Is it time to panic?

End of Day Update

MARKET BEHAVIOR
Today brought a fairly substantial reversal in fortunes as we tagged a record high in early trade before collapsing nearly 20-points to 1,950 support.  The 50dma is still 50-points underneath us and the 200dma is way back near 1,825.

MARKET SENTIMENT
Today served as a wakeup call for laxidasical bears who were growing accustomed to a never-ending climb higher.  There was no obvious catalyst to this selloff and the biggest piece of the news showed the housing sector improving more than expected.  Seeing the market reverse from fresh highs on good news is rarely encouraging and enough to give us pause.  The big question is if this is the start of something larger or just another buyable dip on the way higher.  As we find ourselves in the middle of summer vacation trade, these lighter volumes can lead to increased volatility due to smaller trades carrying more influence.

Anyone who thinks bulls will panic and rush for the exits is going to be disappointed.  Complacent owners expect this weakness to bounce like it has every other time.  The greatest trade of the last two-years has been buying the dips and the masses are finally waking up to this trend.  This is how a paranoid market that flinched at every mention of Sequester, Fiscal Cliff, Cyprus, and Taper transitions to one that barely budges as war breaks out in Eastern Europe and the Middle East.  Reactive selling at any point over the last two-years invariably lead to regret as those sellers watched the rally leave them behind.  There are only so many times you can fool a person before they wise up.  The problem for many is the more popular something becomes in the market, the less likely it is to keep working.  While everyone’s been calling for a correction since early 2013, eventually they will be right and we are closer to that day than ever before.  While no one can predict where this market will top, it is riskier to own when everyone feels safe and with the market near record highs and the VIX near record lows, it is hard to claim this market is fearful.

TRADING OPPORTUNITIES
Expected Outcome:
Trends continue until they don’t.  While it is clearly premature to call the bull market dead, we all know markets go up and down.  With 20 of the last 27 trading days ending in the green, it isn’t unusual for us to pause and see a few days of distribution.  We have support back at 1,925, 1,900 and the 50dma.  It wouldn’t surprise anyone to see us retest these levels.  And a bull should be hoping for this since a little backfilling makes a continued rally more sustainable.

Alternate Outcome:
Every dip has been a buying opportunity and will continue to be a buying opportunity as long as chasers have money to throw at the market.  We already know owners no longer flinch at headlines or weakness, so it will take an exhaustion of demand to defeat this bull.  Figuring out when everyone has bought in and there are no more buyers left is one of the hardest things to do in the market.  Since a trend continues countless times but only reverses once, it is more likely this dip will bounce like all the others before it.

Trading Plan:
While today’s reversal felt dramatic, we are only 1% from the highs and a long way above the 50 and 200dma.  Given markets move two-steps forward, one-step back, even a bull should wait a couple of days to see how far this step back goes.

Plan your trade; trade your plan