When Distribution Quacks Like A Duck

June 20, 2018

Although the broad averages have risen sharply in each of the last three sessions, none of these short-squeeze lollapaloozas has recouped the even bigger losses sustained earlier in the day. Do we detect a pattern here? The biztainment media seem to wax enthusiastic whenever stocks trampoline off some ugly low like Tuesday’s. But we shouldn’t lose sight of the fact that if the three-steps-down, two-steps-up dynamic witnessed in recent days were to continue for long enough, the Dow would eventually fall to zero.

That will never happen, of course, even when the trumpets sound from on high. But it is a good description of how bear markets typically unfold — i.e., with shares initially falling on most days, gaining momentum until sellers are spent; then, rallying so spectacularly as to fill the crippled, wounded and maimed with hope. “Hope” is the last thing an investor should want to feel, the last refuge of the loser.

Don’t Get Sucked In!

I mention all of this so that Rick’s Picks readers don’t get sucked into what feels like flagrant and pernicious distribution lately by the smart money. For all of us, of course, it is ultimately about making money no matter what the market does, and we should expect to do so regardless of which way stocks are headed. Today, for instance, a SPY chart posted in the chat room by “Nervis Novice” prompted some Hidden Pivot analysis that caught the exact-to-the-penny 273.53 low of a plunge that saw the Dow down more than 400 points at low ebb. A timely interpretation of Nervis’ chart allowed subscribers to buy expiring June 275 calls at or near their low of the day, 0.42, for a quick and easy doubler. (The options nearly tripled, actually, trading as high as 1.16 before the session ended.)

Unless stocks are headed into summer doldrums — always a possibility — there will be opportunities galore to leverage Wall Street’s madness, which seems to be intensifying. My suggestion is to tune out CNBC and all the rest — especially when they are talking about tariff wars — and focus solely on price movement. You will be amazed to discover how stocks drive the news rather than the other way around.

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