Markets opened up and pushed higher in early trade, but have since given up most of those gains by late morning. It doesn’t appear the recent selling in the indexes could be described as irrational panic selling with the tell-tale giveaway of wild moves on high volume. But if it isn’t panic selling, is it real selling? And if it is real selling, should we be concerned “smart” money is moving for the exits? Could this be what we are seeing as every attempted rally is exploited by big money to liquidate even more of their long positions? Like the tortoise and haire, quick sprints down are unsustainable and often signal a climax, but the slow and steady tends to grind down for a while. No doubt we’ll see up-days here and there, but will they have the conviction and support to reverse the new trend and sentiment taking hold in the markets? And of course the thing to watch for is when the scale tips and complacency turns to fear as market participants start rushing for the exit en mass. That tipping point will be a good setup for a reversal, but it will lead to some sleepless nights for anyone still trying to hold equities. The advantage of this scenario for the nimble trader is these oversold conditions present great buying opportunities for those in tune with the market.
No doubt the above scenario is just one of several possible outcomes for the market and we need to watch closely to identify and trade the one that is playing out. This could be nothing more than a quick shakeout to refresh the recent rally and we continue higher from here because not all sell-offs need a climax to rebound. We could simply see the selling pressure exhaust itself and the correction ends with whimper as the market resumes higher. But using history as a guide, a sustained 12-month rally is exceedingly rare and we should expect some gut-wrenching volatility even in the most bullish of years. If trading stocks was easy, everyone would be rich, and as we all know that isn’t the case. We should always expect the market to throw us curve-balls that rattle our resolve and tempt us into doing something stupid and the key to making big money in the markets is resisting the markets deception. Unfortunately that is a lot easier said than done.
FB bears are coming out of the woodwork demonstrating there is some counterweight to this seemingly euphoric trade. I’m not sure how many are simply skeptical vs how many will actively attempt to short the stock, but a certain level of skepticism is necessary for any stock to move higher because structurally if everyone is bullish, then there is no one left to bid up the price. The one significant headwind for a FB investor is it takes far more buying to push a $100b market cap stock to $200b than it takes to move a $2b company to $10b. This is simply the laws of diminishing returns. The unfortunate thing for us retail investor is FB didn’t come public years ago to give us the opportunity to ride that wave up to $100b.
It is interesting to see gold selling off in the face of renewed Euro troubles. Wasn’t this supposed to be the safe harbor to protect investors from money printing and inflation? It might ultimately play out that way over the long-term, but it seems like gold is at the very least temporary correcting from an overbought condition. Too many people were seeking refuge in gold and that imbalance invariably leads to a reversal.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.