This week almost every equity fund we track went from working off stop-losses to gapping higher and triggering buy-stops a day later. Though none of the gaps left any of the ETFs overbought, some of the gaps were sizeable enough to make an immediate switch reaction of questionable value, especially given the circumstances leading up to the stop-loss/buy-stop cycle.
The fact is, when prices move a lot in a short time, they can be expected to retrace some of that gain or loss in due course. A corollary to that expectation is that “all gaps are filled”. The latest round of stop-losses occurred in March when the war in Iran broke out, oil prices soared and stocks gapped lower. The latest round of buy-stops occurred this Wednesday after the Tuesday night obliteration of Iran’s bridges and power plants was called off, a ceasefire was implemented and stocks gapped higher.
War and negotiation are two exogenous circumstances that invariably provide an immense amount of uncertainty. Flipping back and forth between the two generates even more volatility in the marketplace. To avoid being whipsawed, I’d suggest this week’s buy-stops should be acted on after delay. Wait for the price to retreat to the low end of the gap and buy then. With a ceasefire set to expire in 10 days lower stock prices are likely to come down soon.
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