An Abnormal Market

Jesse Livermore once wrote, “Never be afraid of normal action, but be very afraid of abnormal action.”

The word abnormal is the first thing that comes to mind when I think about the current market.

On the one hand, the S&P 500 and Nasdaq Composite look pretty good. They're holding up near new highs and have been finding support at key moving averages.

However, beneath the surface, we've seen terrible stock action. Most stocks are below their 50-day moving average. The same is true of the percentage of stocks above their 200-day moving average. In addition, we've seen a high number of new net lows on both the Nasdaq and the New York Stock Exchange. Individual stock trades have been difficult as well.

All of this is quite strange. You would think that, with all the damage being done beneath the surface, the indexes would be 10, 15, or even 20 percent off their highs. However, this is not the case because money keeps flowing into large, mega-cap names such as Microsoft Apple, and Meta.

Now, one of two things can happen.

The first scenario is that the market is on thin legs, being held up by just a few names. Eventually, the market unwinds, and the stocks like the Magnificent Seven begin to unwind, just as the rest of the market already has.

The other possibility is that breadth has been so terrible that we may actually be bottoming. Perhaps there has been a stealth bear market beneath the surface, and conditions have become so oversold that we're now ready for a rally.

In March, I was very certain that the market was about to tank and that we were headed for a violent correction or a deep bear market. I thought the war in Iran would escalate to the point where we would be on the brink of World War III. However, as we all know, I was completely wrong, and the market gapped up and rallied strongly in April and May.

I also thought the market might collapse this past summer, but that wasn't the case either. Then, about a month ago, I started seeing the bullish point of view.

Now I'm very confused.

On the one hand, we have seasonality working in our favor, and the Nasdaq Composite and S&P 500 are within striking distance of new highs. On the other hand, as I mentioned, market breadth beneath the surface has been absolutely terrible.

I'm not really sure which of these scenarios will play out, but there is one thing I am sure about: when I don't know what to do, the only thing left to do is play defense.

In this type of market, there's no need to try to predict what will happen next. The key is to let the market force you in or force you out and let the market tell you what to do.

There's no need to force trades. There's no need to be right. There's no need to pick the exact bottom. There are no called strikes when you're trading stocks.

It's okay to sit and do nothing, and for me, that's the best place to be right now.

Clearly, individual stock trading has been extremely difficult over the last few months, and this has been one of the trickiest markets I've ever experienced.

In the meantime, the best bet is to sit and wait until some normal price action comes around

Risk right. Sit tight.

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