In this post:

• • What month is typically a weak month for trading?
  • How a market could be compered to an athlete runner?

Hey Market Pilots,

February is typically a weak month, and while that sounds like no fun or detrimental to our accounts, we should keep a few things in mind when contextualizing it.

While the second half of 2020 and the beginning of 2021 have been extremely strong, we can’t expect our accounts—or the market—to go up all the time. The market can be viewed as an athlete that has just run a marathon or a sprint and needs to take a break to recover. This is what I see happening in February with its seasonal weakness, because January is seasonally strong. Therefore, it is reasonable to expect the market to take a breather in February and digest the moves it made.

This resting time can be accomplished with a pullback to support or a flag sideways. So far, I am seeing both develop. First, we saw the SPY pullback last week to the Daily 50 SMA and now I view the market as trending sideways. There can still be another move down in the market, perhaps even breaking below the Daily 50 SMA, but in the greater scheme of things, these moves are just the market seeking out support.
Individual names have done about the same thing as February approached. Some really pulled back, but many of those were because their January runs were so strong that they became severely overbought and had a long way down to find support. Others have stayed fairly level, just biding their time till the market finishes its resting phase.

Being able to call the “top”, or at least when the market is ready to rest, is important so you can reduce risk and exposure. Building up cash in your account when things slow down is how you keep your gains. But once that is done, you can see about hanging onto names that appear to have strong relative strength, and then simply wait for the rest of the market to get back into shape.

This recent activity, and the expectation that February is a weak month, have me very excited because I know there will be strong moves in a few weeks. These are the cycles of the market and if you know them, you can figure out when it’s a good idea to reduce exposure, and when it’s appropriate to push harder and lean into the moves. I welcome February and eagerly await this lull in the market. It’s when I can also take a break, study my recent trades, and begin looking for the names that will be top of my list when the market comes back to life.

Over and Out,
Your Profit Pilot.

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