Aug 05
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks gave back all of Monday’s gains on above average volume and ever so slightly undercut Friday’s lows in intraday trade.

MARKET SENTIMENT
Confidence was shattered when someone in the Polish government claimed Russia was preparing to invade Ukraine.  While most doubted the accuracy of this claim, it was enough to send an already weak market into a 15-point tailspin midday.

Poland is a member of both NATO and the EU and the US has a couple dozen F-16s stationed in the country.  It is ridiculous to think Putin would share his war plans with anyone in Poland, so we can discount these particular comments as overblown hyperbole and they don’t warrant further attention.  (Poland has been lobbying for months for the US to increase its military presence in the country and these alarmist comments are self-serving.)

While we can ignore these alarmist comments, it is noteworthy how strongly the market reacted to even a hint, no matter how dubious, of an escalation in Ukraine.  Market participants are skittish following the dramatic selloff last week and any whiff of problems sends them running for cover.

The market is a modest 3.5% from record highs, but you wouldn’t know it given all the pundits claiming the sky is falling.  Sentiment is plummeting, put/call ratios are spiking, and anyone watching the financial media is scared to death.  Given how dramatic the reversal in sentiment, it seems likely this is an overreaction to recycled headlines that have been in the news for months.

Simple fact is markets move up and down.  If everyone knew a dip wasn’t the start of something bigger, no one would sell it, everyone would buy it, and we’d all be rich.  But we know the market doesn’t work that way.  Dips are dips because they scare the hell out of owners and everyone assumes prices will continue dramatically lower.  If they didn’t, no one would impulsively sell their stocks at a discount and we wouldn’t get a dip in the first place.

Most everyone agrees the economy is still improving and the fundamental data backs it up.  The criticism bears have is this market’s gone too far and is overvalued.  They have long claimed we are on the verge of a correction and they are confident this time is the real deal.  And so far they’ve been persuasive enough to convince a lot of other people to dump their stocks too.

TRADING OPPORTUNITIES
Expected Outcome:
Every dip in the history of the market was a buying opportunity and this one will be no different.  The only question is how far this will go before it is buyable.  Given how quickly sentiment shifted and how little meat there is to the fundamental justifications for this weakness, the bottom is likely quite near.  While we might have one last leg lower, that would be the last flush before we bottom.

Alternate Outcome:
If Putin actually invades Ukraine, the threat of WWIII will crush the markets.

Trading Plan:
The best trading opportunities arise from having the courage to buy when everyone else is scared.  While the market is poised for another dramatic down day if we fail to hold 1,920, we should be looking for bargains to be bought rather than dumping stocks at a discount.  Everyone knows markets go up and down, but they always forget it in the moment.

Plan your trade; trade your plan

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About the Author

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.

Ron August 5, 2014

The economy is improving, for the 1‰, bankers and buy back stock executives yes, middle America not so much when 1 out of 3 is in credit default, smart money is begging you to buy the dip while they continue to lighten up, of course this time is different!

Let’s see if 1900 holds otherwise look out below!

    Jani Ziedins August 6, 2014

    In good times and bad, the middle of this country spends every dime they earn. Often they take on even more debt during good times because they assume they will be able to pay it off in the future. Consumers living paycheck-to-paycheck is better for corporate earnings than if they were stockpiling savings.

baruch August 6, 2014

I’m confused as this post doesn’t fit with your usual approach. Usually logic doesn’t matter, we care about the emotions of the buyers and sellers. Therefore it doesn’t make a difference if the market is too high, if we have confident owners than we’ll run out of sellers forcing the market to move higher due to short supply. Here there is no evidence that owners are confident. Selling is on high volume and it may get worse, what is making you think that the supply of sellers will dry up? It seems logic, that nothing fundamental has changed, while that may be true the evidence is pointing to an emotional sell off which can be self perpetuating.
Thank you for your excellent blog and hoping for a response.

    Jani Ziedins August 6, 2014

    Only a small percentage of owners would consider selling this weakness. The vast majority of 401k owners look at quarterly statements at best and are totally oblivious to any news that doesn’t show up on their Facebook feed. Of the small percentage that follow these developments with keen interest, we’ve seen a fair chunk of them flushed out in the recent downdraft, the high volume you spoke of. Many of those still holding stocks here either are not interested in selling, or they deliberately bought the dip and are willingly taking on the headline risk. We always run out of supply when fear is the highest because after that point there is no one left to sell.

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