End of Day Update:
The relentless selling continued in the first half of the day, but in typical fashion, the market overdid it and snapped back to breakeven by the close. It was a fairly dramatic reversal, covering nearly 50-points combined. Volume was brisk for the third-day in a row as traders both bailed out as the pain got too great and chased the ensuing afternoon rebound.
Again there wasn’t an individual headline driving the selling and the weakness felt more herd-like when many traders dumped shares simply because everyone else was. But there always comes a point where we run out of sellers. When no one is left to sell, supply dries up and prices rebound. No matter what the headlines, tight supply props up prices and that was the case this afternoon. If today’s low holds, the bull market remains intact because this is a higher-low than August’s 1,900 dip. While pullbacks always feel like the world is ending, as long as we keep stepping higher, all is well with the market.
But what are the chances this low will hold? Markets move for one of two reasons. New information causes the majority of traders to adjust their forward-looking outlook. Whey they change their mind, they buy or sell stock to reflect their new expectations and this one-sided trade moves markets long distances. The other source of volatility is normal fluctuations in supply and demand. The former is what big market moves are made of because the new information converts bulls into bears or bears into bulls. It takes a fundamental shift in the underlying economics to drive these major changes in sentiment and so far the economic data we keep getting points to a slow, but steady recovery in the US and a struggling recovery in Europe. None of this is new and unlikely to change anyone’s mind. When bulls stay bulls and bears stay bears, what we are left with is the market’s normal gyrations due to minor imbalances in supply and demand. This is when we go a little too high and then turn around and go a little too low. Obviously the push to 2,020 a few weeks ago was a little too high and now it appears like 1,925 is a little too low. During these typical gyrations it is most profitable to buy weakness and sell strength. If this bounce holds, we should not violate today’s low. The best trade is buying the dip with a stop under 1,925.
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.