The Power of a Love for Profit Taking

It’s strong and it’s sudden and it’s cruel sometimes

But it might just save your life

That’s the power of love…

–Huey Lewis and the News, “The Power of Love”

The power of love is a curious thing. And when it comes to the love of protecting profits, Wall Street traders are fond of exercising that power, particularly before a long holiday weekend.

For the past two trading sessions, we’ve seen this love unfold, as Thursday’s rather broad drubbing of 3.5% on the S&P 500 and nearly 5% on the NASDAQ Composite was followed up today by a selloff of another 2.3% in the S&P and another 3% in the Nasdaq after the first two hours of Friday trading.

Yet the selling here should not really be too much of a surprise to anyone who followed the markets in August. Stocks were much too exuberant during that month, and to give you an idea of just how exuberant things were, consider that during August the S&P 500 was only down four days! That’s right, we only saw four down days during the month.

That kind of upside is simply unsustainable, so it should not be a surprise that we have seen some selling into the long Labor Day weekend. It also shouldn’t come as a surprise that we’ve seen bigger selling in the market segment that’s made the biggest move higher this year, technology stocks.

The selling is especially understandable if we consider all of the unknowns still swirling around this market like hungry, bearish vultures.

Let’s take a little inventory of those unknowns and unresolved issues that could put a big hurt on this market going forward. Here’s just a shortlist of candidates that, if they break bad, could make the past couple of sessions seem tame by comparison.

• Coronavirus: Will new cases continue to recede, or will we see another fall wave hit alongside flu season?

• Economy: Can the recent trend of improving metrics continue, and if they do, will that delay or even block the next candidate, stimulus?

• Stimulus: Will Congress finally come to an agreement on a much-anticipated coronavirus stimulus bill that meets market expectations ($1.5 trillion is what’s anticipated)?

• Politics: Will the presidential election polls begin to tighten now that we are just two months away from the vote, or will the markets more fully price in a Biden presidency and a potential “Blue Wave” that sweeps Democrats into power?

• Vaccine: Will we get a COVID-19 vaccine and/or a game-changing therapeutic that will help get the world back to some semblance of economic and social “normal” over the next six months?

As you can see, there’s no shortage of unknowns to grapple with here if you are an investor. Yet it’s important also to keep in mind that preholiday profit-taking is not only extremely common, it’s also to be expected considering the aforementioned remarkable August we just had.

Check out the chart here of the major domestic indices last month. As you can see, we saw an unsustainable, record-setting run to multiple new highs.

The key takeaway for you here is that this pullback was long overdue, and in the big picture, it will be healthy. The reason why is this pullback sets us up for more buyers to come back into the market as stocks lop off a little of that August froth.

The bottom line here is that stocks were way overdue for a pullback, and so traders sold equities and took some risk off the table in front of the Labor Day holiday. This is all part of the ebb and flow in markets, and there is no need at this stage to be panicked or overly concerned about the future of equities.

They will be fine, and they are still very much ensconced in a bull market.

Yes, that can change quickly, and perhaps this is the beginning of such a change. Of course, we won’t know that until it happens. Fortunately, the strategy of consistently adding to the stocks in our Income Multipliers Portfolio, along with the strategy of following the short- and medium-term opportunities in our Tactical Trends Portfolio (TTP) will allow us to profit from the flux.

So, with that assurance in hand, I urge you to go out and engage in your own version of a Labor Day “labor of love.” After all, if you don’t love your life, then isn’t it about time you start doing something worthy of the power of love?

Choose to make it a fantastic holiday weekend.