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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 was crushed last Friday and it added to those losses Monday. But on the heels of Friday’s -3.4% bloodbath, Monday’s -0.7% loss felt almost quaint. The index even managed to poke its head into the green during Monday’s session. Unfortunately, that momentary relief was short-lived and prices slipped back near the intraday lows by the close.
The bloodletting started Friday when Powell announced the Fed’s primary focus was fighting inflation and it wasn’t going to let up until the job was done. That mirrors what he’s been saying all along, but it spooked some investors that were hoping for a lighter touch and a quicker return to easy money.
Complicating issues is we are quickly closing in on the Labor Day holiday and many institutional investors are spending the final weeks of summer somewhere other than behind their desks. That means big money managers are not there to steady the market if small investors overreact to these headlines and price action. The saving grace is these small fries don’t have much money, meaning they run out of ammunition fairly quickly and these irrational swings tend to stall and reverse fairly quickly.
What’s that mean for us? Well, it would be foolish to assume the worst is already behind us. These things are rarely one or two-day events. But at the same time, if big money is MIA and not participating in the selling this week, supply could dry up fairly quickly.
A violation of 4k support seems highly likely, but at this point, that will probably signal capitulation selling and not the start of the next big leg lower.
I’m not saying we can’t fall a lot lower than 4k over the next few weeks or months, just that it won’t happen until big money returns from vacation in the second half of September. Until then, expect the elevated volatility to persist, but in a more back-and-forth sort of way.
A really nice setup would be buying a violation of 4k support that bounces back above this key level. Put your stops under support and see what happens.
As for those of us with short profits from Friday and Monday, don’t get greedy and be ready to take profits soon. If the selloff resumes in the back half of September, it will be easy enough to reshort the market. In the meantime, it would be a real shame to let those profits disappear if prices bounce in a near-term relief rally.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 tumbled Monday, extending Friday’s losses and the index now finds itself 5% under last week’s highs.
As my dad always used to remind me when I was a kid, easy come easy go. Luckily for readers of this blog, we were on high alert and ready for this pullback. As I wrote in last week’s free post, “How much higher can this go?“:
While I’m not in the business of picking tops, this is pretty darn high and at the very least, we can say the risk/reward is no longer lined up in our favor.
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Sometimes it is better to be lucky than good and I was definitely lucky when I wrote that post hours before this latest round of selling started. But just because I didn’t know exactly when the next step-back was going to start doesn’t mean we can’t be smart about our positioning when the odds are no longer stacked in our favor.
In this case, that meant taking some profits proactively last week and keeping a trailing stop nearby for the remainder of our position. And now that the market is 170 points lower, while other investors are filled with fear and dread, wondering if they should abandon ship before things get worse, I’m watching this from the sidelines with a pile of profits that I’m getting ready to throw back into the market as soon as this bounces.
Headlines remain largely the same, meaning this latest round of selling is little more than traders waking up to all of the risks they were ignoring last week. And so continues the swinging pendulum of sentiment. One week everything is great. The next week the sky is falling. Funny how that works.
Without a major headline catalyst driving this selling, I don’t expect it to go far. This is the kind of stuff that bounces before support and doesn’t crash through it.
The problem trading this gyration is we don’t know if “bouncing before support” means bounce above 4,100 or bouncing above 4k. But rather than try to guess, as smart traders, we let the market lead the way and we buy after it bounces, not before.
Odds are pretty good we will spend some time in the red Tuesday, but be on the lookout for that next bonce and be ready to jump on it. Start small, get in early, keep a nearby stop, and only add to a trade that’s working.
And if Tuesday’s bounce doesn’t stick, no big deal, we pull the plug at our stops and try again Wednesday.
I have no doubt things can and will get worse later this fall, but we are still stuck in the final weeks of summer and that means we shouldn’t expect major moves in either direction while big money is still at their summer cottages.
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