Pull Up Your Shorts!

Stocks rose sharply in volatile trading on Wednesday as surges in retail and energy shares helped Wall Street regain most of the steep losses as the market breached bear territory.

As of Christmas Day, the Dow and S&P 500 was down almost 15% for the month, with the Nasdaq down a little more than that. It’s been an awful month in a terrible quarter, featuring the worst Christmas Eve trading session ever.

In retrospect, the last time valuations were around current levels certainly proved a great chance to get in. The S&P 500 has handed investors a 56 percent return since the start of the final quarter of 2013, a period that includes the near 15 percent tumble in the index this month. And earnings growth has been much stronger this year than earlier this decade, a trend that many see continuing thanks to solid U.S. job and consumption growth.

A market correction (a drop of 10 percent or more) is often a leading indicator of the possibility of a near-term recession as investors sniff out a potential slowdown in consumer and business spending that could hurt corporate profits.

But by several key measures, the economy is in its best shape in years, posting its strongest six-month stretch since 2015 and poised to reach 3 percent growth this year for the first time since 2005. The 3.7 percent unemployment rate marks a half-century low and heralds faster wage growth for American workers. And retail sales have been robust. That’s important because consumer spending makes up a majority of all economic activity.

Some analysts bumped their projections on some of the more notable tech stocks which, in turn, made many investors cover at least some of their shorts. It’s hard to hold on to bets against the market when there is even a hint of good news.

I did close out part of my hedges at a nice profit into the carnage which freed up some money to add to some of my solid positions that pay steady dividends. I already took care of tax-loss selling and am prepared to hold a nice cash position for the foreseeable future. If the market rallies big into the new year, I am ready to put on more hedging.

One thing I always look for in rallies is to see what stocks are up with the market and which ones are not. If a stock isn’t going up with the market, I want to steer clear of it. If a stock goes down more than the market when the market falls and rises less than the market when it goes up, it send a clear signal that it may not be a good position to own. The ones that are rebounding along with the market are the ones I want to keep an eye on for buying when they go back on sale.

While some economists see elevated danger of an impending recession in the U.S., indicators ranging from the job market to manufacturing PMIs still suggest solid growth. However, we have to remember that we never really feel the pain of a recession until we are already knee deep in it!

Whether we become submerged in a full-blown bear market or the bulls find a way to actually maintain a sustained rally is yet to be seen. Either way, I expect continued volatility in the markets. In fact, sometimes the fastest and largest rallies can be seen during a bear market. That’s why it pays so well to be flexible and make smart moves when opportunities present themselves. These minor adjustments can make a huge difference in your long-term portfolio.

For now, just understand that short sellers must follow discipline and unleash their hold on the downside when there is any hint of positive news in the markets. However, it doesn’t mean that we give up being cautious (which includes holding a strong cash position) and maintain well-balanced portfolios. React to market movements in the context of your goals. Identify when you need the money that you have invested, how much you need and how important it is that you have that money.

However, keep in mind that the markets are forward-looking instruments and if they are giving us warning signs of a recession in the future, we shouldn’t ignore the message…

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