How Yesterday’s Sell Off Can Help You Outperform

Bottom Line

I believe there are two key takeaways from yesterday’s price action.

First, before markets reversed (while they were at record highs) I spoke to a colleague on a desk and he remarked how the most unbelievable thing about this rally isn’t so much the strong buy demand, but instead the total and complete lack of anyone booking any profits and selling at least part of their long positions.  There was simply nothing coming for sale.

Normally you make money doing the opposite of what the crowd is doing, so the fact that the market has marched higher like it has and no one is booking any profits tells me that’s probably the right thing to do (some profits, I’m not saying get out).   The S&P could rally another 20% from here (sentiment remains very skeptical and many people were asking if “this is it” yesterday, thinking this is the start to the inevitable correction).  But, yesterday’s “shot across the bow” reversal is a signal to put at least some money in your pocket. 

(Yesterday’s sell off was more about the bond market than most realize. 
When the 10 year yield broke through 2% and the 30 year Treasury moved to
new multi-week lows, the decline in stocks accelerated.)

Second, don’t ignore the fact that utilities badly underperformed and bonds sold off hard.  That tells me this is about the market starting to discount higher interest rates, and that may be the next big trend that can make us some money.  If you don’t have any positive exposure in your accounts to rising rates (either through bank stocks or inverse ETFs on the long bond) then start thinking about getting some, because the next big trend emerging may, finally, be of higher rates and lower bond prices.