Markets closed on the day’s low but most likely we’ll find support at these levels for a couple of days before we see further declines. An Obama reelection is setting up nicely for “sell the rumor, buy the news” trade. The most unexpected outcome is for the market to rally after an Obama win and that is exactly why it will rally.
Markets ended modestly lower after yesterday’s big selloff, but still held up relatively well given the last several days of trade. We mostly arrested the decline and did not trigger another day of avalanche stop-loss selling, but the market did close on the day’s low. What does that mean for tomorrow? Will we see more sellers get shaken out as we undercut support at 1400, or did today’s weak close induce most of the selling and we’ll see prices rebound tomorrow?
The impetus is on bears to continue pressuring the market. There were a lot of latecomers selling and shorting today, but usually the obvious trade is the wrong trade. That leaves us trying to figure out which direction the largest number of gullible traders are going; are they anticipating a market crash, or are they buying the dip?
Today didn’t feel like a lot of dip buying and we saw the shorts pile in over the last hour of trade. Of course selling often begets selling and declining prices can transform a confident bull into a spineless seller in no time. But those cases are extreme and reserved for infrequent market crashes. We are not crashing here, just correcting from an overbought condition and as such, we are already a good way through this correction.
Volatility is picking up as fear is creeping back into the market. But any bull should be excited about this transition because we need fear to rally. Fear is what keeps traders out of the market and watching from the sidelines. But over time those traders wade back into the market and their buying pushes prices higher for the trader savvy enough to get in early.
My honest assessment is we will find stable footing for a couple of days, maybe even see a rebound attempt as bottom-pickers rush in and shorts get chased out. But not long after we’ll see another leg lower once that buying dries up. Then as quickly as the market drops and pierces support, it will bounce back from a climax bottom. And of course all of this lines up nicely with the impending election. I expect weakness anticipating an Obama reelection and a rally after the election when the market moves past politics and focuses on whatever new obsession it discovers.
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.