Market gives back a chunk of the relief rally

By Jani Ziedins | Intraday Analysis

Sep 29

S&P500 daily at end of day

The market continued its indecisiveness and has chewed up anyone trying to anticipate the next big move.  Don’t fall for the market’s tricks and stick to sound analysis of supply and demand.  The market often convinces you that you are wrong before finally proving you right.

MARKET BEHAVIOR

Markets gave back a big chunk of yesterday’s relief rally.  Seems a bit of the bi-polar temperament is returning to the markets, but these 1% dips and rebounds are nothing compared to what we saw just a few months back.  While it feels dramatic because the markets have been so docile lately, keep everything in perspective.  The market continues to be relatively calm and the sky is not falling in spite of what you see reported in the financial press.

Selloff volume has been greater than rebound volume, but that is not unusual for selloffs when everyone is on edge.  Stealth corrections often do more damage than ones everyone is talking about, and without a doubt this pullback is front and center.  In-your-face corrections flush out the weak holders and rebound in short order.  It is the stealth corrections where everyone is lulled to sleep by complacency that have the potential to put a large dent in your portfolio.  All the chatter and fear in the markets today means the selling will climax and we’ll find our footing.  Remember, complacency is what allows bigger corrections to happen and I don’t think the market is complacent yet.

MARKET SENTIMENT

The market never wants to be easy and the long trade was getting a bit too obvious.  And of course if the long trade is too obvious, then a reversal becomes the second most expected trade by the cynics.  But to fool bulls and bears alike, the market throws in these whiplash head fakes to draw in both sides and then proceeds to humiliate and demoralize everyone.  Only after everyone is crushed and given up will the market reveal its true intentions.

There is renewed fear over Europe, yet again, but seriously, this story is three years old!  These recycled headlines are not the stuff that moves the market in major ways.  New and unexpected news moves markets, not something that has been over-analyzed ad nauseam.  Free and efficient markets are the most effective discounter of known information ever conceived and all of this noise is already priced in.  Anyone claiming what is going on in Europe, Asia, or the US is new and unexpected is deluding themselves.  Who is actually surprised that young and unemployed people in Greece and Spain are pissed off?  Really?  Common, give me a break.

So what does that mean for a trader?  Market reactions to these old headlines are not going to stick.  There are plenty of reasons the markets can head lower, but it won’t be any of the ones people are talking about right now.  Weak holders can get shaken out because of the headlines, but that selling dries up quickly and it becomes a great buying opportunity for the bold.  We will have a correction, just not yet.  The nervousness is too pervasive for the market to selloff in a material way.  We need more complacency before that happens.

TRADING OPPORTUNITIES

While there is still upside in this move, that doesn’t mean we have to sit through all these ulcer inducing gyrations and head fakes.  It is far easier to watch volatility this from the sidelines after cashing in decent gains from the earlier, easier, and more profitable portion of this rally.  Fools hold out for top dollar and only a gambler enjoys these market whips.  Buy early and sell early are the only way to beat this game and sleep well at night.  It is not wrong for an investor to hold for longer periods of time, but we are traders and our nimbleness is our greatest strength.  It would be a shame to give up the only advantage we have in this game.

Stay safe

Follow

About the Author

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.