The S&P 500 crashed Monday as investor sentiment soured following record-high Coronavirus infection rates in Europe and the U.S. and the next round of Covid stimulus negotiations are postponed until after the election. At least that’s what the financial media told us.
While both of these headlines are extremely concerning, do they qualify as new and unexpected? Nancy Pelosi’s stimulus deadline came and went nearly a week ago and European infection rates have been spiking since September and the U.S. rates have been trending higher for nearly as long. If a person didn’t see these things coming from a mile away, clearly they were not paying attention. Yet the financial press spins these obvious events as if they caught everyone by surprise. I don’t know about you, but neither of these headlines surprised me. While I might be more cynical than most, I doubt these predictable headlines surprised even optimists among us.
If stocks didn’t tumble today because of a surge in infection rates or the postponement of stimulus negotiations, why did they crash? Simple, stocks move in waves. Always have and always will. Every bit of up is followed by a bit of down. Everyone knows this, yet it is amazing how many people are caught off guard when the next wave comes.
Large institutions already positioned themselves ahead of the election. Bullish or bearish, big money placed their bets weeks ago and that means supply and demand is modest and prices are mostly drifting sideways into the election.
The thing to remember about trading ranges is prices typically rally to the upper bound before stalling falling to the lower end. The S&P 500 challenged 3,500 in early October where it peaked and now it is testing 3,425 support.
If that’s all that’s going on, should people be running around in a panic? No, of course not. But if people didn’t panic and sell, prices wouldn’t fall. Investing 101: Every dip feels real. If it didn’t, no one would sell and prices wouldn’t fall.
As bad as Monday’s selloff felt midday, prices bounced and finished well above the early lows. As is usually the case, how we close is far more important than how we started. The early wave of selling capitulated and prices bounced back near 3,425 support by the end of the day. If stocks reclaim support Tuesday, that’s a buyable bounce with a stop just under this level. Start small, get in early, and keep a nearby stop. If the market trades well tomorrow afternoon, add more. If it doesn’t, no big deal, pull the plug and try again next time.
Previously, I was expecting some weakness after the election. But maybe that weakness came a little early. Until further notice, I will treat this test of support as a buying opportunity, not a reason to abandon ship. If prices tumble under 3,400 Tuesday, all bets are off and I will reevaluate. Until then, this is a great entry point with a well-defined stop.
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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.