What Should Traders Do as Bull Market Velocity Slows Down?

What Should Traders Do as Bull Market Velocity Slows Down?

Posted On May 21, 2021 2:43 pm

In my past few articles, I’ve discussed my renewed commitment to practicing patience with my current market trades, even with my bullish outlook intact. 

Bluntly put, the bull market has become longer in the tooth and is slowing down. But, this isn’t necessarily unhealthy. The initial sprint pace from the March lows, up some 65% over the next four months, was unsustainable and carried by a small group of big-cap tech stocks.  Then came a period of high speed, near-daily rotation from “work-from-home” into “reopening” or growth-to-value. 

Honestly, this soon-to-turn 56-year-old had a hard time keeping pace.  However, I kept grinding away.  

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In a way, it was invigorating to keep learning about new issues, SPACS, cryptocurrency, and the dynamics of how unprecedented stimulus distorted the economy with speculative asset bubbles on one end and struggling Main Street on the other. 

 However, the bull’s now slowing down and putting on some weight — not necessarily a bad thing for Options360 marketing trading opportunities.  The weight I speak of comes in the form of expanding breadth; what had been a whipsawed rotation is now settling into meaningful participation of various sectors, leading to more sustainable broad market uptrends. 

The chart below shows NYSE up volume to declining volume expanded to make new highs with S&P 500 (SPY) just below new highs, indicating that the bull market’s expanding “under the surface” and tagging new sectors along for the ride. 

s&p500 stock chart 2021

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This next chart shows I probably wasn’t alone in pulling in my horns in recent weeks, taking some risk off the table, and being patient in letting trades come to me as opposed to chasing. 

This Core Research chart shows “risk-off” hit the lowest level since last March before turning up on Friday.  This suggests that the story of 2021,  which dovetails nicely with the expanding breadth, is a rally that keeps renewing itself. There will be minor pullbacks shaking everyone, but this remains a textbook bull market nonetheless. 

core active risk management model chart

However, this market slowdown or de-risking has allowed me to be more patient, not become susceptible to the Fear of Missing Out (FOMO) and let the trades come to me. 

As mentioned early this week, we added a bullish position in Microsoft (MSFT) after waiting three days for our proper entry point — within a mere day, we were able to make an adjustment to reduce the cost basis by 30%.  

Today, Options360, also initiated an iron condor in Home Depot (HD); a name I was waiting on until after this week’s earnings report.  While I can’t go through all the details just yet, I will say this:  It’s nice to have the perspective to identify good setups and the patience to pull the trigger when the time’s right.  

These moments don’t last forever.  However, I fully expect to take full advantage of them while the time lasts. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.