It’s been a rough week for the S&P 500 as it shed more than 80 points over the first two days.
The index closed at record highs on Friday but by Tuesday it was already retesting 4,120 support. And so goes the swinging pendulum of sentiment.
There are only two ways this plays out. Either this is the start of the end. Or this is just another routine wobble on our way higher.
So far we haven’t seen any meaningful technical damage telling us “this time is different”. The index gapped near 4,120 support at open and traded mostly sideways for the remainder of the day.
While Tuesday finished deep in the red, more important is the selling didn’t accelerate following the opening gap. That tells us most owners chose not to pile on the weakness and instead, shrugged and kept holding their favorite stocks. This rally has been built on the unshakable confidence of owners and Tuesday’s dip didn’t change that. Most owners would prefer to keep holding for higher prices and as long as we avoid the waterfall selloff, expect them to keep holding.
And this gives us the tipping point for this market. Remain above 4,120 and most owners will continue shrugging off these inflation headlines and will keep holding for higher prices. But fall under 4,120 and the real second-guessing will start.
At this point, we still have to give the edge to the bulls. A trend is far more likely to continue than reverse. And let’s not forget, we are only two sessions removed from yet another record high. Weak markets do many things, but setting record highs is not one of them.
Monday was a dreadful day for the FAANG stocks as they went into freefall. Fortunately, Tuesday turned out much better, even going as far as being good for these best-of-the-best stocks.
As I wrote previously, these critical stocks have been underperforming the indexes and that persistent weakness threatened the entire bull market. Yet Tuesday was a stark turning point with most of these stocks producing nice gains or at least finishing well off their early lows on an otherwise dreadful day for the indexes.
If these tech highfliers lead us lower, it makes sense to reason that they could also be the spark that pulls us out of this funk. If these stocks have another good day Wednesday, the worst could already be over for both these stocks and the entire market.
That said, there are no guarantees and if these leading stocks retreat under recent lows, expect them to continue pressuring the entire market.
Tuesday was a really good day, but we need these stocks to confirm this reversal in fortune on Wednesday or Thursday.
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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.