Anxiety flares up

S&P500 daily at 12:59 EDT

Intraday Update

MARKET BEHAVIOR
Stocks sliced through 1,870 support and tumbled all the way to the low 1,760s by midday.  The market is still above the 50dma, but this level is in danger if the selling keeps up.

MARKET SENTIMENT
The media claims this weakness is due to tensions in Ukraine and disappointing earnings out of AMZN and F.  I guess that excuse is as good as any, but for all the anxiety this weakness is causing, we have only given up 20-points of a 70-point rebound.  When taken in that context, this move appears more normal and healthy than scary.

The more closely a person follows their positions, the bigger deal these gyrations appear.  For the vast majority of 401k investors, a 15-point decline doesn’t even register, but for the guy who follows tick-by-tick, this is a huge move.  If we pullback from the 5-minute chart and look at the daily, today’s “plunge” hardly shows up.  But markets function by convincing people to overreact.  Every dip feels like the start of a larger selloff because if it didn’t, no one would sell, and without selling we wouldn’t have the dip.

Sometimes markets under appreciate the risk involved.  This happened during the financial crisis when no one had a clue about the huge house of cards Wall Street built.  Is that happening with the Ukrainian crisis?  We’ve known about this unfolding event for a couple of months and the market largely brushed it off.  Was it being naive?  Are things deteriorating?   Last time we went through this, Russian troops invaded Crimea and the market actually rallied.  Now we have Russian troops amassing outside eastern Ukraine.  Is this significantly worse than last time, or is it more of the same?

If we learned anything from the first round, it’s that Europe needs Russia, and Russia needs Europe.  Most of the words exchanged are little more than political grandstanding and it is highly unlikely we’ll see meaningful sanctions put on Russian energy exports or Russia withholding energy from Europe.    The threat of a civil war is escalating, but the market’s proven time and time again over the years that revolutions and civil wars are not a big deal even when they involve oil exporting countries.

For the most part, this Ukraine story is recycled news and anyone who owns the market here either held through the Crimea crisis, or they bought during it.  Anyone afraid of these kind of headlines sold months ago.  The main thrust of this mornings weakness is to punish late dip buyers.  While it felt safe to buy after four or five up-days, today’s price action is proving otherwise.

TRADING OPPORTUNITIES
Expected Outcome: Rebound to the upper end of the trading range.
Today’s weakness is cathartic for the market and clearing the way for a move higher.  The fearful and pessimistic are selling to the confident and opportunistic.  The fewer weak owners we have in the market, the more likely it will rally simply because we run out of sellers.  Confident dip-buyers willing to hold through weakness makes it less likely we will encounter that weakness simply because there are fewer people willing to sell.  Tight supply almost always equals strong prices.  While this weakness could go a little further before it is done, selling off on recycled headlines is typically far more shallow than if the market was blindsided by something new and unexpected.

Alternate Outcome:
Markets go up and markets go down.  If anyone could figure out why, they would be extraordinarily rich.  Sometimes they behave as they should, other times they do the opposite of what we expect.  Last time we rallied on the takeover of Crimea, maybe this time we crash on the takeover of eastern Ukraine.  This game would be too easy if the market were predictable.

Trading Plan:
Buying on the fifth consecutive up-day, when everyone felt good, didn’t turn out to be such a good idea and selling here when everyone is freaked out probably isn’t the right move either.  The trade of the year has been buying weakness and selling strength and that pattern likely remains intact.  Maybe we haven’t found the bottom of this move yet, but it is safer to buy todays weakness than it was after a six-day rally pushed us up to 1,885.

Plan your trade; trade your plan