Stocks gapped lower at the open on renewed Euro fears, but recovered a chunk of those losses by mid-morning. We bounced off 1545 and are back above 1555.
The financial world is holding its breath over a savings account tax in a country smaller than many mid-western cities. The rebound from opening lows shows many investors think the fear is overblown and the anxiety induced selling is reversing. Europe has been a concern for three years and so far they managed to muddle through it without collapsing the global financial system, chances are this is just another bump on that road. The biggest fear is Cyprus sets a wider precedent and opens the door to similar moves in Greece, Spain, and Italy. It will be interesting to see how this story plays out over coming days and if European officials relent on their pressure for such a tax seeing how it could shatter confidence in Eurozone bank deposits.
As we discussed here many times, markets move on supply and demand, not news. News can affect traders expectations of the future and make them change their positions, but it is this buying and selling that changes prices, not the news itself. Why this matters is if news simply reinforces existing sentiment, it won’t move markets because no one adjusts their portfolio. This is why markets often shrug off good or bad news to the frustration of fundamental and news based traders.
Up to this point the market ignored headlines of negative GDP, ‘socialists’ taking over in Italy, and the Sequester. Will Cyprus really be the thing that finally upsets this teflon market? Market participants are already doubting the significance of Cyprus and using this dip as a buying opportunity. Buying weakness worked every other time this year, so that makes it a perfectly safe buy here, right?
While I’m not worried about Cyprus, the market is more vulnerable than it has been in months because the extended rally and assumption by many traders every dip is buyable. By mid-day it looks like the market is finding support and this dip has not triggered a wider avalanche of selling. This support in the face of seemingly dire headlines shows we are still in position to take out the all-time highs, but I’m not sure how much is left in the tank beyond that. It will be interesting to watch how the day closes. If the rebound continues and we close near flat, that will signal all clear and will make traders even more complacent about the next dip. On the other hand, afternoon weakness will put more pressure on the markets and could signal the start of something bigger. It’s not that Cyprus is a big deal, but it could be the final straw that breaks the camels back.
The market ignored far more meaningful economic news on its way to these highs, so why are we afraid some tiny island taking down the rest of the world? If we are weighing the significance of recent developments, negative GDP headlines, arbitrary Sequester cuts, and anti-austerity leadership in Italy are far more meaningful than some Mediterranean island. No matter what the market does from here, it won’t be because of Cyprus. Today could easily be the start of something bigger, but we’ve laid the groundwork for a pullback it would happen with or without this nudge from Europe. This mornings bounce shows the market is still resilient and new highs are easily within reach, depending on how we respond to those, this rally could continue to 1600 and beyond.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.