Why Tuesday was a great day

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Tuesday was a great day for the S&P500. While the index only finished 0.3% higher, the numbers don’t tell the whole story.

Prices slipped at the open after Trump fanned the trade war flames by threatening to tax all Chinese imports at 25%. This isn’t the first time he made these threats, so it didn’t catch anyone by surprise, but it threw cold water on hopes the two sides were moving toward a compromise.

But rather than tumble lower, stocks quickly found a bottom and recovered into the green. This is definitely not the price action we’d expect if the market was fragile and vulnerable.

This resilience made Tuesday the opposite of last week’s fearful selling, but this isn’t a surprise. Last week I told readers:

“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.”

That is precisely what happened and this market finds itself well above last week’s lows. Sign up for Free Email Alerts so you don’t miss profitable insights like these.

Recovering from last week’s dip tells us big money would rather buy these discounts than sell the weakness. That was especially true Tuesday when the market failed to tumble on the ominous trade war headlines.

There are few things more bullish than a market that fails to go down on bad news. That tells us most of the bearishness has already been priced in. Over the last two months, we have witnessed a ton of selling. But what happens every time a fearful owner bails out, he sells his stocks at a steep discount to a confident dip buyer who is willing to own the risks.

Over time these fearful sellers are replaced by confident buyers and there comes the point in every dip where we run out of fearful sellers. Once everyone who fears the headlines sells, there is no one left to sell and the headlines stop mattering. That is what happened today; Trump threatened to take his trade war nuclear and the market yawned.

There comes the point in every dip where things go too far and prices are attractive enough for buyers to start ignoring the headlines. It certainly seems like this market is getting to that point.

The next most obvious target is reclaiming 2,700 support, and the 200dma after that. We are not out of the woods yet and we should expect volatility to stick around. But the swings are getting smaller and the fear of a collapse are dissipating. We currently find ourselves near the lower end of the trading range and are in a place where the market is brushing off bearish headlines. That tells me the near-term path of least resistance is higher. Things will look different after we run up to the 200dma, but we will discuss what comes after that when we get there.

Trump specifically called out Apple when threatening to increase Chinese tariffs to 25%. While that would put a massive hole in AAPL’s earnings, the stock largely shrugged off the news and finished practically flat. That tells us AAPL’s 25% tumble from last month’s highs has already factored in a lot of bad news. If further downside is limited because most of the bad news is already being priced in, that actually makes this a pretty safe time to be buying. While prices could continue slipping, the lower we go, the safer it becomes.

It’s been a while since I wrote about Bitcoin because I’ve been so consistently bearish about it there wasn’t much new to add, but now that prices dipped into the $3k’s, the situation has changed. While I’m still skeptical of Bitcoin’s long-term viability, every collapse includes multiple sharp rallies. Given bitcoins sharp fall, I would rather buy these levels than sell them. It wouldn’t be anything to see prices bounce 25% or 50% from current levels. For the most nimble of traders, that’s good money for a few days of work. The challenge is knowing when we will bounce. Anyone buying the dip better be willing to sit through some dramatic near-term weakness first.

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Jani

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