Here’s What Could Trigger the Next Market Selloff

© Provided by CNBC
© Provided by CNBC

The market has to bounce? Those are famous last words for this generation of traders.

I can’t tell you how many times I have heard this in the past few years, and most times, the traders have been correct. But this has allowed them to have a false “Masters of the Universe” complex, where they think each selloff is just an opportunity to buy. And anything and everything they do is correct. In trading, no one is right all the time.

The past two trading days (while great for day traders) were a wake-up call for this generation of position traders. And while the market did bounce off of an overextended dump on Monday morning, it doesn’t mean we are out of the woods.

A market recovering due to a rate slash by China is not the same as a market bounce on trading or corporate fundamentals. So, before everyone starts jumping for joy, I would consider that while this might have been another Band-Aid on the wound, it’s not a cure for the overall issues that led to this month’s selloff.

What will happen over the coming weeks is that the traders and investors who have been bottom picking will be trading scared and will be the first to bail out. That will cause the next leg down. Or, they, along with other investors will sell into rallies in fear of another selloff, which causes natural resistance.

The problem is that this economy is floating on many false assumptions. Instead of growth from producing and selling products, the economy’s growth comes from artificially low interest rates, layoffs and cost-cutting.

Even worse, no one from either side of the political aisle stands out as a leader who understands real fiscal policy. And we all must remember that the Federal Reserve is out of bullets.

One of the concepts investors have to understand is that the market does not always have to bounce and if it does, a trader can be right about a bounce and still get blown out in the process of waiting for it.

To anyone who says, “The market has to do ___,” I always say: “Don’t ever tell me what the market has to do! The market is bigger and smarter than us all. And once again, it showed everyone from the small investor to the ‘masters of the universe’ who’s boss.”

My advice for young traders is to take a step back and realize that experiencing market moves like this will, in time, make you a better trader. Most young traders think there are two main positions — long and short. Traders need to understand that being flat can be the most profitable position since it allows a trader to think clearly. I’ve never heard one of my clients tell me they thought the market was going to go down when they were long.

Traders tend to talk their positions so my advice to the trader who has been rattled the past few days is to step back, get flat and don’t worry about missing moves in the market. I have been going home flat since early last week which has allowed me to trade intraday and make the most of the markets movement. Being flat has allowed me to sleep very well the past few nights.

Do not worry about missing out. I remember in 1987 feeling like that would be the last time to take advantage of a market move. We have seen and will see many more in the years to come. The key to trading is to cut your losses and to be able to come back and trade another day.

Written by David Greenberg of CNBC

(Source: CNBC)

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