Why Thursday’s early wave of selling stalled and bounced

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The S&P 500 skidded -0.8% Thursday after the monthly ADP report showed robust hiring, sending us back into the “good is bad” paradox.

The thing about “good is bad” is it’s an idea embraced mainly by retail traders. If institutional investors feared strong economic numbers, the indexes would not be hovering near 52-week highs. But since this is a holiday-affected week and big money managers are on vacation, retail investors have oversized influence. That’s why we get things like Thursday morning’s reflexive 1.3% tumble at the day’s worst.

The silver lining is the index bounced decisively off those late-morning lows after running out of sellers. This is the slowest week of the already slow summer season. While that often leads to sleepy sessions, the low volumes also leave us vulnerable to elevated volatility because it doesn’t take much buying or selling to trigger oversized moves.

As dramatic as these moves feel in the heat of battle, the light volume also means these little traders run out of money quickly. And at this point, it looks like they could only keep up the selling for two hours before supply dried up and prices bounced.

Without big money’s guiding hand, anything could happen on Friday, but at this point, it looks like smaller retail traders ran out of things to sell and Friday should be better.

Following the crowd’s panicked moves is tempting, but it is often best to watch these gyrations from the sidelines, especially during these erratic holiday-affected sessions. I didn’t need to join Thursday’s selling and I didn’t need to join the afternoon buying either. Better and more reliable trades are coming our way and I’ll leave this chop to the impulsive gamblers.

At this point, I’m comfortable waiting and watching Friday’s trade unfold from the sidelines. If the selling accelerates, the best trading opportunity will be buying next week’s bounce after big money returns and undoes all the damage these impulsive retail traders did when left to their own devices.

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