Sell the Rips!

For a dead cat, yesterday’s bounce staggered the mind.

Until 3 p.m. rolled around, that is…

After bouncing almost 500 points earlier in the day, this deceased feline plunged about 70 stories to its second death, turning stocks blood red for the sixth day in a row. The Dow ended the day down 204 points after that promising start. Cue another “Markets in Turmoil” segment on CNBC…

OK, so let’s get down to brass tacks – you want to keep your head above water in this nightmare market? Here’s how you do it:

Sell the rips.

There you have it. Forget buying the dips. Sell the rips…

It’s time to flip the switch. We’re no longer in a “BTFD” market (that’s buy the f-ing dips—a catchy trader’s wheeze that’s proven lucrative over the course of this bull market).

All rallies are now guilty until proven innocent. In fact, you can expect to see some really big rallies over the next several weeks. But I won’t trust any of ‘em right off the bat. You shouldn’t either. Why not? Because as a rule, the biggest rallies in stock market history have come during bear markets. It’s that simple.

I dug up an old article from the 2008 meltdown courtesy of the good ol’ USA Today. Check out this tidbit:

Ten of the largest point increases for the Nasdaq composite, for example, occurred in the 2000-2002 bear market. Four of the top five all-time point gains for the Dow also came in the last bear market.

Fact is, most folks have forgotten what a market correction feels like. All I’m seeing in the financial media right now are stories about how people shouldn’t panic and how long-term investors haven’t capitulated yet. Wall Street analysts are already trotting out defensive statements on all their favorite stocks. What else would you expect?

But here’s the thing: Monday’s lows are probably still in play.

“This is what’s known as a ‘retest’ in the technical analyst lexicon,” Bloomberg explains.  “Dramatic and climactic selloffs like [Monday]— where it seems like everyone’s throwing out the baby, the bath water, and the whole darn tub— are often followed by sharp recoveries. But just like a horror-movie villain that you think has been slain in the second act, you should know better.”

Just look what happened after the infamous flash crash five years ago:

Flash Cash Redux

So we’re not falling for the usual script. That’s why you should be selling the rips, not buying the dips. Use rallies as an opportunity to get out of any trades that have gone sour.

Remember, don’t buy the dips – sell the rips…

Regards,

Greg Guenthner
for The Daily Reckoning

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