In our June 6 Watchlist Update, we asked if the market low was already in.
At the time, the lows from May 20 were holding across the major indexes, and we saw a bullish follow-through day on May 26.
By then, the market was about 7% off those lows, and it looked like the S&P 500 was potentially setting up in a bullish consolidation range.
I also said that “unless the May 20 low is breached and the market begins another leg lower, I am now bullish on the market and looking for long trades.”
Well, that didn’t last long…
As you can see in the chart of the S&P 500 Index above, stocks broke down heavily over the past three trading days to breach the May 20 low.
Thankfully, however, I was able to save my Alpha Stocks subscribers from taking extra losses when the market gapped down on Monday…
On Friday morning, I sent the following text message alert to Alpha Stocks subscribers…
“The market is selling off on heavy volume. Poor CPI numbers showed that inflation has not peaked and in fact has increased.
Exit all remaining Alpha Stocks positions. We will cover this in more detail in Monday’s live session and re-position next week.”
So, yes, I went from being bullish on the market to recommending subscribers close out all of their Alpha Stocks trades within just about one week.
Some might call that flip-flopping, but I call it being nimble.
Your ability to get into and out of positions quickly is one of the most important skills you can have in a trading environment like this.
But the bigger point here is that I saw something that told me to exit the markets on Friday ahead of yesterday’s bloodbath.
So, what was it?
First of all, we saw a big distribution day last Thursday.
In the June 6 Watchlist, I mentioned that I wanted to see additional accumulation and stocks move up on increased volume.
Well, Thursday showed us exactly the opposite.
Instead of accumulation, we saw distribution on heavy volume, with the S&P dropping 2.4% and the Nasdaq falling 2.7%.
And if you refer back to the chart above, you can see that this was the day when the market broke below the horizontal lower boundary of the short-term consolidation range.
Of course, this was all in anticipation of the big inflation report the following day.
We already covered the inflation report a bit in Monday’s update, but let’s review some key points to show why the market got spooked heading into the weekend.
The CPI rose 8.6% in May, which was a new 40-year high. Even the “core” inflation number, which excludes food and energy, was up 6% year over year.
Energy prices were up sharply month over month, while food costs showed a month-over-month gain of 1.2%.
Shelter costs showed the fastest one-month gain since March 2004, according to CNBC.
Basically, this report put to bed the idea that inflation had peaked, which in turn sparked a bit of a panic on Friday.
That’s when I knew that we couldn’t just sit idly by.
Not long after the market opened, I alerted Alpha Stocks subscribers to exit all of the remaining portfolio positions.
When Monday rolled around, things got even worse.
Everyone must have been watching and reading the inflation news over the weekend, working themselves up more and more heading into Monday’s session.
Because when the opening bell rang, the S&P 500 was lower by another 1.6%. It and the other major indexes cascaded lower throughout the rest of the session and ultimately closed at new lows down nearly 4%.
The expectation now is that the Federal Reserve and its Open Market Committee (FOMC) will have to go with a big rate hike at its next policy announcement on Wednesday.
At last month’s meeting, the Fed raised interest rates by 0.50%, which was already the largest hike in 22 years.
Now, some market participants are expecting the Fed to increase interest rates by an even larger 0.75% this week.
Whether the next rate hike is 0.5% or 0.75%, this is not going to be good for the markets.
Inflation is the Fed’s number-one problem, and I think they’ll do what’s needed to get it under control, even if it means crashing the markets in the process.
Once that became clear to me, I knew it was time to make an exit in Alpha Stocks so that our portfolios could live to trade another day.
And even though it was disappointing to exit early on Friday, it paid off as all of the stocks we closed ended lower on Monday.
Join Me This Afternoon
At this point, I’m looking for some new bearish plays to take advantage of this market environment.
If you want to receive an alert when it’s time to make the next trade for Alpha Stocks, consider signing up for today’s LIVE training session.
We have plenty of long ideas for the right stocks, but we’re also not afraid to go short. We short stocks and we also provide option alternatives if that’s more of your style.
And we get together every Monday for an hour-long live session so that subscribers can ask questions and get guidance about our trades.
If you’re ready to see what you could be missing out on, I’m holding a special session this afternoon in which I’ll discuss my strategy in more detail…
Embrace the surge,
Editor, Stock Surge Daily