In last weeks note before the selloff, we noted that the markets, especially the S&P 500 was looking very tired and in need of a correction. After the action of the past few days, this seems even more evident.
The theory of the selloff from the hedge fund industry was to take some profits and lighten up ahead of the Fed meeting. Most were anticipating that Bernanke would hint that the economy is getting better and the end of easing was coming. This is actually laughable!!
The Fed is smart enough to know that anything in that context would spook the market in a big way, and may lead to another major selloff. In turn this could cause a double dip recession, and make all work that was done to prop up asset prices rendered useless. Very quickly we might ad.
The SPY has been kept in check for more than a few days at the 155.65 level, where there seems to be some good resistance. This was more evident into the close yesterday when the Bulls fought to try and run to 156. With only a few minutes left in trading the rally reversed hard & strong down to a little under 155.50, and then with less than a minute left the Heroes reemerged and drove it back to 155.7.
One thing that history has taught us is that someone big is definitely doing some selling, and when this happens, like it has since the February selloff, we need to heed the warning signs. This doesn't mean that the market can not run a little higher, but it does mean that will only be another opportunity to sell.
The market does not turn on a dime until the Big money is all out and positioned for the fall. It is a process that takes a month or two because they are dealing with selling and shorting trillions of dollars in assets. This would be impossible to do overnight. They also push the markets higher at the end to bait in all the last remaining heroes that are itching to get in. Then comes the big reversal plunge lower that shocks mostly everyone and causes the panic selling that will eventually put in a bottom.
Since this run has been truly euphoric, and billions of average investor money has been coming in since the beginning of the year, we would expect a sharp and fast downturn to break the 1500 level. It may bounce around there for short term support for a few days, but it will eventually break it.
The 1425-1450 level is showing us that this could be the ultimate settling point, but that will depend on the panic. For over a month now buyers have not been hedging as much, which is a sign that the Smart money is not fueling this rally anymore. It is the late comers, mainly the mutual funds who are always late because of the influx of average investor money they need to put to work.
In all reality, the S&P 500 could pull back to 1100, which would be a 50% retracement of this rally that started around the 660 area. A move there would not break the market, but would be a normal pullback to solidify the bottom that was reached in 2009. Long term it wouldn't do much damage to the charts, but in the short term it would destroy them.
These are scenarios that we all must be ready for just in case they play out that way. With the market anything is possible!!
This is not the time to be a Hero, this is the time to be a smart and cautious investor. Be ahead of the correction, so you can make money in a down market. That is what makes a good investor. Being able to make money in an up or down market, puts you on the same playing field as the Big guys!!
Good Luck & remember to keep asking people, how many of them make money when the market sells off? You will be surprised how many lose a lot of money in corrections.
Disclosure: I am long TZA.
Additional disclosure: We are long AAPL, BIDU. We are short biased on the overall markets.