Start of the End, or End of the Start?

End of Day Analysis:

It was a wild ride as the market gapped lower at the open, rallied 40-points by lunchtime, only to give all those back and then some by the close. While the market closed lower by 16-points, we traveled nearly 120-points to get there. Absolutely stunning.

The crashing oil story took the day off as the market obsessed over the imploding Russian Ruble. Many pundits drew parallels to 1998’s currency crisis and that was enough to roil markets around the world. But was this just a hiccup, or the start of another global meltdown?

Russia’s been the target of sanctions from the West since they exploited and inflamed the crisis in Ukraine. These political tensions and preexisting economic weakness already reduced Western exposure to Russia, so it is far less likely this crisis will take Western banking and economies down with it. This story should leave the front pages in no time.

As for oil, it’s funny how bears try to have it both ways. Rising oil prices are clearly bad for consumers, but then so are falling oil prices?!?!? On popular social media it is hard to find many people on Main Street that are worried about $2 gasoline. This video clip got nearly four thousand up-votes on a popular website when one guy shared his feelings from his last trip to the gas pump.

Technically today’s price action was as ugly as it gets. We blasted above key levels in midday trade, but couldn’t hold them and made new lows by the close. This wild ride lead to lots of trading and volume was 28% above average and one of the most active days of the year.

But technicals are only half the picture. What about sentiment? Last week’s selloff saw bullish sentiment on Stocktwit’s SPY boards plunge from 65% to 41% while bearishness spiked to levels last seen near the bottom of October’s selloff. While hardly conclusive, it does show many traders have changed their minds recently and their selling is clearly evident in the falling prices. But the thing about markets is they operate on supply and demand, not sentiment. By the time the crowd is overwhelmingly pessimistic, that means they’ve already sold their stock. Once the crowd finishes selling their stock, we run out of supply and prices rebound.

While today’s headlines feel horrific, we have to remember they feel this way during every dip. If they didn’t, no one would sell the headlines, and we wouldn’t have a dip to begin with. The question is if this time is more than another routine dip. In a bull market we have to operate under the premise that every dip is buyable. That’s because a rally continues countless times, but only reverses once. When trading, I would rather put my money on countless profit opportunities, than bet everything hoping this is that one time.

But we cannot be ignorant to the risks either. If we are already at oversold conditions, the market should bounce and race higher into year-end. But if we cannot find a bottom, the next stop is 1,950. After that it’s 1,900. Break 1,900 and we’ll race past October’s lows.

Jani