The S&P 500 slipped on Wednesday, giving up 0.5% and falling for the third day in a row.
No doubt the financial press found some excuse to justify Wednesday’s decline, but the simple truth is stocks move in waves. After several weeks of up, it’s time for a bit of down. Two steps forward, one step back. Rinse and repeat. This latest wave of selling is no more meaningful than that.
But as I’ve said many times before, the market loves symmetry, which means the inevitable step back will reflect the scale of the prior runup. That means this step back has the potential to offset a four-month rally that added 600 points.
Now, we don’t need to offset the entire run from the 2023 lows, but even retrenching a portion of the rally from 4,200 will require more than three modest days of selling.
I still like this market and am in no way calling for a crash back to the lows. But I also know stocks move in waves, and it’s been a great ride to this point. At the very least, even bulls should be expecting a near-term cooling off, and 4,200 support is very much on the table.
We take profits when we have them because if we don’t, we won’t have profits left to take. That means longs should have already been locking in some of their profits proactively and protecting the rest with nearby trailing stops.
As for the bold, there is still more downside left in this short, and we are nowhere near capitulation. Keep holding those shorts and move our stops down to at least our entry points, making this a low-risk/high-reward trade.
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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.