absolute certainty, is that it’s far better to be buying stocks today than it was two weeks ago.
Traders should keep this in mind the next time they’re feeling like they’re missing out on a big move.