This morning’s selloff wiped out all of last Friday’s employment bounce. We slipped under support at 1,800 in early trade and its been all downhill since then. The next meaningful support level is 1,780. Failing to hold that likely means a trip back to 1,760 and the 50dma.
Dip-buyers are MIA. Either they are sitting on their hands waiting for even better prices, or we ran out of them and this slide will continue until we reach levels far more thrifty value investors cannot resist.
The news is fairly benign and we don’t have a major headline event driving this selling. We simply ran out of new buyers willing to chase stocks at all time highs. This happens from time to time and why buying stocks when everyone is fearful is typically a better strategy than waiting until the coast is clear. Regardless of how we feel, stocks have never been riskier as we marched to new all-time highs. That is the great paradox of the market, the higher prices go, the safe we feel, the more risk we are exposed to. There are plenty of great times to buy breakouts and hold stocks making new highs, but that is when we still have fear and cynicism to feed off of. Since the budget deal in October, there has been little to worry about and most investors forgot their reluctance and finally embraced this market with open arms. But as soon as everyone finishes packing their accounts full of stocks, we run out of new buyers to keep pushing prices higher.
While it is premature to call this a top, buying definitely stalled. Between stronger than expected employment numbers last Friday and a new longer-term budget solutions in DC on the table, we should be higher, not lower. Some will attribute this to renewed expectations of Taper, but never forget prices move on supply and demand, not fundamentals or technicals. We simply ran out of new buyers willing to throw their money at the market and are selling off as a result.
The challenge for bulls is this third pullback under 1790 is making many current owners and prospective buyers nervous. With so many bullish on stocks, that leaves us with a huge pool of potential sellers. Few buyers and lots of potential sellers is rarely a good combination for stock prices.
Failing to capitalize on recent good news shows buying is stalling and we need to tread lightly. The key levels to watch are 1,800 and 1,780. Bouncing and retaking 1,800 shows demand is alive and well. Slip under 1,780 and it will trigger a wave of stop-loss selling, pushing us down to 1,760 and the 50dma. From there it will be a matter of seeing if that is low enough to trigger a counterbalancing surge of value oriented dip-buying.
Over the last 12-months owners have been conditioned to hold through any and all weakness because it always ends in a bounce. This makes it far more difficult for weakness to shake supply free. That lack of selling makes it easier for modest dip-buying to prop up the market and has been the foundations this 25% year was built on. Markets go down when supply swamps demand and as long as owners keep their cool, supply will remain constrained.
Shorts can take a shot at this weakness with a stop above 1,800. Buyers are best served waiting until the market regains 1,800 because it is better to be a little late than a lot early. Owners need to decide how much pain they can tolerate. Shorter duration traders should have already locked in gains. Long-term traders should ignoring these fluctuations and use any weakness as a buying opportunity.
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.