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Invest what you believe, trade what you observe

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In the past hour I was talking with a fellow trader and he quoted the above phrase. How true it rings. Investors put money into a stock long term on the belief that that investment will pay down the road over the long-term. Traders however observer things that are taking place over a much shorter-term time frame. Heck, I point out things in the Hot List that can have effect over the next 15-minutes, but have also pointed out today how YIELDS on bonds have been higher all day. Depending on what type of trader you are, you need to "filter" some of my comments as it relates to your trading strategy.

Trade what you observe

While it is the belief that rate cuts are good for banking stocks, what we are observing today may say just the opposite. Today's observation is that the MARKET might not think that a coming rate cut from the Fed is going to be enough for what the MARKET might be observing as a near-term problem. I have heard that there are some risks for banks as it relates to bad loans, but I myself don't know of any bad loans as being fact. Nonetheless, in the past I've said that "banks relish rate cuts" (my belief), but the past couple of weeks I've been pointing out my observation that this group looks weak.

S&P Banks Index (BIX.X) - last six months

In January I felt the banking stocks and perhaps the BIX.X would be a place for bullish traders to trade on the belief that rate cuts by the Fed would benefit the group. However, two weeks ago I outlined a bearish trade as my observations had this group looking weak. Many MARKET participants feel the Fed will cut rates soon, but this group continues to see selling. A close below 597 and 38.2% retracement could see the group trade 570. At least that's my observation.

Jeff Bailey
Senior Market Technician

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