Exactly three weeks ago, I wrote a piece titled, ‘Is a Market Reversal Coming?’, in which I talked about the folly of making market predictions and my accuracy when I make such predictions.
I openly admitted to the fact that my predictive capability was 50/50 at best, since I get it wrong as much as I get it right.
This has been proven once again, where the market continued to surge upwards from 2040 when this piece was published on 17th March, to a recent year high of 2075, before declining in the past couple of days back to 2045.
Market analysis is based on probabilities, and I stressed that I was concerned about the market struggling to break through the technical resistance of 2100, with the market having already become overbought over the past few weeks since mid-February.
In other words, there was a higher probability which the market would fall back to January and February lows, or almost 10%, compared to a possible gain from trading of just 4% before it reaches the 2100 resistance barrier again. (See attached chart)
The risk to reward ratio simply was not there to trade the bullish side.
With the market falling back towards the level of three weeks ago, where is the market heading next?
Again, I have no idea, but I do believe there is a higher probability at least in the short-term, of a further market pull-back, from current technical over-bought levels.
Personally, I have begun shorting the S&P500 index to hedge our long term exposures for our managed funds, even though we hold over 70% in cash, waiting for a market pull back to take advantage of.
Only time will tell if this is the right move based on probability.
I would always rather be safe, than take silly risks when there is no need to in this volatile environment.
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