End of Day Update:
The S&P500 sliced through the 200dma as it slumped 1.4% Wednesday. This move leaves us just above 2,040 support that comes from earlier in the year. Volume was barely average, telling us there wasn’t a lot of reactive and emotional selling today.
Nothing like a little selloff to revive bears’ hopes and dreams. Whether you were watching TV or reading online streams, plenty of people believe this is the “BIG ONE”. But here is the thing, dig back in your memory and recall a time when all the pundits successfully predicted a big selloff before it happened. If you are struggling, don’t worry, it’s not your memory that’s failing you, it’s the pundits. Now don’t get me wrong, most of these people are exceptionally intelligent and insightful. There is also a lot of truth to what their ideas. But what trips them up is the basic laws of supply and demand. When the crowd is convinced we are headed lower, how do you think they are positioned? Once a pessimist sells, they lose their vote and are merely cheerleaders. And right now it feels like we have a lot of people rooting for the market to go lower. The reason people are so quick to jump on the “this is it” bandwagon is because memories of September’s fear and regret are so fresh in their mind.
The biggest headline these days is December’s looming rate hike. In a WSJ survey, 92% of economists predicted the Fed will boost interest rates next month. For all practical purposes it appears like there is universal belief the Fed will finally act. Monetary tightening for the first time in nearly a decade has people predicting doom and gloom for our economy. Of course many of these same people also called for runaway inflation and $10k gold because of the Fed’s “reckless” money printing. If they got the first call wrong, there is little reason to believe they will get it right this time. Further, the conversation shifted to rate hikes as soon as Quantitative Easing wrapped up last Fall. If anything, Janet Yellen has been dragging this out, so it should not be a surprise or shock to the systems when it finally happens. People don’t get hit by the bus they see coming, so this rate hike will be a non-issue.
While people are scared by this selloff, this is just another buyable dip on our way higher. In my November 5th post, I warned people that we should be preparing for a very typical pullback following a large rebound. Sixty points later, that is exactly where we find ourselves. Two-steps forward, one-step back. Technicians frequently find Fibonacci patterns in directional moves. This would be a retracement of 24%, 38%, 50%, or 62%. Following a 225-point rebound, these are pullbacks of 55, 85, 112, or 140-points. We’ve already passed the 55-point mark and 85 isn’t very far away. While we don’t want to catch a falling knife, an interesting entry would follow the market slicing through support and recovering those losses on huge volume. This would be the capitulation day that chased of the last of the sellers. Traders who miss a big run always hope for a pullback that will let them get in, but all too often they lose their nerve when the market gives them what they were asking for. Embrace discounts, don’t fear them.
What’s a good trade worth to you? How about avoiding a loss?
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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.