This Feels Different

By Jani Ziedins | End of Day Analysis

Jan 05
S&P500 daily at end of day

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.



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.

Market Owl January 6, 2015

Totally agree with your comments. The price action over the past month screams US equity saturation to me. I made a blog post about it noting the volatility at the top.

[email protected] January 6, 2015

Although no one can predict the future I do not think it is that of a big issue. The market is worried once again on meltdowns, but US economy is improving even though we try to refuse believe it.

Just looking at the chart you posted in the head of this post shows the exact opposite of what you speak of. Yes, we are in a sell off, but the previous one bounced and created a new higher high. I do not see any force, trigger, or catalyst which would cause this market to fall like a rock and fall below the previous low of the previous sell off to create a first new lower low.

Of course it may happen, but are we really in such a bad shape that it would trigger a continuous sell off with a magnitude similar to 2008? I still do not see it. Not saying it cannot happen, but I think it will be more hype fear than a fundamental change.

[email protected] January 6, 2015

I just think we may see some consolidation or sideways move in lieu of a frenzy crash.

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