Stocks bounced back and reclaimed some of Monday’s losses. We are stuck in no-man’s land between the 50dma and the 200dma. By midday the market recovered 1,750, which acted as support back in October.
Gone are the days of easy money as this market gives heartburn to anyone paying attention. Yesterday’s weak manufacturing numbers are making some question the strength of our economy. These traders lightened up ahead of what they fear could be another bad Jobs Report. Monday’s dip was the market lowering expectations and ironically enough, reducing the risk of holding through the employment report. If we selloff ahead of time, there is less selling potential following a disappointing number is release. Pricing in bad news creates a positive skew where a disappointing, bu less-bad than feared number could lead to a pop.
Most associate themselves with bulls or bears. We have a natural tendency to think the market is poised to go one way or the other and trade that outlook. But most of the time the market goes sideways. While bears think we are on the verge of a massive selloff and bulls claim this is just another dip on the way higher, where are all the people saying we are entering a six-month trading range? I don’t remember the source, but I recall someone claiming the market trades sideways 60% of the time. Buy the dip and sell the rebound.
Recent weakness wrung out a lot of the excess that built up in the closing months of 2013. Pulling back over 5% put fear back in the market and flushed out many owners who envision far steeper declines around the corner. This selling got rid of many weak owners and replaced them with far more courageous buyers who demonstrated a lack of fear of weakness when they bought the dip. While no one knows exactly how low we will go, we are closer to the end of this dip than the start.
While we might bounce any day, not all selloffs go straight down. The bigger and longer ones step lower with a series of bounces along the way. If the market bounces watch for weakness following a short-squeeze that pushes us above the 50dma. And of course the market could plunge on an atrocious jobs number suggests we are in an economic contraction.
Expect the market to chop sideways until Friday. The last couple of weeks of selling lowered expectations, making it easier for the data to come out better than feared. That will likely lead to a short-squeeze, but if the market is stuck in a trading range, that strength is a better selling opportunity. But if we miss jobs gains by more than 100k again, look out below.
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.