End of Day Update
Stocks closed higher and recovered most of Friday’s losses, but it was a wild ride getting there. After an opening gap higher, the market slipped to break even before staging a late-day rally back to the early highs. Volume was well under average on the first day of this holiday-shortened week and the S&P500 remains under the widely followed 50dma.
Sometimes markets are overwhelmed by surges in supply and demand, other times they move because no one is buying or selling. Today’s low-volume rally had selling take a break as we floated higher on tight supply. This strength took pressure off nervous owners, but it didn’t do much to tempt reluctant dip-buyers that were burned by last week’s false bottom. While there were few buyers, there were even fewer sellers and is why we ended the day higher.
With the S&P500 down over 4% and the NASDAQ 8%, many are claiming this is the 10% correction that is long overdue. These people point to similar corrections in years past, but to me there isn’t much similarity because the examples they hold up were driven by some fundamental change that altered investor’s outlook on the future. Euro Contagion and the downgrade of US debt were the two biggest selloffs of this 5-year old bull. While the technical setup might be similar, we still lack the fundamental catalyst that changes confident investors outlook on the future. Without those fear mongering headlines, this dip will likely be little more than the normal back-and-forth.
Expected Outcome: Without a fundamental reason to sell off, we will remain range bound.
While I don’t see any reason for the market to implode here, there also isn’t much reason for it to race off to the moon either. We trade sideways more often than directionally, so why are so many people taking sides, predicting a launch higher or collapse lower? Why can’t we simply hang out in a 100-point trading range through summer?
Sometimes we don’t know why markets selloff until after the damage is done. Maybe there are people far smarter and connected than we are and they are liquidating positions ahead of the imminent market collapse.
While it is fun to predict market collapses, smart money bets on a continuation of the previous trend. That’s because a trend will continue countless times, but only reverses once. It’s a numbers game. While it is hard to get excited about the upside, the market is in a better position to bounce than continue lower.
Plan your trade; trade your plan