Now that we have had a good bit of pain the question becomes, what do we do now? If you are reading this today, chances are you haven’t yet thrown in the towel and while you may have experienced a few lumps, I am hoping that you are still in a position to recover and move forward.

Fear and greed are the two basic emotions that move the markets and it is imperative we strike a balance between the two. Greed has kept the markets moving higher and fear is what got them tumbling in the final 2 hours on Tuesday. They key is to recognize this and not fall victim to one emotion either way.

There are a few truths we need to remember before we go into today.

1.) The averages while shaken, remain technically ok. Until we crack further, the last few days remain a nasty shake in an upward trending market.

2.) Short interest is at all time highs. This means that more people are betting against the markets than ever and at some point they need to cover. Rarely will the masses be right in their convictions and rarely do markets completely fall apart when short interest is at highs. I don’t like the technical action however I am ready for some big bounces if the trend now changes to down.

3.) Patience is your friend. Just because you took a few hits yesterday does not mean you have to make it up today, tomorrow or the next. For lack of a better term, remember how ‘easy’ it was a few short weeks ago to add gains. This fish in barrel shooting episode has past but fighting in an environment that is not set up for a win, can often create more damage. Remain patient and let others do the heavy lifting before you step in.

4.) Don’t change your thesis, if it is broken step aside. This is an environment where it is very easy to start moving from a trader to an investor. I don’t care how cheap something looks, it can easily become cheaper. If it is broken and does not fall within the rhyme and reason of why you bought the stock in the first place, don’t change your thesis, hit the eject button and move on.

5.) Live to see the other side. Real traders are made by how they handle adversity. Markets will go up and markets will go down. They have since they started under the Buttonwood Tree. Understanding that adversity is all part of the game and is Mr. Market’s way of shaking things up and separating out the weak from the strong.

6.) Remain open minded. Just because of yesterday, don’t start adopting the ‘world is falling apart thesis.’ We bounced back from a 400 point drop in February like it was nothing, and could easily do the same. If you stick your head in the sand, you will convince yourself that the action is not worth playing even when it does improve. Stay open minded, stay flexible and be prepared either way.

It looks like the market is poised for a bounce this morning, which is not surprising after yesterday’s sharp sell off and poor close. If you need to, take the bounce opportunity to lighten up a bit. Be productive and start to develop a list of stocks you want when the dust settles. Hang in there, and as always, keep on moving forward. It is a marathon and not a sprint.

Trade ‘em well today

~ Quint