Is this time different?

By Jani Ziedins | End of Day Analysis

Apr 05

Screen Shot 2016-04-05 at 8.50.47 PMEnd of Day Update:

Tuesday the S&P500 stumbled into its biggest losses in nearly a month. Overseas weakness spread to our shores and this time dip-buyers were helpless to stem the tide of selling. While we are only a few points from recent highs, this dip felt different.

As we discussed last week, the move to a new quarter often brings a change in investor strategy. In March big money was caught off guard by the swift rebound from February’s lows and these managers were forced to buy back the stocks they sold earlier in the year. Their insatiable need to rebuild their portfolio pushed us higher all month. But now that the calendar’s rolled over and managers are given three-months of breathing room, there is less pressure to buy every dip. This vacuum of demand was fully evident Tuesday. We slipped and there was no one to catch us. This is why we finished at the lows.

While one data point doesn’t establish a new trend, it should be enough to give us pause. We rallied 15% in two-months. That’s a huge number by any measure and it would be foolish to expect this rate of gains to continue. Now that we moved into the second-quarter, will money managers continue buying with reckless abandon? Tuesday’s price-action suggests otherwise and we should prepare for a bumpier road ahead.

If we truly exhausted the supply of willing buyers, prices should continue slipping over coming days. The most obvious support level is 2,000. Fail that and the 50dma and 1,940 are the next logical levels to bounce at. Now don’t get me wrong, I’m not predicting a crash and return to February’s lows. But a cooling off period is warranted given how far we’ve come. Two-steps forward, one-step back.

That said, if we bounce Wednesday and recover Monday’s close, dip-buying is alive and well. That means there is no vacuum of demand and the good times are still rolling. Selloffs are swift and if Tuesday’s weakness doesn’t spread, then this was just another dip on our way higher.

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.