It doesn’t get wilder than Thursday’s crazy ride in S&P 500. Prices plunged at the open after the US had the CFO of a major Chinese tech company arrested for violating Iranian sanctions. That was a significant escalation in Trump’s confrontation with China and it crushed all positive feelings following last weekend’s trade truce.
The selling intensified and by late morning we were down more than 3%. But then something happened. We ran out of sellers. And more than just run out of sellers, the market erased almost all of those losses and closed practically flat. We went from one of the worst days of the year, to a trivial 0.15% loss. Talk about an epic reversal.
A big chunk of the afternoon’s strength was fueled by the Fed’s slowing stance toward future rate hikes. Rather than dole them out at regular intervals like they have been doing, the Fed is quickly shifting to a wait-and-see outlook. A similar ideal launched last week’s 2.3% surge higher and today it erased 3% of losses.
But this market’s resilience shouldn’t surprise readers of this blog. After Tuesday’s 3.24% collapse, I wrote the following:
I expect global stocks to get hammered Wednesday as the world reacts to the U.S. market collapse. But after that, expect cooler heads to prevail. As I’ve been saying for a while, this is a volatile period for stocks. That means large moves in both directions. But so far these wild gyrations have been consolidating October’s losses, not extending them. There is no reason to think this time is any different.
Trading so close to 2,700 support means there is a good chance we will violate it. But as long as the selling stalls and bounces not long after, that tells us most investors would rather buy these discounts than sell them.
I will be completely honest, I expected us to poke our head under 2,700 and bounce. There is no way I could have foreseen those Huawei headlines sending prices cratering nearly all the way to 2,600 and then bouncing. Even I am dumbfounded by today’s resilience. But it still isn’t a complete surprise.
It isn’t controversial to say the majority investors know the stock market trades sideways most of the time. But the paradox is that most of the time, the same people also almost always assume each day’s gyration is the start of the next breakout or breakdown.
It is shocking to see the amount of gloating going on every time the market moves to one edge of the trading range or the other. We’ve been bouncing between 2,600 and 2,800 for most of the last two months. Today’s dip and reversal count as the 7th time the market challenged and failed to break out of this range.
But rather than use “common” sense and assume each dip is a great buying opportunity or rally a time to take profits, these impulsive bulls and bears ignore the evidence and proclaim this is finally the big move they’ve been waiting for. Monday it was the bulls. Today it was the bears. And both sides got it exactly wrong.
The ironic thing is by the time these chronic bulls and bears realize we are stuck in a trading range is right before we break out of it. No one said trading is easy. But it is a lot less hard if we know what to pay attention to.
As for what comes next, the US taking one of China’s top business executives into custody isn’t going to go over well and this story is a long way from being done. We should expect the situation to evolve and that will exacerbate volatility, but as long as investors would rather buy these discounts than sell them, we should be in good shape. The bottom of every market selloff feels like things are about to get a lot worse, and this time won’t be any different.
By this point, most of the Trump’s trade war is already priced in and the only thing that would worry me is we start shooting at each other. Barring that, this is just another buyable dip.