Who was selling today and why their opinion doesn’t matter

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Tuesday was another dramatic session for the S&P 500 as prices tumbled nearly 2%. The post-election relief is long forgotten as nervous selling pushed prices back near October’s lows. But as horrific as the headlines sound, we have only slipped back to where we started the year and are just 10% under all-time highs. If a person overreacts to flat years and pullbacks from all-time highs, then the stock market might not be a good fit for them. For the rest of us, this is business as usual.

While this week’s price action slammed us underneath 2,700 support, the thing we have to keep in mind is this is a holiday-affected week. Big money managers who make millions of dollars a year are on vacation this week with their family, not toiling away in the office. Why this is important is because without big money’s guiding hand, emotional retail investors are running the show. Big money’s absence during holidays often leads to increased volatility, and the market shedding nearly 100-points over two days definitely qualifies as volatility.

But the thing to remember about retail investors is they have small accounts. That means they don’t have the firepower to drive large moves. Only big money can propel directional moves and if they’re not behind today’s selling, then we should expect the weakness to stall and reverse once emotional retail investors run out of things to sell.

It is hard to ignore 100-point moves, but if big money is not involved, then it means the price action is not relevant to what comes next. Big money always has, and always will, drive the big moves. Emotional retail investors do little more than provide noise along the way. And unfortunately today, that noise was deafening.

As I started with, if a person cannot stomach a 10% pullback from all-time highs, they shouldn’t be the market. But for those of us that have been around a while, we are thankful these fearful people are willing to abandon stocks at steep discounts. Their loss is our gain.

As for how much further this can go, that is anyone’s guess. Emotional selloffs are the hardest to predict because fearful selling begets fearful selling. While stocks are at attractive levels, that doesn’t mean they cannot get even more attraction. But if I’m buying the dip, I’m not overly worried if I’m buying a 10% discount or a 12% discount. I’ll take every little bit I can get, but I don’t need to be greedy and am more than happy to settle for good enough.

As for the bears, it’s been a good run, but now that prices are into correction territory, they need the economy to get worse for us to keep tumbling. Unfortunately, most of the time reality turns out a lot less bad than feared. Will this time turn out any different, no, probably not. But that won’t stop the cynics from shouting that we should abandon the stock market.

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Jani

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