I’ve been bullish stocks for the past 2 odd years. But it looks to me a bigger correction in the US stocks could be upon us. Emerging markets have been under performing this whole year and there are no signs of a reversal yet (see Watch Alibaba for clues in emerging markets). Then the German DAX is just confirming the move down is very likely (see Winter coming?). And it looks gold could be starting to catch some bid (see Rotation to gold and miners?).

We saw a few failed breakouts higher in the US indices recently. I was writing about the Dow Jones Industrial Average, looking for a continuation higher. But it failed and that failed break higher, by the way a similar one happened in S&P 500, is causing concerns for bulls and all these developments are by no means constructive for stock bulls. 

So its up to everyone to decide what you want to do. You can either stubbornly hold to your longs, you can be defensive and go into cash or you can even short some indices, sectors and even individual stocks. But which ones and under what conditions?

We have already identified that we want to be short DAX if it’s below 11,900. But what about the US? As long as S&P 500 and DJIA are below 2880 and 26,500 respectively we don’t want to be long and want to be looking for short opportunities. And there are a few sectors that could potentially look ugly should weakness continue to be seen.

Semiconductors had a great run in 2016 and 2017. While it first seemed 2018 could serve as a consolidation year before another leg higher it now looks it was forming a rounding top after the price got to its 2000 peak.  

$SMH ETF is holding above a crucial support at $95. Should the price get and stay below then there is no reason to be long this sector. Even more, in this case there is no reason not to short it!

Very similar is with the financials $XLF ETF. It almost reached its 2008 peak but since then stalled and didn’t move much. Financials are always a great tell where the broad market could be moving, so it’s important to keep an eye on it.

If price gets and stays below $26 there is the same conclusion as for the semis. We want to lean to the short side.

There’s always a case that what we expect won’t happen. The market is here to surprise us. So I am being open minded that the recent moves were just a shakeout before a strong rally. But if levels mentioned above don’t hold then all bets for that are off. In that case we either need to stay away or be short the market. Everything else is just asking to lose money. Potentially lots of it. It’s your call.

Get in touch¬†if you’d like to discuss this topic in greater detail.

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