The worse this looks, the more I like it!

By Jani Ziedins | End of Day Analysis

Sep 30

Free After-Hours Analysis: 

The S&P 500 attempted another bounce Friday morning. Unfortunately, that late morning buying proved fleeting and the index slipped into the red by the close, setting yet another fresh 52-week low.

Friday’s loss makes it -2.9% for the week and the sixth weekly decline out of the last seven. That hurts, but it definitely feels like the selling is losing momentum near the old lows.

Monday’s close was the first fresh 52-week low since this summer. Following Monday, we set a further three 52-week lows. But as dire as four 52-week lows in a week sound, the market dropped less than half a percent on average since Monday’s close. While not good, this is far from panic territory.

There are two ways to interpret this. Either the market is finally running out of sellers after six weeks of exhaustive selling. Or this week’s reasonably stable trade was nothing more than the calm before the next storm.

If stocks were a lot higher, I would be far more worried about further selling. But after the market shed more than 700 points in seven weeks, we have a lot less to worry about because it can’t give back those 700 points again.

Sure, anything is possible and we could fall again next week, but the next bounce is a lot closer than most people think. The AAII sentiment survey is over 60% bearish and at a 12-month high, while the historical average is all the way back at 30%. If a person believes in trading against the crowd, sentiments has rarely been this skewed in the bearish direction.

As always, no matter how overdone the selling has gotten, the market can always get even more oversold. But it is getting harder and harder to scratch out those last few points to the downside and when this pops, boy is it going to pop.

At the very least, we should be lightening up our short positions because greed never pays. But more than that, this thing is a tightly compressed spring poised to rip. Wait for that bounce to start and then jump aboard.

As I often remind readers, the biggest and fastest rallies occur during bear markets. And the last time I checked, we are still in a bear market.

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About the Author

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.