Markets gapped lower at the open after Boehner’s Plan B crashed and burned. Overnight S&P500 futures dipped 1.7% but the market eventually opened down 1% this morning. The market attempted an early rebound, but that fizzled in the second hour and we are currently making new lows.
Technically speaking the market is still in good shape. We are well above the 50dma and currently holding above support at 1420. While the headlines are scary, the market is not in a bad position yet. Of course the big risk comes from a potential wave of supply hitting the market if we break these key levels and trigger a lot of new selling.
Right now the market is suffering a crisis of confidence. The recent rally priced in a fair amount of optimism over a timely resolution to the Fiscal Cliff, but yesterday’s developments put that in doubt. Many of the buyers who were sucked in by the “everything’s fine” aura put off by the market are fleeing in droves. The question is if this new selling will shake the confidence of previously steady holders. A lot of traders are apprehensively sitting at their desks with their finger on the sell button this morning. If further weakness develops and we start making new lows, these potential sellers will hit the market with a new wave of supply.
I’m actually surprised at the market’s reaction to the failure of “Plan B” because Plan B was dead on arrival between the Democrat controlled Senate and Obama’s veto. Of course these fractures in the Republican party give Democrats the upper hand; united we stand, divided we fall. A lot rests on Boehner’s shoulders right now. He can put forward a more moderate plan that would win the endorsement of moderate Republicans and Democrats. Or Boehner could let ideology trump reason and stubbornly push an all or nothing agenda. Boehner will cave at some point, but politics is a game of showmanship and expect Boehner to put on an act for his constituents before letting a deal happen.
There are three reasons the market will sell off, changing fundamentals, normal swings in supply and demand, and a wave of emotional selling. I’m assuming the Fiscal Cliff deal will get done eventually, so the fundamental picture doesn’t change much. We were poised for a normal pullback after the strong 100 rally in a month. These are modest corrections and don’t go too far or too fast. And there is emotional selling, the most unpredictable of the group. The on trait often seen with emotional selling is it often goes further and longer than anyone expects. The post-election selloff is a perfect example. The thing we have to watch for here is if this is just a normal rebalancing of supply and demand, or if it turns into an irrational and emotional selloff. We should know pretty quickly if this thing finds support or selling gets out of hand.
Markets are lower, but the losses are not accelerating in the first couple hours of trade. We are standing on a trapdoor, but it hasn’t opened yet and it might not open depending on what other market participants think. If we hold these levels, anxious owners will start to relax and buyers will begin nibbling. But if the market cannot find a floor, selling will pick up as we break through levels of concentrated stop-losses at 1420 and the 50dma.
How to trade this. Long-term holders should no watch the intraday market, it will just shake your confidence. Look back at the reasons you bought and make sure they are still valid. If so keep holding and mentally prepare yourself for potentially more downside before things rebound. Swing traders, watch for a buying opportunity, but don’t get in front of this selloff. Let things settle down before jumping in. This might be a modest correction or it could turn into an avalanche. In cases like this it is better to be a little late than a little early. Shorts should start looking for an exit to lock in profits. You can hold for a little longer, but don’t get greedy. The market and economy have not fundamentally changed, so don’t expect a major market crash. We will find a floor over the next few trading days and if you don’t lock in profits, you risk giving them all back. And for those considering putting on a short today, you are risking have this market snap back in your face. It is best to get in ahead of these things because chasers almost always end up holding the bag.
AAPL is holding up fairly well all things considered. It gapped lower at the open, but is still trading above the daily lows as the market is making new lows. This behavior shows most of the weak holders in AAPL have already sold and there is some price stability as the new owners are much more willing to sit through some volatility.
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.