Fin - Breakout - US

Purple Crayon: Sell Until You Can Sleep

Jeff Macke

In emotional markets, it's often best to take a step back and view the situation as dispassionately as possible. For some, that means a stiff drink. For others, it's a long walk or time with the kids. For me, the best way to remove the emotion of the market is by drawing pictures with a purple crayon. It's a habit that works out particularly well for me since I can actually call coloring "work."

Which brings us to another edition of the Purple Crayon, a look at the stock market through the lens of a straight-edge ruler and a nice, thick marker. I use a crayon not just because I'm adorable. I use it because crayon tips are thick. I give the market about 1 percent above or below key levels before I consider a move significant. One percent keeps me from over-trading every move and panicking in general.

All that said, let's get to it:

The S&P500: The Big Daddy of indices is looking dicey. The best case read is that 1,320 is going to hold. If it does, the likelihood is that a trading range is being established from 1,320 to 1,340. As always, these levels are approximate. Just as Tuesday's close at 1,345 didn't mean the market was breaking out to the high side, Wednesday's final print around 1,315 didn't necessarily portend a total collapse. That said, support below 1,320 doesn't come in until 1,300. Below that and we're talking another 5 percent to 10 percent lower. Don't shoot the messenger (though you're welcome to send all the comments you want).

The XLF Financial ETF: A simply horrible looking chart. Sharp rally, steep sell-off, no real support for at least 10 percent lower, maybe more. Goldman Sachs (GS), formerly the most important stock in the market and most powerful company in the world is getting subpoenaed. Again. If the charts look terrible and the industry's very business model is in question it may be best to avoid the sector. Just in my opinion, of course.

The XLP Consumer Staples ETF: The consumer staple group's performance is exactly why I use charts. The XLP consists of companies such as Hershey (HSY), Coors (TAP) and Coke (KO). These stocks shouldn't be higher because consumers should be trading down to generic brands. Yet the stocks are doing well and consumers are still buying. What's more, the earnings for many, if not most, of the companies in question just reported were solid, suggesting the ability to pass along input costs to shoppers. You can disagree with both my fundamental view and the chart but I'm looking to buy dips in select names.

The GLD Gold ETF: Yup, gold is still working. Yup, I'm talking my book. Would you rather I talk about stocks I don't like enough to own? Gold is still moving higher. Pick a reason, any reason. Global anarchy, printing press currencies, people wanting super heavy and shiny paperweights. None of it matters to me, in this case. Gold is moving higher and it's near enough to support to give me a safe stop. And did I mention the GLD is working? Because it is. That's a nice thing in these frightening times.

Remember, a 10 percent correction would be healthy for the overall market. Also remember that's there's absolutely no reason you have to hang around and chew your fingernails to the nub waiting for the selling to stop. Last summer the market sold off over 15 percent from the end of April to the beginning of July. You can't "buy the dip" if you don't have the cash to do so. This isn't a call to panic, it's a call for prudence.

There's an easy way to tell if you're taking too many risks with your portfolio. Ask yourself how you slept on Wednesday night after the 2 percent sell-off. If the answer is "not at all" it's time to lighten up your portfolio. Said another way: Sell until you can sleep.

We want to know what you think. Comment below or drop us a line at

View Comments (26)