Are stocks on the verge of plunging?

End of Day Update:

The S&P500 started Tuesday with modest gains, but the new Fed chief spooked the market when he hinted at four rate-hikes this year instead of the previously expected three. That was enough to send us into a tailspin that erased Monday’s breakout.

The Fed told us the economy is getting stronger and the market sells off. That’s like someone complaining about making $3 million because their taxes will go up. (If anyone feels that way, send the money my way and I will happily pay the taxes!)

Anyway, the market is fretting that things are too good. When is too good ever a problem? Well there is the inevitable excess that leads to the next economic contraction, aka a recession. But that is still a ways off because there are few claiming our economy is already overheated. In reality we are just starting to warm up following a prolonged period of lethargic growth. The Fed raising rates is simply us returning to historically normal levels and it is most definitely not yet approaching smothering levels.

Most market participants agree with the above assessment and is why we shouldn’t expect Tuesday’s dip to go very far, especially since it follows February’s selloff. That plunge under 2,600 scared off most of the weak holders and they were replaced by confident dip-buyers. Out with the weak and in with the strong means we are standing of fairly stable ground. Conceivably we could slip as far as 2,700, but that is unlikely and would represent a dip buying opportunity, not a justification to sell reactively.

It is not unusual to experience some downside volatility following the recent gains and lingering uncertainly. But market crashes are brutally quick and false bottoms last days, not weeks. The fact the market held up so well the last few weeks tells us most owners still believe in this market and Tuesday’s headlines didn’t change that. These owners will keep holding and their confidence is keeping supply tight. If we were going to plunge further, it would have happened by now. Tuesday’s dip was much-ado-about-nothing and any near-term weakness is a dip-buying opportunity.

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As expected, Bitcoin slipped under $10k over the weekend, but the selloff failed to build momentum and we have since recovered above this psychologically significant support level. Runaway selling is taking a break because the weak hands have already been flushed out. Selloffs cannot get started when there is no one left to sell the dip. Things look good over the near-term the path of least resistance is higher. We will most likely break $13k and even push toward $14k over the next few weeks.

But the thing to remember is BTC is still very much in a downtrend. While we can buy this rebound for a quick trade, this is most definitely not a good place to invest in BTC for the long-term. These rallies are to be sold, not held or chased. Lower-lows are still ahead of us and we haven’t seen the worst of this selloff yet. Bitcoin prices peaked at the end of 2013 and it took nearly two-years before the selloff and consolidation ended. Most likely it will be another six-months before BTC finally reaches a bottom. Until then expect lower-highs and lower-lows.

Jani

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