This Feels Different

S&P500 daily at end of day

End of Day Update:

Stocks tanked on the first real trading day of 2015, continuing the selloff that started in the final sessions of 2014. Volume was above average and this was a meaningful move, unlike the low-volume, holiday fluff we’ve seen recently. The question is if this is just another routine, buyable dip like all the others, or the start of something different?

Volatility often picks up during changes in trend. This is where one side is losing control and the other is getting stronger. For the first time in a while, both forces are on equal footing. The battle gets scrappier and price moves are more dramatic. Big drops followed by big rebounds. And more plunges and bounces.

For the last three-years I’ve been a buy-the-dip guy, but this one feels different. Back then the market sold off as traders feared the worst around every corner. But bull markets feed on this fear. Low expectations make it easy for a market to rally. But here we find ourselves without a worry. The rest of the world has been melting down over the last six-months, but US Blue Chips have been immune to whatever ales the rest of the world. No doubt they became a safe harbor in a turbulent world, but how much longer can that last? If US markets are still pricing in continued strength, it is harder to exceed those expectations and all too easy to miss the mark. That doesn’t give us a favorable risk/reward.

Every market tops when it runs into a dip that doesn’t bounce to new highs. The big tell for us is what happens next. Today we sliced through the 50dma on accelerating volume. No doubt we took out technical stop-losses and triggered a wave of defensive selling. Buy-the-dip has become such a routine trade that it shouldn’t surprise anyone to see the market bounce in the next day or two. But will there be enough buying behind that rebound to send us back to new highs? Or will the move stall and we stumble into another round of liquidations?

It feels different this time and it is hard to get excited about buying the dip. The confirmation will be a string of lower-highs and lower-lows. If that is the case, forget about the 200dma, October’s 1,820 lows are at risk. While everyone fears a huge selloff over a couple of days, the real damage comes from a six-month grind lower.

Jani