The S&P 500 started the day with nice gains as attention shifted toward the start of earnings season. The index even challenged June’s highs just over lunchtime. Unfortunately, that was as good as it got and a late-day selloff slashed 85 points from those midday highs, transforming a great morning into a very disappointing afternoon.
Normally, it is incredibly bearish to see stocks retreat so decisively from a retest of prior highs. Rather than chase prices even higher, most owners took this opportunity to lock-in profits. That’s not unexpected given how far we’ve come since the March lows and the start of earnings season adds a new dimension of risk to the calculus. That said, if nothing else thrown at this market has been able to dent it, do we really believe some disappointing earnings will change the market’s mind?
Everyone knows earnings will be dreadful. We very easily could see some of the worst quarter-on-quarter declines in a generation, if not market history. But that’s the thing, everyone knows earnings will be dreadful and these results won’t catch anyone off guard. The same phenomena happened when we experienced the biggest jump in unemployment claims in modern history and the highest unemployment rate since the Great Depression. Did the market flinch following those appallingly bad reports? Nope. It shrugged them off and continued higher.
As I’ve written previously, we continue giving this market the benefit of doubt until it gives a compelling reason not to. This afternoon’s fizzle was definitely a warning sign. But so far it was also only a single warning sign and this rebound has ignored countless similar signals over the last few months. For those reasons, I need further confirmation of a change in trend before I’m willing to abandon this rally.
For the time being, keep holding but move our stops up. 3k is major support but we should be out long before prices retest this level. Consider locking in some profits if prices open weak tomorrow morning and continue skidding in early trade. The next level to lock in further profits is if prices slip under 3,140. Cut through those and close weak again and we should be all the way out.
But just because a dip squeezes us out doesn’t mean we give up on the rally. If prices recover these support levels, we jump back in. Without a doubt, getting caught in a little whipsaw is annoying, but it sure beats holding a bigger loser or missing the next leg higher.
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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.