Focus on What Matters

End of Day Update:

It’s been a brutal week for the S&P500 as we experienced one of the worst starts to a year in market history. We’ve fallen 140-points from last week’s highs as traders continue to be terrorized by Chinese uncertainty. We’re down five out of the last six sessions while Chinese regulators have suspended trade twice this week due to selloffs exceeding 7%. Given this turmoil it is no surprise to see AAII’s sentiment survey approach historic levels of pessimism. If we take trading cues from the crowd, clearly this is the best time to panic and dump stocks at steep discounts before the selloff gets worse. But since I make money trading against the crowd, I am looking at this move in a far different way.

We’ve only closed under 1,950 a handful of times since 2014. If we view risk as a function of height, buying and owning stocks here is one of the least risky times to be invested in over a year. While it certainly doesn’t feel safe, I’m sure most would agree buying and holding stocks today is a far better idea than buying and holding them last week. Everyone knows we are supposed to buy when people are fearful and sell when they are greedy, but that is far harder to do. When the crowd is running scared and our trading screen is filled with red, it is way too easy to succumb to the crowd’s seduction.

In Friday morning trade the Chinese stock market is holding up relatively well after their government unwound some the currency moves that unnerved markets. This bumped their market and halted what could have been another day of relentless selling. They also abandoned the ill-conceived 7% percent circuit breaker that exacerbated recent volatility. Together these have been enough to at least temporarily delay another wave of panic driven selling. As a result US and European futures are higher in sympathy.

Assuming China can hold it together for the rest of the trading day, the next big event is the US monthly employment report. Normally this is a headline event, but it has been forced to the back pages as global volatility dominated the financial media’s attention. The most important thing to remember is the S&P500 responds to US corporate sales and earnings, not Chinese. If our recovery continues to chug along despite Chinese weakness, our stock market do the same.

China has been slowing for over a year and no one believes the overly optimistic economic growth numbers the communist government is putting out. If China weakness was going to take us down, it would have happened by now. The US is largely a self-centered, consumer and services based economy. Our vulnerability to a Chinese slowdown is far more limited than an export dependent economy like Germany. And the proof will be in the pudding. Another strong US employment report Friday morning will show these Chinese and oil fears are overblown. Soon traders will shift their focus from these global-macro distractions to the actual performance of our economy as demonstrated by employment and fourth quarter earnings. While it’s been a lot of fun following the Chinese and oil markets the last few weeks, it is time to get down to business and focus on the things that really matter when determining stock prices.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

If you want more check, out my premium subscription that delivers this analysis every day during market hours.

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
Start your free trial today!