Aug 20

Putting today’s selloff in perspective

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 stumbled Tuesday, shedding 0.8%, but this selling shouldn’t come as a surprise. August has been a volatile month for stocks, and the previous two days of substantial gains left us vulnerable to a normal and routine step back. While this 0.8% loss would be significant in calmer times, it is quite a bit smaller than the gains and losses over the last few weeks, and it should be taken in that context. Noteworthy, but not alarming.

More importantly, the S&P500 finds itself near 2,900 support. This is after multiple dips under this psychologically significant level over the last few weeks. Trade tensions flared and recession fears spread over the previous few weeks, causing many investors to shift to a defensive posture. But rather than devolve into a downward spiral of selling, supply dried up under 2,900 and prices bounced. That’s because confident owners remain stubbornly confident. It is hard to trigger a waterfall selloff when so few owners are interested in selling their beloved stocks. When traders stop selling the headlines, they stop mattering. And there is a good chance that is what happened here.

This afternoon’s close pushed prices back to 2,900 support. And while this development is noteworthy and worth our attention, the longer we resist selling off, the less likely it is we will selloff. That’s because market crashes are breathtakingly quick and unravel before most people realize what happened. This “crash” is entering its third week. If this market was fragile and vulnerable, it would have crumbled weeks ago.

If the S&P 500 tumbles under 2,900 support over the next few days, we have to adopt a defensive posture, but if prices bounce back above this key level, that is our buy signal. We trade the market, not the headlines. No matter what we think is going on around us, the only opinion that matters is the market’s.

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Tags: S&P 500 Nasdaq $SPY $QQQ

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