Don’t fear a routine and healthy dip

By Jani Ziedins | End of Day Analysis

Sep 21

End of Day Update:

On Thursday the S&P500 experienced the largest drop in over two-weeks. As dramatic as that sounds, we only lost 0.3% in a relatively benign pullback to support. This was the lowest volume day this month and the first time trade has been below average since August.

As far as pullbacks go, this one was as mild as they get. There are two ways to interpret this. Either this dip was the best bears could manage in such a resilient and strong bull market. Or these are the first cracks in what is about to become a larger selloff.

If a person thinks a bull market needs to go up every single day, they should be worried about this price-action. For the rest of us, we know markets moves in waves and down days are a normal and healthy part of moving higher. Prior to today the S&P500 was up seven out of the last eight days and a routine down day was long overdue.

The question is if this is the first signs of a larger down move? Headline wise not a lot happened Thursday. The biggest market news was a continued digesting of Wednesday’s Fed policy statement that announced the unwinding of their bond positions and the continued possibility of a third rate-hike later this year. While both of those actions are relatively bearish, the market widely expected these moves and no one was caught by surprise. We slipped a little in Wednesday’s intraday trade, but a late-day rebound put us back where we started by the close. Thursday’s dip retraced some of Wednesday’s selloff, but it didn’t undercut the lows.

If we are expecting the market to collapse on bad news, Thursday’s “news-less” day definitely won’t cut it. This market withstood a nearly constant barrage of negative headlines over the last month and barely sold off two-percent. If those headlines couldn’t break us, there is definitely nothing in the current news cycle that tops ballistic missile launches, nuclear bomb tests, and back-to-back hurricanes. That resilience means we can safely cross news-fueled selloff from the list of vulnerabilities. If this market was going to crash on bad news, it would have happened weeks ago.

The next possibility is this bull market is extended and exhausted. Markets that rally too-far, too-fast are prone to collapse because everyone who could have bought has already bought and there is no one left to keep pushing prices higher. But the thing about exhaustion tops is prices race ahead and climb at a steeper rate than the prior uptrend. Is that price-action happening here?

The last several months were a sideways consolidation that ended with a double bottom and rebound off of the 50 day moving average. That looks more like sustainable base building than overextended exhaustion.

If this market is not vulnerable to negative headlines and the recent consolidation looks more supportive than threatening, do we really think Thursday’s dip is the start of something bigger? Or just one of those normal and healthy down-days that accompany every increase in prices?

As I’ve been saying for over a month, if this market was fragile and vulnerable, we would have crashed by now. While the rate of gains is nothing to get excited about, a market that refuses to go down will eventually go up. I see no reason to think anything has changed in the last several days. That means keep doing what has been working. Continue holding your favorite positions and adding more on the dips.

As I write this, overnight futures slipped on Asian weakness. But as I said above, testing support is a normal and healthy part of moving higher. There is nothing to worry about if we dip under 2,500 support. A wave of selling might hit us as recent buyers’ stop-losses are triggered. But that selling will quickly dry up like it has every other time this year. Confident owners didn’t sell far more dire headlines last month and there is no reason to think they will start bailing out now. Confident owners keep supply tight and prop up prices. That has been happening all year-long and there is no reason to think something has changed here.


If you found this post useful, return the favor by Re-Tweeting it.
If you disagree, tell me why in the comments.

Free blog posts are published Tuesday and Thursday evenings.
Signup for Free Email Alerts and be the first to read my latest analysis.


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.