The Chop Continues

End of Day Update:

The S&P500 took us on a wild ride Wednesday, covering nearly 100-points intraday. We’ve seen big moves recently, but today’s volatility takes the cake. As dramatic as the surges and crashes were, volume was barely average. That tells us most traders didn’t change their mind and stuck with the cash and stock positions they started the day with.

If anyone traded well today, it was surely more luck than skill. These violent swings convinced reactive traders to buy and sell at the exact worst moment. The only way to survive chop like this is to resist the urge to trade. That means sticking with the positions you have, or watching from the safety of cash. Reacting to a choppy market is the surest way to blow up a trading account.

This morning’s mindless selling pushed us under the 200dma. The best the financial press could come up with was blaming Chinese stocks, which paradoxically ended the day up 1.2%. Don’t bother trying to understand the logic on that one.

By lunchtime the market found a bottom and started rallying 30-point ahead of the Fed’s meeting minutes. But the euphoria was short-lived as we gave up a big chunk of the rebound by the close.

While we love to assign blame for every move, the simple truth is people were selling because other people were selling. The herd rushes in and the herd rushes out. These daily moves are nothing but head fakes that convince reactive traders to give away all their money, and so far they’ve worked exceptionally well.

I don’t see anything in Wednesday’s trade that suggests this is the start of something worse. The market chopped around all summer and this looks to be much of the same. We had multiple opportunities to breakdown this year and there isn’t anything here that makes these headlines more credible than the ones the market ignored previously.

Contrary to the crowd, I’m eagerly looking forward Fed’s rate hike in September. Without a doubt this will kick off the next rally leg when they announce a 0.25% hike followed by similar hikes every three-months. That gives us clarity and predictability as well as two more years of historically low interest rates. The Fed laid out a similar plan with Taper and paradoxically the end of Quantitative Easing lead to a 10% rally in equities. We will see the same thing here because it will finally let us stop worrying about when the first rate hike will happen.

Jani

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