Another Placeholder

S&P500 daily at end of day

End of Day Update:

Wednesday was little more than a placeholder. We traded inside a 10-point range on less than average volume. The unfortunate thing for bulls is we saw similar price-action Monday, hours before Tuesday’s 1.4% plunge.

The only positive thing out of Wednesday is the loss was limited to 0.2%. Few buyers are attracted to these discounts, meaning we need to fall further before value investors and swing traders start buying the dip. It was also a fairly painless decline, meaning we didn’t flush out the last of hopeful. Only two things will turn this around, buyers snapping up irresistible discounts or a soul crushing slide chases off the last of the sellers and we bounce on tight supply. So far neither condition is met, meaning this move is not done making new lows.

The headlines are obsessing over rising rates and the surging dollar. But do we really need to worry about these things?

We are fooling ourselves if we think the Fed controls interest rates. They stopped buying bonds nearly a year ago. When everyone expected rates to rise, they fell instead. If long-term rates wanted to go higher, they would have done so already. This means we can safely cross increasing interest rates off the list of things to worry about.

The other fear is a strong dollar. But why is the dollar surging? Obviously because we are the strongest investment grade economy in the world. Hard to argue with that, I mean really, Europe? China? Asia? South America? We’re it. And as long as we look better than everyone else, expect foreign investment to continue flooding our markets and propping up prices.

And now I’ve given you two pieces of contradictory information. Price-action that tells us that we are headed lower, but rational analysis of the fundamentals that say we have nothing to worry about. How do we settle this discrepancy? Easy. Time. Everything in the market is about timing. Expect the selloff to continue until we have an incredibly painful, high-volume capitulation. Then we buy the rebound before everyone realizes things are not as bad as the fear-mongering lead us to believe.

It would be nice to see high-volume plunge Thursday morning that reverses midday and finishes near flat. That is the all-clear for us to get back in on the long side. Be very wary of any bounce that comes before a capitulation bottom, since that is likely a bull trap before the capitulation bottom.

Jani