On Tuesday the S&P 500 tried to recover Monday’s selloff. Unfortunately, the follow-through never materialized and we finished well off the intraday highs. Traders still seemed more inclined to take profits than buy the dip.
If this market was poised to rip higher, this was the bulls’ opportunity. The lackluster buying suggests this weakness will likely extend past Monday’s dip. But this isn’t a bad thing. The recent run up leaves us 70-points above the 50dma and a check back is long overdue. The only question is if we dip back down to this key moving average, or trade sideways and allow it to catch up.
Falls from unsustainable levels typically happen quickly, so the longer we hold current levels, the more likely a sideways consolidation becomes. But we need a few more days because two days definitely doesn’t qualify as solid support.
Last Friday we broke out to record highs when the Senate finally agreed on a budget. That clears the way for more significant Tax Reform. Unfortunately those fuzzy feelings didn’t last long and rifts within the Republican party started showing as Trump and key Senators started throwing barbs at each other. Trump definitely has a more antagonistic leadership style and that will likely lead to more tension during the Tax Reform debate. The market hates uncertainty and this conflict will likely erase a big chunk of the hope that lifted us to these levels.
I’m most definitely not a bear and still think the path of least resistance over the medium-term is higher. But I have also been doing this long enough to know the market doesn’t move in straight lines. After a period of nice gains, it is perfectly normal for the market to consolidate the run up. This is part of the healthy process of moving higher. In fact I would be more concerned about the sustainability of this rally if we didn’t consolidate recent gains. The higher we go, the harder we fall when the inevitable consolidation eventually happens.
All of this means this is definitely a better place to be taking profits than initiating new positions. But just like how we shouldn’t overreact to recent strength, the same level-headed thinking will be required if we dip further over the next several days. Additional weakness is creating a buying opportunity, not an excuse to reactively abandon an otherwise healthy market. Remember, smart money trades proactively by selling strength and buying weakness. Reactive traders bleed themselves dry by doing the opposite they buy high and sell low. Don’t be a reactive trader.