Lemmings jumping off the off the cliff

Free After-Hours Analysis: 

Thursday started off well enough for the S&P 500 as it popped more than half a percent at the open on a better-than-expected weekly employment report. But all of those good feelings vanished in the blink of an eye. Not long after lunch, the market entered freefall, turning nice opening gains into big losses by the close.

If you believe the financial press, investors got spooked when a couple of Fed officials suggested rate cuts might not be as close as many investors were hoping. But more than these somewhat questionable explanations, this looked more like lemmings following each other off the cliff than a rational response to some unofficial comments by some relatively unknown Fed officials.

I will be honest, I came into Thursday long because I liked the way the market bottomed on Tuesday. As I wrote Wednesday evening, the market was acting well, which made it buyable. I wasn’t expecting a big rally because that’s not what this market has been giving us, but it was a decent, low-risk entry.

Luckily, Thursday’s open allowed me to lift my stops above my entry points, so I was sitting pretty with another low-risk trade. And I felt good about my position until the selling knocked us under the morning’s lows. That’s when the selling accelerated, and I got concerned enough to pull the plug even before my stops were hit.

Remember, stops are our last line of defense, not our only line of defense. If something doesn’t feel right, it probably isn’t right. That’s what it felt like as Thursday’s selling started feeding on itself. And no matter what it feels like, there is never an excuse to let a winning trade turn into a loser, so even if a person didn’t get spooked by the accelerating selling, they should have pulled the plug at their entry points no matter what. Follow these simple defensive rules and most people would have missed all of Thursday afternoon’s pain.

As for what comes next, there wasn’t any meat to Thursday’s selling, so I question the sustainability of this move lower. We need headlines that will shatter bulls’ confidence and turn them into fearful bears for this rally to break. I didn’t see anything on Thursday that will convince bulls to start selling their favorite stocks. Until proven otherwise, I will be looking for the next buyable bounce, it will probably be here sooner than most people will be ready for.

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