Much ado about nothing

End of Day Analysis:

Thursday was one of worst days for the S&P500 this year as we plunged 1.5%. There wasn’t a clear catalyst driving the selling. Instead it was a combination of Asian weakness, D.C. dysfunction, weaker than expected earnings, and terrorism in Europe. It was simply one of those days where nothing went right. Even this “half-full” market couldn’t find anything to be positive about.

Given the size of the selloff, volume was suspiciously light. The waterfall price-action gave the impression the market was overwhelmed by a giant wave of panic selling. But the below average volume tells us that’s not what happened. Today’s weakness was more about a lack of buying than fearful selling.

The above shouldn’t come as a surprise since confident owners have propped up the market up all year long. If confident owners were not scared out of their positions through all of this year’s countless bearish headlines, was today’s news any worse? Not really. And that’s why most owners continued to hold their stocks through today’s brutal selloff. Their confidence is aided by the fact most owners are having a great year and are still sitting on a pile of profits. To them this is just another bump on the way higher and nothing to worry about. That’s why despite the gruesome price-action, few owners sold and volume was uncannily light.

Instead the damage was primarily done by the lack of demand. This is not new and has been an issue all year. Every breakout fizzled because those with cash refused to chase prices higher. That forced us into this slow grind higher. Today’s dip was larger than most, but it isn’t unusual to see sideways churn before staging the next move higher.

I’ve been defending this market all year. Every dip has been a buying opportunity and I don’t feel any different this time. Many have criticized my analysis, but so far the market has proved me right dozens of times. Can this time be different? Might this be the end? Sure. But the thing to remember is while a trend continues countless times, it reverses only once. Which side do you think has the better odds?

We could see another day or two of selling, but as long as owners remain confident, supply will dry up and prices will rebound like they have every other time this year. Without a doubt this bull market will die like all of the ones that came before it, but confident owners need a reason to change their outlook and “too high” ain’t it. We need something new and unexpected. Something that threatens corporate profits. I didn’t see anything like that in today’s news flow and is why most confident owners will brush off this dip like all the others that happened this year.

Holding through a dip is not easy but this is a better time to be buying stocks than selling them. The best trades are the hardest ones to make. That means holding when you don’t want to hold and buying when you don’t want to buy. Maybe this time is different, but the odds are against it.

Jani

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