Where Did the Dip Buyers Go?

By Jani Ziedins | End of Day Analysis

Aug 25
S&P500 daily

S&P500 daily

End of Day Update:

It was another dramatic day in the market as the S&P500 gave up a healthy 2% rebound to end the day solidly in the red. Volume was elevated, but well off of Monday’s historic levels.

The market opened sharply higher on the coat-tails of an impressive European relief rally. But our rebound never built momentum and traded sideways under 1,950 for the first half of the day. While it was nice to see the emotion fueled selling take a break, the lack of further progress revealed those with cash were not ready to buy the dip. Without demand to extend the rebound, we started sliding lower midday. The selling picked up speed as fear of regret compelled many to dump their stock at any price. This became a self-fulfilling prophecy that accelerated until we closed near Monday’s lows.

Those that thought they could hold the dip lost their nerve and bailed out this afternoon. While this close looks atrocious technically, it is actually laying the foundation for the inevitable rebound. Weak and fearful owners were selling shares to far more confident dip-buyers willing to hold this volatility. While people try to outsmart the market with fundamental and technical analysis, it trades on nothing more than supply and demand. Once we exhaust the supply of fearful sellers and replace them with confident owners, prices will stop falling regardless of what the headlines and gurus claim it should do.

The hottest topic in the financial press is if the Fed will raise interest rates in September. Many claim there is no way the Fed can raise rates when the stock market is struggling. My question to these people is what changed since the last Fed meeting? Has employment gone up? Has GDP gone down? Outside of the chronically weak energy market, have we seen deflation flare up? I cannot think of anything that materially changed in the U.S. economy since the Fed’s last meeting. The only thing that is different is the Chinese stock market’s bubble that burst, but is this Chinese gambler’s paradise really something our Fed should be making policy decisions on?

Which of the following two scenarios scares you more?

A) The Fed raised interest rates 0.25% today because they are confident the U.S. economy no longer needs artificial support.

B) The Fed chose to keep rates near 0% today because they believe the economy is too fragile to withstand a modest bump in rates at this time.

I don’t know about you but I would be far more fearful if the Fed doesn’t raise interest rates than if they do. And I suspect this will also be the market’s reaction. Expect prices to rally on a modest and sensible rate hike, and fall if the Fed thinks the economy is too weak to withstand a rate hike.

But Fed decision is weeks away and most of you want to know how to trade this market on Wednesday. The most bullish thing this market can do is sell off sharply Wednesday morning and then bounce into the green Wednesday afternoon. That would mark a capitulation bottom. A less compelling bottom would be continuing to consolidate between 1,850 and 1,950. While the consolidation would be volatile and choppy, this is the easier bounce to jump on board because the recovery will be far slower than the capitulation’s vee-bottom. And lastly and most bearish would be another relentless slide that closes on the lows of the day. That tells us there is still further downside and this might not stop until we hit bear market territory.

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.

Investrite August 26, 2015

In cash and made 2 purchases. I am not in the camp that is yet hoping for a relief rally though at nearly 11:30 am it appears its heading 5that way. Day is not over yet. I think there are still a fair amount of sellers waiting to pull the trigger but their time is tightening rapidly. If they haven’t sold by today they should sit still.

    Jani Ziedins August 26, 2015

    I agree. Holding these lows through tomorrow tells us Monday’s emotion filled selling is behind us and we should start seeing more rational trade. But undercut the lows today or tomorrow will set off another wave of reactive selling. But that is actually what I’d like to see because it will likely end in the far more explosive (and profitable) v-bottom.

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