From the desk of Tom Bruni @BruniCharting

The TSX Composite is down roughly 6.75% year-to-date, with stocks getting hit hard since their July 13th, 2018 high. Only one sector is positive over that time period, but I think its recent action gives us a really good perspective on the type of market environment we're in.

Counter-trend trades are lower probability by nature, which means risk management is vital both when they work and when they don't. Taking the loss and reevaluating when the trade thesis is invalidated is something most traders think about, but managing risk on a trade that begins to work right away is just as important and not discussed as often.

Today I want to look at the importance of managing positions that begin working right away, so that we can avoid winning trades turning into losers.

Small-caps have been lagging for most of the year with that trend really accelerating in May, posing a major headwind for the broader market. One thing we were looking for before putting cash to work on the long side was a sign(s) of risk appetite for stocks, which we're seeing for the first time in a while. The question now is will it last and how does it affect our portfolios?

I've just updated the Monthly Chartbook, and although October was a rough month for the equity market, our opinions really haven't changed all that much from last month in terms of trend and risk management levels. With that being said, I want to use this post to highlight a few things that stuck out to me.

I am really enjoying these conversations with Phil Pearlman. This is the 3rd episode we do where we're discussing important topics about our feelings and emotions. Today's topic is Grit, and the advantages that someone with grit has these days over those who don't. Taking a loss and moving on is not just part of investing, it's part of life. In this conversation we discuss the Bond Market and the implications of U.S. 10-year yields losing 3% and why Phil is Bullish Grit going into 2019.

Here is the second episode in full:

The last two months have not been kind to India's stock market, which is why we've been approaching it from a more neutral perspective for most of that time. Although big selloffs are never fun, the progression of this trend from its start to now has been pretty orderly.

We want to use this post to lay out that progression for educational purposes, as well as update our views on the market now.

For this entire month we've been discussing why a continued neutral approach toward equities was best and what we needed to see to get more aggressive on either the long or short side. The bull case has been building all month and after weeks of patiently waiting the market has finally given us the last piece we needed to get involved, a well-defined risk level.

Welcome to the new market regime, young lads. Many of us, and many more that are way older than me, have seen plenty of bear markets. At our shop, we rely heavily on global markets to give us information about stocks as an asset class, so we're accustomed to seeing bear markets all the time. It's nothing new to us. But I understand that many of you are new to this whole up AND down thing. It's normal, I promise.

Today I want to stress an important point that I think gets forgotten: The biggest stock market rallies come in bear markets! You don't get 6% rallies in the Dow when we're in healthy uptrends! You need serious volatility to spark something like that, and it only happens when risk is extremely elevated. I'm sure you've noticed that we’re getting much bigger down days AND up days in the market lately. This is not characteristic of the type of environment where stocks are going up. It’s the type of behavior we see, historically, when stocks are going down. This is one of many reasons why we’ve wanted to sell ...

The market is a beautiful thing. We have uptrends and we have downtrends. We weigh the evidence regularly to determine which one of these we’re in, or if it's a sideways trend. Our approach to the market has to depend on the market environment we have. In other words, we have to play the cards we're dealt, not the cards we might want. So we first determine how we want to approach the market, and then we decide which vehicles would be the best way to express that thesis.

Here are a list short ideas that I think present favorable risk vs reward opportunities:

From the desk of Tom Bruni @BruniCharting

Over the weekend I ran the performance metrics of the Russell 3000's Sectors and Industries to get some perspective on where the leadership is since the S&P 500's high on October 3rd and year-to-date. In this post I just want to share this table and talk about some of the themes I see.

From the desk of Tom Bruni @BruniCharting

On the blog we've been discussing why a more neutral approach to the market is best, as well as what we're looking for to mark a tradeable bottom. Last week we saw an expansion of new lows and stocks hitting oversold conditions in the Russell 3000, however, we are beginning to see some improvements in its daily momentum readings.

When the weight of the evidence is pointing in one direction as it has been from early 2016 through mid-2018, it makes sense to be aggressive and take advantage of the clear trends while they're intact. However, when conditions change and the evidence becomes mixed, a more neutral approach is appropriate. So what does that look like from a practical sense?