End of Day Update:
The S&P500 dipped under 2,100 support in early trade, but the selling quickly stalled and we rebounded to three-month highs. Head-fake moves like these show the risks of triggering trades solely based on obvious technical levels. No doubt a lot of bears were sucked into selling this morning’s dip, only to see it blow up in their face hours later.
It’s been a great ride for anyone who held the rebound. Rather than defensively sell the recovery, these owners are gleefully holding on for larger gains. The lingering concern that makes me question a return to all-time highs is we still haven’t resolved the global growth problem that triggered August’s selloff.
We often see binary outcomes in politics. Did Congress pass the budget? Did the gov’t shutdown? Did Greece accept the bailout? Did the West respond militarily to the Russian occupation in Ukraine? Politically caused situations can be fixed overnight and this immediate resolution justifies prices returning to previous levels. But economies are far too large to turn on a dime.
The late summer selloff was driven by slumping commodity prices, a strong dollar, and declining overseas consumption. These factors are just as real today as they were two months ago and will still impose a measurable impact on our economy. While I disagree with the bears that these factors will cripple our economy and send us into a deep recession, they are real headwinds that will weigh on growth, employment, and earnings.
August’s 10% selloff more than adequately accounted for this economic slowing and represented a great dip-buying opportunity. Once the news is priced in, it is safe to ignore the headlines. From there it should have been a slow grind higher over the next several months as we overcame these headwinds. That is the trade I was expecting. Instead we got this rocket ship from the bottom that pushed us right back to all-time highs. It doesn’t take an economics PhD to figure out that stocks should have at least a small discount to account for China and Europe slowing down.
Since we don’t have a clear resolution to these global growth problems, people must be buying stocks for other reasons. First they were buying because of more easy money. Then they continued buying because everyone else was buying. Neither of these things changed our economic reality and that realization will most likely hit stocks in coming weeks. While we’ve grown drunk on the relief rally over the last month, we will eventually stumble upon a headline that reminds us the situation is not solved. Then the scramble for the exits begins all over again. The emotional selling will be less intense than August, but it will still feel like we are falling off a cliff. While I’m warning of near-term pullback, I’m actually bullish about the situation. Markets move two-steps forward and then take a step back. This is the healthy and sustainable way they climb higher. Everyone knows this, but all too often we get sucked into the myopia of hype, fear, and greed following large moves.
The best profit opportunities come from buying stocks when owners are selling at a discount, not charging a premium. I don’t know when the market will take its step-back, but only a fool would expect these strong price gains to continue indefinitely. That means we must patiently wait for the all fools to finish throwing all their money at the market before gravity takes over. But rather than fear the dip, we should embrace the buying opportunity.
What’s a good trade worth to you? How about avoiding a loss?
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