Another leg down

S&P500 daily at end of day

Markets added to the decline, clearly undercutting the 200dma and resting just above 1350.  Was this the capitulation point, or just the start of a bigger move lower?

MARKET BEHAVIOR

Big down day in the markets as we continued the Q4 slide on high volume.  The market is now 8% off the September high.  That makes this a material pullback, but still far from a major one at this point.  Remember, most often it is the slow-motion declines that do the most damage because people don’t notice it happening when the moves are not dramatic enough to make headlines.  Plunges like this get everyone’s attention and run their course fairly quickly.

Given the size and severity of the moves the last few weeks, I expect we have a hard bounce in our near future.  Will that be tomorrow?  Or will we have another few dramatic drops before bouncing?  I can’t say because my magic crystal ball isn’t working, but I do know the market doesn’t make huge directional moves without a dramatic reversal thrown in just to keep things from being too easy.

MARKET SENTIMENT

The bigger question is if this coming bounce will be a bottom or just a sucker’s rally before more selling.  That is the harder question to answer.  The market’s psyche is an interesting thing and it sure does its best to try to confuse even the most seasoned of investors.  There is enough uncertainty surrounding the markets that we should expect a return of volatile trade.  We’ve already seen those volatile down days, but also know there will be strong up days as part of this too.  Obviously the market can’t leave bears out of the pain trade for too long before putting the screws to them.

The Fiscal Cliff is the big thing on trader’s minds and the market reacts strongly to any comments out of our national politicians.  Today it happened to be Obama’s first press conference since being reelected.  But the thing to remember is the Fiscal Cliff is a completely artificial and manufactured phenomena that is 100% under the control of just a few men.  They might be playing a high-stakes game of chicken to leverage a stronger negotiating position, but remember this is all just showmanship for the cameras.  These guys will broker a last-minute deal because that is their job and any politician is too spineless to make a real stand and risk committing career suicide.

The thing to keep in mind when the news is hyping up how much damage falling off the Fiscal Cliff will cause our economy, they are quoting a Congressional Budget Office report that assumes we will go the entire year of 2013 without a deal.  I suspect we probably won’t even go a few weeks before a deal is struck, again our politicians don’t have any core values and will cave fairly quickly when the heat is on.  But honestly this is a good thing and part of why this country is so successful.  We need a compromise even if it is last-second and involves lots of posturing for the cameras.. The worst thing for us is ideologues throwing up permanent roadblocks and falling on their swords for their hardcore base.

TRADING OPPORTUNITIES

I didn’t expect today’s selloff and thought we might be firming up a bit.  No doubt expectation of a rebound will prove correct eventually, but in the markets being early is the same thing as being wrong.  This is why it’s good to have a defensive strategy in place.  No one can be right 100% of the time and success in the markets is about managing those losses when you are wrong so you don’t give back all the profits you made on the good trades.

I still expect the market will bounce at some point, but the market is not behaving the way I expect, so it is best to step back and wait for the market to start acting more predictably again.  Maybe that will happen on Tuesday as we bounce back from Wednesday’s selloff.  Or maybe we selloff for a few more days first   Either way the smart move is to wait for the right entry point.

The market could continue selling off here, but there is no way to guess how far and how long that will go, so I’m not going to short the market and will instead wait for the higher probability trade of buying the bounce and riding that for a quick swing trade.

Remember, we never need to be in the markets and the best place to be when the market isn’t behaving as expected is in cash.  There will always be future profit opportunities, but losses are forever.

Stay safe