PM: Still looking for a bottom

PM Update

MARKET BEHAVIOR
Stocks fell over one percent, continuing the recent selloff.  The silver lining is the midday bounce from much lower levels, but a loss is still a loss.  Volume was well above average as traders dump shares by the truckload.  There is modest support back near 1540 from March and April, but the next major level is the 200dma just above 1500.

MARKET SENTIMENT
Huge trading volumes over the last three-days as the market is anything but complacent.  The alleged rumor is Ben Bernanke yelled fire and everyone rushed for the exits.  Of course no one personally heard him say fire and is panicked simply because everyone else is.

The Fed is still has their foot on the gas and is pumping $85 billion of liquidity into the markets and will continue buying bonds well into next year, but never let the truth get in the way of a good story.  As we’ve long discussed on this blog, markets don’t trade fundamentals, they trade investor perceptions.  Right now investors are acting like three-year olds, throwing a tantrum because Uncle Ben won’t promise easy money for ever and ever.  Without a doubt the market is overreacting, but doesn’t mean the selling will stop and we could easily see another couple of legs lower before this is all said and done.

TRADING OPPORTUNITIES
Expected Outcome:
The high volume selling is flushing out many previously confident holders, creating the next pool of buyers to push this market higher in the future.  But that is still a ways out.  The real savior of this market will be the deep pocketed value investor who sold out when values got too rich last month and is eager to buy back in at these discounted levels.  The biggest question is if these levels are too attractive to resist yet.  Once their buying puts in a bottom, the panic selling will subside.

Given the huge flush in volume, I’d say we are getting close to the capitulation point where most of the weak hands sold impulsively to far more confident value investors willing hold through some uncertainty.  Of course the bottom will remain volatile and we should continue buying weakness and selling strength.

Alternate Outcome:
The market can continue selling and there is nothing more unnerving than seeing our accounts meltdown before our eyes.  Everyone has their breaking point and even the most resolute holder will cave if we keep falling.  The only thing that protects us is our stop-losses and hopefully no one has ridden this down all the way from the peak.

Trading Plan:
The aggressive can continue buying the dip with a tight stop under recent lows, but for the rest of us, the safer play is waiting for the market to bottom.  Wherever this ends, we will likely consolidate sideways and there will be plenty of time to buy back in over coming weeks and months.  In the meantime, both bull and bear should take profits early and often as the volatility will continue for the remainder of the summer.

Plan your trade; trade your plan