Why this selloff is no different

By Jani Ziedins | End of Day Analysis

Sep 05

End of Day Update:

On Tuesday the S&P500 tumbled for the third time in as many weeks. Midday selling pushed us under the 50 day moving average, but fortunately we bottomed not long after and closed well off the lows. Volume was the highest in nearly a month and this was one of first above average volume days in quite some time.

North Korea was the primary culprit yet again as they tested a nuclear bomb over our extended holiday weekend. That was enough to send shudders through global markets. But the thing to remember is this was their fifth nuclear detonation over the last decade. If the first four didn’t trigger a massive selloff, then there is a good chance this one won’t either.

Last week we rallied when the flow of negative headlines abated for a few days, but Tuesday abruptly ended that reprieve. In addition to North Korea, Trump added political uncertainty when he distracted Congress from budgets and the debt ceilings when terminated Obama’s Dreamer program for underage illegal immigrants. Then attention turned to Hurricane Irma, a category 5 storm headed for Florida. Taken together, these three headlines were more than enough to ruin last week’s jovial recovery.

But is the rebound really dead? Three things tell us not to be so hasty.

First the late-day rebound put us back above key support. The 50 day moving average was a ceiling for most of the last few weeks. But overhead resistance often turns into support after we break through. Today’s late recovery suggests that is the case here. Rather than spiral out of control, supply dried up when we tested this key support level.

Second, volume was one of the highest days we’ve seen in recent weeks. All the other sharp down-days also included elevated volume. But rather than portend of worse things to come, these high-volume days were capitulation and we rebounded within a day or two.

Third, all of these headlines are recycled. There is nothing new here. If one of these stories was going to take us down, it would have happened already. Selloffs are breathtakingly fast. Hesitate for a moment and it is too late. Sell first and ask questions later is the first rule of surviving a crash. But this North Korea selloff is going into its fourth week. The market never gives us this much time to think rationally and act calmly before a punishing selloff.

Simple supply and demand is behind this market’s strength. Those that are afraid of Trump and North Korea have long since bailed out of the market and been replaced with confident dip buyers. That is why today’s dip ran out of sellers so quickly. If the current crop of owners didn’t sell the first or second North Korea scare, why are they going to sell this one? Today’s limited selloff tells us they held their ground.

Markets don’t give us this long to sell the top and this one is no different. If we were going to crash, there have been more than enough reasons for us to plummet. The fact we are still standing strong near the highs tells us this market is more solid than most people give it credit for. Keep doing what has been working. Stick with your buy-and-hold positions and keep adding on any dips.

As I’ve been saying all month, a market that refuses to go down will eventually go up. Don’t lose your nerve now.

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.