Selling begets selling, that’s been the overriding theme for the S&P 500 this week. After closing at record highs last Friday, it’s been all downhill since then.
But as I reminded subscribers early yesterday:
Before we panic and head for our bomb shelters, a dip back to 4k only amounts to a 5% pullback, something that happens once or twice a year during normal bull markets. While this feels awful and it could get even worse, this is still fairly routine behavior for a bull market.
The problem with impulsive selling is there is no way to predict how far is too far until it is over. What could have bounced off of 4,120 didn’t. How much lower we go before capitulating is anyone’s guess, but at this point, 4k is very much on the table.
As bad as things look, I remain optimistic. Bull markets dip and bounce countless times, but they die only once. From a statistical standpoint, this is almost certainly nothing more than another wobble on our way higher. But just because the odds are on our side doesn’t mean we blindly hold this dip.
As I’ve been saying all along, in addition to holding for higher prices, we also need to be following this rally by raising our trailing stops. If a person stuck to this plan, they locked in profits nearly 100-points higher and are in a great position to take advantage of this dip.
Just because we remain optimistic doesn’t prevent us from taking advantage of trading opportunities like this. This is almost certainly a buyable dip, but remember, we cannot buy the dip if we don’t have cash.
The Achille’s Heel for this market continues to be weakness in the FAANG stocks and Wednesday was no different. After a promising bounce Tuesday, these best-of-the-best stocks resumed letting us down yesterday.
While these stocks are leading us lower, most likely they will also be the ones to pull us out of this nosedive. Look for a bounce in these stocks to be the signal that the worst has passed us by.
The first bounce in these stocks failed. And maybe the second one will too. But don’t give up, often the third time is the charm.