NEW YORK (TheStreet) -- Thursday proved to be a volatile trading session in the U.S. stock indexes. In what appeared to be a rout to the downside early on in the trading session, the indexes righted themselves and recaptured most of the losses by the close of trading.
The DJIA, which was down some 130 points early on, finished down 21.38 at 16846. The S&P 500 was down 2.31 at 1957.22 and the Nasdaq was lower fractionally at 0.71. The Russell 2000 was lower by 1.97 at 1180.71.
This stock market is becoming more and more difficult to trade. There seems to be a huge amount of hedge fund short positions in the S&P 500 that is proving to be a backstop for any major downside moves at the current time. When the stock market does sell off, the short hedge funds come rushing in to cover their positions. This is putting a floor on the downside and is causing the indexes to reverse to the upside.
Thus, as traders we need to be cautious and opportunistic in our trading style. There will come a day when the stock market returns to some sense of normal but for now this irrational market is the norm.
On the economic front, evidence continues to mount the consumer is getting increasingly squeezed on the back of rising costs as commodities are up 12% year to date and stagnant wages are up only 1.9% YTD. This is not a recipe for economic growth in the U.S. As I have said on many occasions, inflation accelerating within a "growth slowing" environment does not support a stock market that is near all-time highs.
It is quite simple when you consider what has happened to the U.S. dollar. As the dollar declines, commodities rise. This has been the common theme over the past few years. In addition, you have the 10-year Treasury bond continuing to rise as the yield falls. This is reflective of a slowing growth environment.
All of this is contributing to a negative U.S. Gross Domestic Product number.
In sum, having a risk management process is more important today than ever. If you are a trader, it is imperative to know when stocks are overbought or oversold. Then, acting on those signals will allow traders to stay in the game.
If you are a momentum trader, it is also extremely important to know when to sell. Most Wall Street pundits are perma-bulls. You will rarely be told when to sell.
On Thursday, I came into the trading day short U.S. Steel (X - Get Report). I added to my short position at the open when the stock was up and then proceeded to cover the short when X went down for a 1.8% gain. Apple (APPL) was a long position that I continue to hold and I am currently up better than 1%, also.
Again, having an algorithm process is critical. I am having a Free Chat Friday at www.strategicstocktrade.com. Please join in.
At the time of publication the author was long AAPL.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.