Who is the Next Buyer?

End of Day Update:

The S&P500 slipped modestly Thursday, but this was mostly a placeholder day ahead of Friday’s monthly employment report. October’s breathtaking 200-point rally kicked into overdrive following September’s big employment miss. Will October’s employment launch a similarly impressive move?

I cannot begin to guess what the jobs number will be. Maybe we have another big miss. Or maybe economists lowered their expectations so much that it will be an easy beat. But the truth is even if I knew the number ahead of time, I’d still be clueless about how the market will react to it. We vacillate so frequently between ‘good is good’ and ‘good is bad’ that it is challenging to simply figure out which way is up. But rather than guess what the number will be or how the market will react to it, there is a better way.

Everything always comes back to supply and demand. It makes no difference why people are buying, only that they are buying. Same goes for selling. This means we no longer need to worry ourselves over whether ‘good’ is good or bad. The only thing we care about is if people are buying or selling the news. So the question of the day is, “Who is the next buyer?” Find that answer and we unlock the market’s next big move.

To figure out where we’re going, we start with where we came from. Two-hundred points over four-weeks tells us there was a lot of desperate buying in October. Buyers were forced to offer higher and higher prices in order to persuade reluctant owners to sell. Value buying, dip-buying, short-covering, breakout buying, and good old fashioned chasing, we saw it all in October. And that’s what launched us from the lowest levels of the year to near record highs almost overnight. As for what comes next, we need to identify that next enthusiastic buyer.

Near record highs, we can cross value buyers off the list. Same goes for dip-buyers. If there are any shorts left in the market following a 200-point beating, clearly they don’t feel pain and any further gains are just as unlikely to convince them to cover. We smashed through almost every resistance level and moving average on our way higher. The only meaningful level we haven’t crossed is all-time highs above 2,130. But again, if a breakout buyer didn’t buy the previous key levels, is 2,130 really going to get them off the couch?

The one plausible category left is the chaser and given all the selling we saw in September, there are plenty of regretful sellers afraid of being left behind. But while a retail trader might buy after a 200-point rebound, institutional investors are far more stubborn. They are experienced enough to know a pullback is just around the corner and will patiently wait for a hot market to cool off.

And so here we are. I have no idea what the employment number will be or how the market will react to it. But I know that no matter what the knee-jerk reaction is, it is going to be really hard to find new buyers to keep these sharp price gains going. Keep that in mind as you try to figure out how to trade Friday’s employment report.

Jani

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