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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
Last Friday’s 2% tumble in the S&P 500 was the second largest down day of the year and the biggest threat yet to 2019’s stunning rebound. The only constructive thing we could say about Friday’s devastation is the collapse stopped right at 2,800 support. But as worrisome as Friday felt, two days later we are still hanging on to this critical support level.
Weak economic data kicked off Friday’s selling in Europe and the carnage continued when US markets opened. But the thing about these headlines is they didn’t reveal anything investors didn’t already know. Last year’s huge correction was fueled by the fear of slowing global growth and by now everyone knows this is a problem.
The thing to remember about news is the more people that know about it, the less important it is. We saw a truckload of selling last year in October, November, and December. Nervous owners abandoned the market like rats jumping off a sinking ship. But the thing about all that selling is those fearful owners were replaced by confident dip buyers. While one person jumped out, another person jumped in. These dip buyers demonstrated a willingness to buy stocks in that negative headline environment. If they didn’t mind the headlines then, what are the chances are they will mind them now?
And that is why every negative headline and modest dip this year has been met with indifference. Confident owners are not afraid. When they don’t care about recycled headlines, the market doesn’t care. When the market doesn’t care, then neither should we.
While Friday was noteworthy, the real test of support came Monday when we dipped under 2,800. But rather than trigger an avalanche of defensive selling, supply dried up and we finished Monday flat. While it is hard to get excited over flat, given how ugly Friday was, flat is pretty darn impressive.
Market collapses are brutally quick. They move faster than people think because the panicked crowd sells first and asks questions later. But rather than hit the sell button Monday, most traders stood around and waited to see what everyone else was doing. By nature, investors are an optimistic bunch. They prefer holding stocks for higher prices and are always reluctant to let them go prematurely. That is why it is no surprise when you give investors a little breathing room, the anxious selling pressure evaporates.
While it is easy to identify these things after they happened. It isn’t that hard to do beforehand if you know what to look for. This is the analysis I shared with Premium Subscribers last Friday just after lunchtime:
“Today’s weak price movement doesn’t set off any alarm bells yet. We’ve heard this story many times before and this is most likely just another retelling. 2,800 is our line in the sand. Dipping under it is okay, but only if supply dries up and prices bounce back not long after. I will be a lot more concerned if we slip under 2,800 and the selling accelerates.”
Three days later and that is exactly what happened. Selling dried up and prices bounced. While we are not in the clear yet, every hour that passes without tumbling lower decreases the probability we will tumble lower. While we only recovered a sliver of last week’s losses, the fact the selloff stopped in its tracks is a big win. Market crashes are breathtakingly quick and the longer we hold these levels, the less likely a continuation lower becomes.
I like the way the market is acting and the path of least resistance remains higher. That said, the rate of gains is slowing and that means we should expect more of back and forth. While I’d love to see the market surge higher every day, down days are a very normal and healthy part of every move higher. Resist the temptation to join the herd overreacting to every bump in the road.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 slipped a trivial amount Thursday, but more crucially, it held above the psychologically significant 2,800 level. This marks only the 3rd close above this milestone since early November and shows the market continues recovering from December’s brutal tumble.
A lot can change in seven days. A week ago prices fell eight out of the previous nine sessions and it slipped under the 200dma for the first time since mid-February. Traders were getting nervous as it looked like things were getting worse. But last Thursday night in my free blog post, I wrote the following:
“My preferred way of approaching these situations is selling and taking profits early. While other people are sitting through this weakness wondering if they should sell or keep holding, I’m looking at the market with a clear head and waiting for a great dip buying opportunity. When they’re getting scared out, I’m jumping in. If most people lose money in the market, shouldn’t we be doing the opposite of most people?”
And that opportunistic approach paid dividends Friday. The S&P 500 traded sharply lower Friday morning, but that was as bad as it got. In my Premium Analysis sent to subscribers Friday morning, I told them:
“Today’s close will be insightful. A strong recovery tells us owners remain confident and are still holding for higher prices. As long as they keep supply tight, prices will find a bottom quickly. But weak close means many of these owners are developing second-thoughts and their selling will add to the supply. One is bullish, the other is bearish.”
As it turned out, Bulls won the battle and prices closed well above the early lows. That bullish reversal was the start of this week’s strong rebound. That was the signal for dip buyers to jump in and for shorts to lock-in profits and get out of the way.
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But that was then and this is now. What you really want to know is what comes next.
Last week’s dip was the perfect setup to trigger a bigger selloff if that is what this market was inclined to do. We’ve come a long way since the December lows and a pullback is a normal and healthy thing to do following such a strong move. But rather than use the excuse to lock-in profits, most owners stood their ground and refused to sell.
What the market is not doing is almost always more insightful than what it is doing. Last week the market refused to accelerate lower. Confident owners didn’t fall for the second-guessing and no matter what is going on around us, when most owners refuse to sell, prices find a bottom and bounce.
Move forward several days and while Wednesday’s lethargic break above 2,800 resistance was uninspiring, the important thing is we held this key level through the close…and then again Thursday. Prices tumble from unsustainable levels quickly and two closes above a significant milestone is a notable accomplishment.
Refusing to breakdown last week and holding above support this week are two significant accomplishments and definitely give the upper hand to bulls.
What this means going forward is that if bears want to break this market, it will take something even more significant than what we saw last week. Headlines have been far from great. European and Asian economies continue to slow. Trump’s negotiations with the Chinese are bogging down. Even the robust U.S. economy is slipping as last month’s employment missed the mark by a mile and other economic data was disappointing.
All of these headlines were perfect excuses for the market to keep tumbling lower. Yet here we stand, within a few points of six-month highs. If the market doesn’t care about these things, then neither should we.
This week’s muted reaction to reclaiming 2,800 shows this market lacks explosive upside, but the path of least resistance remains higher. The going will be slow, but expect higher prices over the near- and medium-term. While we always run the risk of being blindsided by the unexpected, it will need to be far larger than anything thrown at us thus far if it is going to derail this rebound.
That said, slow means lots of back and forth. Some days will be up, some days will be down, but the up will be a little bigger than the down. The only thing we need to fear is a shockingly bad headline that sends prices tumbling under 2,800 and the losses accelerate after that. A routine dip under 2,800 that bounces hours later is nothing to worry about. In fact, bouncing quickly would be yet another bullish sign that this market doesn’t want to sell off.
A market that refuses to go down will eventually go up.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
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