Stocks slipped under 1,800 in midday trade as dip buyers were unwilling to defend that support level.
Stocks go up and stocks go down. We had a strong, 150-point rebound from the October lows and no matter what side of the fence we fall on,we shouldn’t be surprised by occasional selling along the way. The bigger question is if this is just another routine, buyable dip, or the start of a stumble into year-end.
To bounce we need dip buyers. These are either bargain hunters who find deals too good to resist, or regretful traders who missed the prior run and jump at the chance to get in at earlier levels. Since we are only one percent from all-time highs, we can pretty much eliminate bargain hunters as a source of support. These buyers wait for better discounts and will holdout until at least the 50dma before finding prices too attractive to resist.
Without bargain hunters, that leaves us dependent on chasers to continue pushing us higher, the proverbial next greater fool. While these people are always out there, we want to know how much money they have left to throw at this market. Given the strong move since the start of the year, we can assume many of the chasers prepared to buy this market have already bought. While there are mountains of money stashed in savings accounts and bonds, that represents a multi-year story as it flows back into the market and has a limited impact on day-to-day trading.
With everyone justifying why we should own stocks at these levels tells us these people are already fully invested. With fewer skeptics to convert into buyers, that makes it more likely the market will struggle to continue making strong gains. Prices move when people change their minds and trade that new outlook. Since many are now comfortable owning this market, that means we might be running out of new buyers.
Rallies go far further and longer than anyone expects. There’s been a loud chorus calling for a pullback since March, yet here we stand 300-points higher. There is no reason this remarkable rally needs to stall out here and we could easily surge another 50 or 75-points into year-end and the buying frenzy continues.
With limited upside and material risk underneath, the risk/reward favors locking in profits and resisting the urge to buy the dip, at least for a little bit. The most aggressive can short this violation of support with a stop above it.
Plan your trade; trade your plan
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.