Markets sagged again today. The saving grace is the markets bounced off of the 50dma. Is this signs of strength and an imminent rebound, or the misguided rationalization of the Titanic captain commenting about the positive aspects of striking an iceberg?
Combining crowd psychology with economic pricing models, when people run for the exits at the first hint of trouble is a good indication the market is on solid footing and not overvalued. With such skittish holders, it is hard for the market to get overpriced since there is so much selling pressure at every turn. But on the other hand, when people start making excuses and rationalizing on how the fire in the corner is not that bad and it probably isn’t a big deal, that is when the crowd has become complacent and the market is likely overvalued because people are reluctant to sell. With a lack of seller representation, the markets will be skewed to the high side.
Applying that logic to this market, we need to ask ourselves, is the market panicked over this pullback, or is it rationalizing how the 50dma is providing good support and is creating a buying opportunity?
The market is vulnerable here, so be on high alert. It is better to be out of the market wishing you were in, than in the market wishing you were out.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. 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 manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, 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 young children.