Buy the dip?

By Jani Ziedins | Intraday Analysis

Nov 07

Markets sold off hard after Obama’s reelection, but most likely this is a buying opportunity for the brave and savvy trader willing to take heavily discounted shares off of emotional and panicked sellers.

MARKET BEHAVIOR

A wave of emotional selling hit the market this morning as we dipped under 1400 and pushed close to the 200dma.  If we were looking for an enthusiastic purge day to clear the deadwood for an upside move, this could easily qualify as that day.  The market bounced at 1388 in late morning and held above that level for the remainder of the day.

Little surprise the emotional selling lead to the biggest volume we’ve seen in a couple of months.  The big question we are left wondering is if this was just the first day of a larger selloff, of if this was the high-volume capitulation point that will let the market bounce back from the funk it’s been in since September.

MARKET SENTIMENT

A lot of Republicans were devastated over the election yesterday and hit the panic button this morning.   It seems clearly obvious to some people who Obama is going to wreck this country and take the economy and markets along with it.  Isn’t that what was supposed to happen in 2009 too?  Yet here we are with a fragile recovery and a market that is higher by over 100%.  Now don’t get me wrong, I’m not an Obama supporter, but I’m smart enough to realize that the economy and recovery will continue chugging along no matter who is in the White House.  If people want to panic and sell you their stock at a steep discount, I say buy it.

Today was a dramatic move and everyone was watching the markets to see how it reacted this morning.  In addition to a selloff due to the election, we also broke under 1400 triggered a wave of technical of stop-loss selling.  No doubt today was a big day in the market, big enough in fact to change the dynamic of the people who are hold stocks.  The emotional and fearful sold by the fistful to the brave and the savvy.  This change in composition is what will enable the market to rally.  Hopeful holders are fair-weather owners and are demoralized easily.  Calculating buyers are far more confident and willing to stick it out.  A large chunk of available supply hit the market today and we should see far less in coming days.

TRADING OPPORTUNITIES

I’m not a day trader and don’t try to pick exact tops or bottoms.  I might be early and we could see a couple more days of weakness ahead, but the panic induced selling is creating a great profit opportunity for the contrarian that is willing to go against the crowd.  But remember, in cases like this it is more prudent to be a little late than a little early.

No doubt today could lead to a multi-day move lower, but I don’t think it will because bigger moves lower require lots of optimism to fuel the selling.  The market has been fairly pessimistic lately and the Obama reelection was the final nail in the coffin, not the first.  I expect most of the big money managers came into this expecting an Obama win since Obama has led in both popular vote and key swing states for most of the year.  I suspect most of today’s selling came from weak-kneed retail investors and their selling will dry up pretty quick.  In often the hardest trade to make is the right trade.  Right now the most difficult trade is buying this market.  Don’t jump in front of the steamroller, but look to buy soon after the market recovers its footing.

Stay safe

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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.