To make market beating returns in stocks, you want to be sure to ride the big trends up when they occur, and employ some means of protection when conditions get difficult.

Therefore, you want to pay attention to trading days when the action is somewhat unusual, and may indicate a change in trend.

A true selling day is one of those days, and today we had one.  A true selling day was described by private trader Gary Smith many years ago as a day when all the major market averages are down at least 1%.

Today, the Dow Industrials finished down 1.02%, the S&P 500 was lower by 1.16%, the Nasdaq was down 1.14%, the Dow Transports were down 1.76% and the Russell 2000 was down about 1.3%.

Gary often used this signal as an opportunity to raise cash, and would go 100% to cash if another true selling day occurred before a significant buy signal.

The last time that happened was May 2nd.  It is not unusual to see this occur after a strong rally, as big institutional investors will take some money off the table.

However, I bring it up now because we have entered the weakest part of the year seasonally for the market, as August and September often spell trouble.

We are also getting some ominous news out of the financial markets, as the ratings agency Fitch suggests it may need to downgrade many of the banks it follows due to weakening conditions.

This news also comes on a day when economic data out of China was weaker than expected, and there are major concerns that the China economy may already be in recession.

Lastly, the yield on the 10 year treasury note is near its highs of the cycle, dating back to October, at about 4.22%.  Higher interest rates increase borrowing costs across the economy, and under certain conditions, can put pressure on stocks.

Personally, I’ve been quite surprised by the rally in stocks, but I would note it has been a narrow rally, as the Russell 2000 index hasn’t even been able to surpass its August 2022 high.

While tech, the homebuilders and a few other economically cyclical sectors have led the market higher, it will be difficult for them to continue higher if the banks come under pressure.

With all this in mind, it is probably a good time to get ready to play defense.

If you are looking for a program for analyzing stocks to better time your trades, check out Trendspider.