Markets continued sliding today, but the selling seemed to abate some by looking at the volume. Buyers are still a little gun-shy and we need their buying to put a bottom in this slide.
Markets continued the selloff and broke through the 200dma. Volume was lower than Wednesday, showing the mad rush of selling was slowing, but the decline continued because buyers were unwilling to step in. As horrible as things appear, we are less than 7% off a 52-week high. But that is a double-edged sword, while we are still having a great year, that also means there is a lot of air beneath us.
The 200dma often provides support in a bull market and testing that moving average is a healthy part of moving ahead. The question is if we are leaving the bull market behind and moving into a bear market where the 200dma becomes a ceiling.
The difference between this selloff and other selloffs we saw in 2011 and 2012 is this time sentiment was already fairly low before the selling started. Optimism is the fuel of selloffs because you need hopeful owners to spook out of the market. If everyone is already pessimistic, there are no hopeful people left and supply dries up, leading to increasing prices.
2008 was a different animal because while sentiment was already low after a yearlong bear market, traders still failed to understand the true risk of mortgage-backed securities and credit default swaps. So even though sentiment was already low, it was still far above where it should have been given the dangers the market was exposed to.
But how is that different from now with the European Debt Crisis and the Fiscal Cliff? The difference is today you can walk into any Starbucks and find a random stranger who knows the ins and outs of these impending crises. Back in 2008, even smartest people on Wall Street didn’t have a clue what a MBS or CDS were.
In the markets you can ignore what everyone is talking about because it is already priced in. That is the difference between 2008 and today. We’ve been talking about European Contagion for almost three years now and I can’t even keep track of how many Fiscal Cliffs there have been. Financial journalists could recycle articles from two years ago and no one would even notice, that’s how long we’ve been talking about this stuff.
The truth is no one can say for certain if we will bounce off of the 200dma or crash through it. Trading is a game of probabilities and we have to wait for the high-probability trade. As I’ve shared earlier, I think the market is setting up for a nice buy, but it is foolish to get in front of this steamroller. Let the gamblers try to pick the bottom. There will be plenty of profit left even if you are a little late to the rebound.
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.