The market traded mostly sideways and found support at 1350 the day after Wednesday’s plunge. Volume was elevated for such a modest move and a lot of shares exchanged hands with the weak selling to the bold.
The downdraft took a day off as there was a willing buyer for every desperate seller. The constructive thing is this churn is replacing skittish, short-term holders with more courageous, longer-viewed owners. All the Johnny-come-latelys who chased this Summer’s rally and were buying above 1400 are fleeing the market in droves. At a certain point they will all be flushed out and replaced with calm, cool, and collected value investors who smell profits in other people’s panic. Now this doesn’t mean the panic induced selling is over, but the lower we go, the closer we come to the end of this.
The Fiscal Cliff is all anyone is talking about, but the thing we have to ask ourselves is if the Fiscal Cliff frenzy can get any worse? Can Obama’s or Boehner’s rhetoric get any worse? Or are expectations of fiscal calamity already predicting the worst and there is nowhere to go but up from here?
The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap. On the other side, a huge number of skittish sellers has already sold, meaning the potential supply is dwindling by the day. This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk. There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.
The upcoming holiday week could obscure trading as many of the big decision makers are away from their trading desks, but if we look back at last year, the Monday after Thanks Giving was a huge reversal and showed early strength that turned into the best Q1 rally in decades. I’m not sure if the same thing will happen here, but it is certainly a possibility to consider, especially if we see constructive collaboration on the Fiscal Cliff.
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.