Free Weekly Analysis:
It was a mixed week for the S&P 500. Monday started with a nice pop as the index launched its second rebound attempt from September’s swoon. Unfortunately, stocks could only string together two winning sessions before three successive losses knocked us back to where we started. So much for bounce attempt #2.
Headlines remain dreadful, but they’ve been dreadful for months and in that regard, nothing has changed. Instead, most of this weakness comes from the high-flying tech sector that led this miraculous charge to all-time highs. Live by tech stocks, die by tech stocks. At least that’s how this has played out so far.
There isn’t anything inherently wrong with the tech trade. These companies are still performing at the top of their game and most are insulated from Covid. In fact, many like NFLX and AMZN actually benefited from the lockdowns.
If it isn’t the fundamentals, what is the problem with the tech trade? Simple. Two steps forward, one step back. Cognitively, everyone knows the market moves in waves, unfortunately, most people forget this very basic concept in the heat of battle. Tech stocks raced higher and it only makes sense that at some point, they take a break and cool off. This appears to be that point.
If September’s dip is a normal and healthy thing to do, there is no reason to panic and abandon ship. The world is not ending and the market is not crashing. This is nothing more than stocks taking well deserved a break. These tech companies were the best-of-the-best coming into September and they will still be the best-of-the-best leaving September. All we need to do is put up with a little near-term volatility. No big deal.
Friday’s intraday dip in the S&P 500 undercut both the weekly lows and made fresh monthly lows. Nervous traders often place their stops under recent lows and that leaves us vulnerable to an avalanche of autopilot selling if the market undercuts those widely followed levels. But guess what happened today when we undercut the lows? Nothing. The market slid past the lows and rather than accelerate lower, supply dried up and prices bounced.
This resilience tells us we are running out of nervous sellers and there is very little supply underneath the market. Most owners do not have their finger on the sell button. If they did, we would have seen that avalanche of selling overwhelm the market this afternoon. Instead, most owners shrugged and kept holding. That is a very bullish development.
As I wrote earlier this week, as long as the S&P 500 remains above 3,300, this continues to be a dip-buying opportunity. Only after the market crashes through 3,300 should we consider shorting. If the imminent collapse is as big as the naysayers claim, we can afford to be a little late and still make a boatload of money. Until then, I’m giving this bull market the benefit of doubt. That means buying every bounce attempt, including Friday afternoon.
Obviously, the first and second bounce didn’t work, but that’s to be expected. If we knew which bounce was the real deal, this would be easy and everyone would be rich. Now that we’re on bounce attempt #3, I’m a little more hopeful. Statistically speaking, the 3rd bounce tends to be the most successful.
As long as we start small, get in early, keep a nearby stop, and only add to what is working, any losses from buying the wrong bounce are small. More important is that we put ourselves in the right place at the right time to profit when this thing finally takes off. If I’m wrong and the market collapses next week, no big deal. I’ll close my long and go short. In fact, my trading account actually prefers a bigger selloff because volatile markets are extremely profitable. The bigger the dip, the bigger the payday.
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