Testing Support

End of Day Update:

The S&P500 tested the resilience of 2,100 support for a fourth day. We sliced through this key level early in the day, but recovered most of those losses before the close. Volume was average for these typically slow summer months, but well short of the elevated levels seen in recent weeks.

Summer markets are often choppy when institutional investors are on vacation. Without big money’s steady hand, smaller and more emotional traders drive these erratic price swings. But these smaller traders don’t have the account size required to push sustainable moves and is why prices jump around, but ultimately don’t go anywhere. This phenomena perfectly describes the trade we’ve seen in recent weeks; dramatic, but unproductive.

Much to their detriment, these smaller traders pile in and out of the market following every gyrations. They reactively buy when prices go up, and reflexively sell when they go down. While everyone knows it is foolish to buy high and sell low, that is exactly what most of these small traders do. There are times to buy breakouts and sell breakdowns, but sideways markets is definitely not one of them.

While it is tough to be brave when prices fall and cautious when they go up, that is exactly what we need to do. There is no reason to be afraid of today’s weakness and break of support. We didn’t collapse when headlines were shouting Greek Contagion and Chinese Bubbles, so why should we all of a sudden be afraid they are going to fall on us now? Markets have been given every opportunity to implode this year. If that is what they really wanted to do, it would have happened already.

Jani

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