The Sky is Falling

By Jani Ziedins | End of Day Analysis

Aug 06
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The S&P500 sliced through 2,100 support and fell all the way to the 200dma before mounting a feeble bounce into the close. Traders clearly took notice as volume surged to the highest level in over a month.

Today’s selloff clearly rattled nerves and has many fearing worse things to come. Money managers, gurus, and journalists all smell blood in the water. And they’re not the only ones. The Stocktwits $SPY sentiment gauge swelled to 63% bearish. Bullishness on AAII’s sentiment survey is hovering near five-year lows. The CBOE Put/Call ratio spiked today to levels only seen a few times in the last five-years. And Investor Intelligence reports 58% of investment advisors are bearish. It seems everyone lost confidence in this market.

Given how bearish these indicators are, you’d think we are in the middle of a long and deep correction. The funny thing is we are only 2.4% from all-time highs. The most plausible explanation is a highly insightful crowd and savvy pundits see the storm clouds brewing and are getting out ahead of the long-awaited correction. That is of course if you think pundits and the crowd are good at identifying important turning points.

As a devout contrarian, if the crowd get this right, I’ll eat my hat. I really don’t want to eat my hat because I really like it, but I don’t have anything to worry about. It’s not because the crowd and gurus are stupid. Intelligence has nothing to do with it. Supply and demand drives market pricing and by rule the majority’s opinion is already priced in. Common sense tells us that anyone anticipating a correction would sell their stocks ahead of time. From this we can infer the large majority of people with bearish outlooks are at the very least underweight stocks. If that’s the case, then most of the selling is already behind us and this is the safest time to buy and hold stocks in quite some time. No one said being a contrarian was easy, but to make money we have to make the hard trades.

The headline event everyone is looking forward to is the monthly jobs report due before Friday’s open. While the media hypes this up every month, it’s been years since this report made a lasting impact on prices. This Friday will be no different. Expect early volatility, but the numbers will be forgotten by the close.

Jani

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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.

[…] hypes this up every month, it’s been years since this report made a lasting impact on prices,” he wrote in a post. “This Friday will be no different. Expect early volatility, but the numbers will be forgotten by […]

Tom A August 7, 2015

I liked your comment about loving your hat. Good one.
On a serious note though, you said:
“Common sense tells us that anyone anticipating a correction would sell their stocks ahead of time. From this we can infer the large majority of people with bearish outlooks are at the very least underweight stocks”
But what if exactly the opposite is true? What if all the bulls who think there might be a correction (emphasis on might) have not sold, confident in the knowledge that there will be a V shaped rally to new highs before you can blink an eyelid? You can’t blame them for holding on to their positions and instead opting for hedges, because every little pullback has resulted in an instant rally, so why take the risk of selling and not being able to get back in before the rally?
Note that mutual fund cash levels are at the lowest levels, so that does not point towards investors having sold and sitting in cash waiting to pile in. Margin debt has also not dropped.
The Fed has put a floor and also a ceiling on the market. The real action will only happen once they get out of the way completely, either by openly communicating that they will not raise rates in the foreseeable future (which they won’t do unless there is a drastic change in the economic picture) or by doing their dirty deed of “one and done” so the market can get it out of it’s system. Failing either of these 2 outcomes, we will most likely be stuck in a rut between the 200 DMA and 2134 till the Fed acts or something gives.

    Jani Ziedins August 7, 2015

    No disagreement from me. Investor time horizon is the wild card. Bearish short-term traders are in cash or short because they pride themselves on their nimbleness. These are the active investors that trade options, spend time on Stocktwits, and respond to AAII surveys. But you are right, the wider buy-and-hold crowd is still fully invested. The only question is how far will the fear will spread. If it stays confined to the financial pages, the blissfully ignorant 401k owner will never have a reason to sell and launch a much wider selloff. Given that we are less than 3% from all-time highs, I doubt anyone in the mainstream will even hear about rate hikes and all the other things active traders are fixated on. Without wider selling, we run out of supply and bounce like we have every other time in the last five-years.

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