Where Did All the Sellers Go?

End of Day Update:

It was another dramatic day for the S&P500. A brutal morning plunge undercut recent lows, the 200dma, and 2,050. This weakness sliced through most technical stop-losses, triggering a wave of defensive selling. But not long after those waves of autopilot liquidation ran through the market, supply vanished and we launched higher, ultimately closing nearly 2% above those fear-induced intraday lows.

Pundits claim the weakness was driven by this headline and the rebound motivated by that one. But the truth is far simpler than that. The market was acting in a predictable and typical way given sentiment, technicals, and supply & demand. Figuring out what was going to happen wasn’t that hard if we were looking at the right pieces of information.

Sentiment is in the toilet following this weekend’s “No” vote. Most analysts put the probability of a Grexit at far greater than 50/50. Anyone expecting an orderly resolution to this crisis is clearly in the minority these days. But since a Greek departure is now the widely held view, we know most of the defensive selling already happened. It’s common sense that anyone predicting an imminent market collapse is already sitting in the safety of cash. That tells us any bout of fearful selling like we had this morning would be short-lived because there are so few people left to sell these “new” Euro headlines.

Most of today’s weakness was fueled by technical stop-losses that defensive traders place near key price-points and moving averages. Undercutting last week’s lows forced disciplined traders to exit their positions. That selling then pressured others with stop-losses located near the 50dma and 2,050 to bail out not long after. But once we violated all the popular stop-loss levels, we ran out of new supply because only defensive technical traders were selling this dip. Since those that feared the Grexit already left, by default that means anyone still holding doesn’t fear these headlines and was uninterested in joining the herd selling. That’s why supply vanished and we launched higher after undercutting the last stop-loss level.

While today’s outside bullish reversal suggests we are near the bottom of this move, the situation in Greece and China is far from over. We should expect near-term volatility to continue, but this is a better place to be buying weakness than selling the fear.

Jani

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