Has anything changed?

By Jani Ziedins | End of Day Analysis

Dec 18

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It’s been another rough stretch for the S&P 500 as prices tumbled to the lowest levels of the year. Monday crashed through 2,600 support, triggering an avalanche of defensive selling that didn’t stop until we fell another 50-points. Tuesday was a little bit better since prices closed unchanged, but that disguised the fact early gains didn’t stick and we stumbled back to breakeven. Few things are more disheartening than fizzled rebounds.

Bears want us to run screaming from this market because it is so obviously doomed. Unfortunately for them, they are living in the rearview mirror. They are beating their chest over what has happened. But in the market, we only profit from what is ahead of us. Currently, the market rests 13% under the 2018 highs. The question we need to be asking is if it better to be selling these discounts, or buying them?

A quick history lesson. The S&P 500 has only fallen more than 15% from all-time highs 11 times. The last two times were the dot-com bubble and the 2008 financial crisis. Do current conditions resemble the dot-com bubble where average p/e’s of tech companies were nearly 100? Or the financial crisis where the entire banking sector was so overleveraged it nearly went out of business? Some people think so and clearly they should be selling everything they own and burying it in the backyard. But for the rest of us, do we really believe the economy is on the verge of a collapse that has only been seen a handful of times over the last seven decades???

No doubt bears will crow that I was bullish two months ago in October when the market dipped to 2,600 support, and then again when it fell to the low 2,600s in November. I guess they were right since we now find ourselves under those levels. But the thing to note is it took two full months to fall another 50-points. That’s less than one-point per day. Wow, terrifying stuff!!!

While bulls and bears have been arguing passionately over who is right, I have been quietly grinding out profits riding the waves between these two extremes. I even wrote about it a couple of weeks ago in a post titled “Q: Who is right, Bulls or Bears? A: Neither!

“It is shocking to see the amount of gloating going on every time the market moves to one edge of the trading range or the other. We’ve been bouncing between 2,600 and 2,800 for most of the last two months. Today’s dip and reversal count as the 7th time the market challenged and failed to break out of this range.

But rather than use “common” sense and assume each dip is a great buying opportunity, or rally a time to take profits, these impulsive bulls and bears ignore the evidence and proclaim this is finally the big move they’ve been waiting for. Monday it was the bulls. Today it was the bears. And both sides got it exactly wrong.”

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Has anything changed? No, of course not. Bears are as confident as ever, and bulls are cowering in the corner. This is a mirror image of two weeks ago when the market was challenging 2,800. The last seven times bulls and bears were bragging about their success, the market reversed ran them over. Will this time be any different? No, probably not. But I don’t mind. I will continue betting against the crowd, and so should you.

While I like these discounts, the looming Christmas and New Years holidays complicate the situation. What would normally be an attractive buying opportunity might struggle to get off the ground since big money is leaving for vacation. That puts impulsive retail investors in charge and that is rarely a good thing. Luckily, these little guys have small accounts and their emotional buying and selling doesn’t go very far. We saw the emotional selling from Thanksgiving week erased the following week when big money returned to work. And the same could happen here.

Most likely the market will muddle into year end and the bigger bounce won’t happen until January. That is if nothing significant occurs between now and then. The one big thing that could happen is the Fed backing away from the widely expected rate hike on Wednesday. That would send the market surging higher. But if that doesn’t happen, expect the market to muddle along between 2,500 and 2,600 for the next two weeks. After that, if the financial world doesn’t collapse, expect the market to recover from these oversold levels as reality turn out far less bad than feared.

In my long-term investments, I love buying these discounts and hope prices fall even further so I can buy even more. In my shorter-term trading account, I would rather be buying these discounts than selling them, but I’m not eager to rush in ahead of what could be a volatile holiday.

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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.