On Tuesday the S&P 500 opened with a 0.5% loss. That would have been shocking a few weeks ago, but on the heels of last week’s volatility, it seemed fairly benign in comparison. And as such, most traders didn’t overreact and buying quickly lifted us off those early lows. By the close, we even managed to finish in the green.
There were no market moving headlines, but sentiment is the primary force driving this market and at the moment, fearful selling is taking a break. We reached a near-term capitulation bottom last Friday and have recovered decisively from those oversold levels. While this is obvious to everyone after the fact, last Thursday I told readers:
“I think the market look pretty good. Risk is a function of height and this is the least risky point in several months. Traders should be embracing these discounts, not running from them.”
Finding a near-term bottom is alleviating some of the anxiety that crept in last week, but without a doubt January’s complacency is long gone. Given the level of damage, we shouldn’t expect this market to rally back to the highs anytime soon. Instead, expect volatility to persist for a while longer as we carve out a long overdue base.
The worst is most likely behind us and it would take a new headline to push us under Friday’s lows. Since rising rates and inflation launched this selloff, those are the headlines we are most vulnerable to. That said, expect any follow-on selling to be less dramatic than last week’s selloff. These things lose strength as they drag on and get priced in. As such, the size of of swings in both directions will decrease over time.
This is a swing-trader’s paradise and that means buying weakness and selling strength. We came a long way from Friday’s lows, making this is a better place to be locking-in profits than adding new money. On the other side, long-term investors should stick with their favorite positions and even add to them. This weakness is a buying opportunity, not the start of something larger.
Bitcoin stabilized above $8k as expected. Dipping under $6k was a capitulation point and these higher prices are bringing a wave of relief for owners. This stability is supportive of prices over the near-term and we should continue creeping higher, even flirting with $10k. But don’t get too excited, this is just another bounce on our way lower. Every bounce is a selling opportunity and this won’t end until we fall under $4k. But it will take a while for us to get there. In the meantime we can profit from these bounces higher.