Tuesday started out well enough. Early sideways trade transitioned into a decent afternoon rally. That is until Trump threw cold water on the market and surprised everyone by announcing all stimulus negotiations are suspended until after the election. That proclamation sent stocks crashing more than 2% from those afternoon highs in a matter of minutes.
If there is a silver lining to this afternoon’s tumble, stocks quickly found support between Monday’s open and Friday’s close and held in this region through the final hour of the day. The index slumped a little further in after-hours trade but not dramatically so. At least to this point, this looks more like concern than panic.
We will learn a lot more about the market’s mood Wednesday. Dramatic corrections like early September and huge crashes like last February get started and they don’t stop going for several days. If prices hold up reasonably well Wednesday afternoon, this latest development is not turning into the next crash.
For a fundamental analysis of the market’s disappointment, this is a delay and not a termination. A stimulus deal will eventually get done, it just won’t happen as quickly as investors were hoping. Delayed gratification leads to dips, not crashes. As long as the market remains above 3,300, stocks are in pretty good shape. And who knows, the dip might even turn out so modest and fleeting it could be hard to take advantage of.
As for how to trade this, the market has been acting well since September’s bottom and smart money was riding this wave higher. This afternoon’s sharp tumble threw a wrench into those plans. Even though stocks didn’t undercut recent lows near 3,320, it still made sense to take some risk off the table and lock-in a portion of our recent profits.
As I often remind readers, it is much better to be out of the market wishing you were in than in the market wishing you were out. There is nothing wrong with taking some risk off the table when we get blindsided by something we don’t fully understand. Our clearest thoughts and analysis comes when the pressure is off and sometimes it only takes selling a small fraction of our position to gain that clarity.
As for Wednesday, wait to see what happens tonight and tomorrow morning. If the market finds its footing, get back in. If we get hit by another round of reflexive selling, get out of the way and wait for the next bounce. My hard stop is near 3,320 and if we fall under that, I’m out no matter what*. (The lone exception is if we gap under that level at the open. I will give the market 15 minutes to find a bottom and bounce before selling.)
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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.