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A Gameplan for Market Pullbacks and Corrections

Game plan illustrated with chess pieces

Whatever you think about US President Trump’s handling of trade negotiations with China, there can be little doubt that the markets are reacting to every tweet and every bit of news. With no deal Friday, May 10th, only hopeful comments by Treasury Secretary Steve Mnuchin and a Trump tweet suggesting the tariffs could be removed and trade talks “will continue” prevented a major sell-off.

Over the weekend, the trade tariff war escalated. On Monday, May 13th, the DOW gapped down more than 460 points at the open; was down 715 by early afternoon; and closed the day down 617 points or 2.38%. Canada fared a little better. The TSX closed  at 104 points, a modest 0.64% compared with the US indices. As could be expected, the gold index had a big day, gaining 3.50%. A few more tweets and a bit of news on the European trade tariffs Tuesday, May 14th and the markets started to climb.

So what is an investor to do? You can’t predict the one-day effect of the news or the tweets, so follow the trends and VectorVest guidance. VectorVest gave investors plenty of warnings the last few weeks about the market losing momentum and the importance of managing risk. I’ll speak about Canada, but the warning signs and guidance has been just as strong in the US.

First, the Color Guard has been predominantly red since April 29th. The April 5th Strategy section stated, “upside momentum has dissipated.” On April 12th, April 18th, and April 26th, we read these words in the Strategy section, “downside risk outweighs upside potential”. On May 3rd, “we still need to see the Price of the VVC/CA move lower for one more week and fall below the 65-day MA to confirm this downtrend,” in other words, generate VectorVest’s slowest, most conservative signal, the Confirmed Down Call. May 10th, “we could receive a Confirmed Down, C/Dn, signal as early as Monday.” On Monday, May 13th, we got the Confirmed Down Call.

I love the RT-Kicker Combo Timing signal. During our recent weekly CA Q&A webinars and the last two International Online User Group Forums, I’ve been showing the Market Timing Graph and the RT-Kicker Combo Timing signals. When the red triangles start to show up in clusters, in other words, more than one within a day or two or a few days, it’s a strong warning of a potential trend change and trouble ahead. Check out the signals beginning May 1st, well before Monday’s sell-off. Then look back to 2018 and check out the signals in late July early August. Those were terrific early warning signals.

RT Kicker Combo illustration
Click or tap image to enlarge

On Friday, May 10th, our Founder Dr. Bart DiLiddo wrote in the Strategy section of the Views, “Let’s just stick to our game plan. Get rid of your low RT, “S” rated stocks that are long, heed the Color Guard, and buy Contra ETFs or sell stocks short only when there’s a red light in the Price column of the Color Guard.”

As always, Dr. DiLiddo’s guidance was bang on. We don’t recommend selling everything at the first sign of trouble, but we do recommend you adhere to your Stop-prices and possibly tighten stops or use the risk management techniques described above by Dr. DiLiddo. Either stop buying and, if you must buy on one-day rallies, invest less per trade and use tighter stops.

In the March 22nd Essay, I wrote about Stop-Prices for Different Stages of Investing. Please read it again. I wrote, for example, “Use tighter Stops on any new positions, including dividend payers, and be prepared to tighten your Stops in Confirmed Down conditions to lock in profits or minimize losses. You can use the “Weed Your Portfolio” techniques explained in Lesson 2 on the Training tab.”

You may also wish to read again my Essay on February 15th titled, “Eight Tips to Maximize Profits and Minimize Losses.” In Tip #1, I said it’s important to buy early in a new uptrend. Then, when the market rally is nearing a top, “use more caution when adding new positions. Slow down your buying and wait for the perfect set-up.” Tip #8 stated, “if the market stalls out and red lights start showing up in the Color Guard, consider tightening your Stop criteria, and when your Stop criteria hits, don’t be afraid to SELL! Cash is a position.”

Well, we’ve seen the dominance of the red lights in the Color Guard recently and now we have a Confirmed Down. There will be rallies for sure, but when downside risk outweighs upside potential, you need to put together and follow your GAME PLAN FOR MARKET PULLBACKS AND CORRECTIONS.

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