Prepare a Plan for Today's Pain

"Pain dies quickly, and lets her weary prisoners go; the fiercest agonies have shortest reign."

-- William Cullen Bryant

The pain and agony in overseas markets continued overnight and the fear of an ugly Monday morning selloff are being realized. A major problem is that the yen has continued to strength against the dollar, and that is causing a broad selloff in the stocks of companies that export products because this essentially reduces their revenue.

Although the yen is the most obvious reason for the selloff, the primary reason is good old fashioned fear. Once the selling kicked in last week many folks found themselves with too much long exposure. They are now panicking and scrambling for the exits. The selling momentum is dominating and dip buyers are standing aside and that means the selling is taking place in a vacuum with no underlying bids. Buyers are now afraid to step up to take advantage of the weakness.

This sort of painful market meltdown is usually short-lived and leads to sharp bounces but it never feels that way when it is taking place. All that investors can think of now is trying to find a way to stop the bleeding. They are acting emotionally because they are feeling intense pain and that often leads to poor decisions.

The big question for us to contemplate is whether you should dump long positions into this weakness. Yes, the technical condition of the indices are now badly broken and you definitely should be trying to find ways to reduce your exposure, but a weak Monday morning open is probably not the time to do it. Often times you can relieve some of the anxiety by making small sacrifices of stocks that are trading down sharply, vs. wholesale dumping of positions into this action - that's as ill-advised as chasing a big gap up to start the week.

Many market players are looking for a quick snapback after the pummeling. It might not last long but it is practically a self-fulfilling prophecy and likely to surprise some by how quickly it will develop.

If and when it occurs, the key is to make sure you don't get sucked into thinking that everything is going to be fine and that we are going to continue on our merry way back to recent highs. A snapback rally will be the time to cut long exposure and consider potential shorts.

There is panic in the air this morning, which means those who stay calm have the chance to find some good opportunities. Stay tough, make a plan and move methodically. The most common reaction market players have after a major melt-down is that they didn't play it better.

Be sure to watch for Rev's "ETF Trader" newsletter, launching later this month.