by James Brumley | July 24, 2013 3:09 pm
Note to self: The next time several of the market’s most notable research departments and gurus all agree on a target price for an index, don’t actually be naïve enough to think stocks have to reach or move above that goal line.
The time to jump off the wagon is right before that key level is hit.
Case in point: The way the S&P 500 Index stopped just two points shy of 1700 early Tuesday as well as today (Wednesday’s trading wasn’t done as of this writing, but it looks like we’re headed into a correction).
A whole slew of pundits including James Paulsen, Howard Silverblatt and Jeremy Siegel had pegged the 1700 level as a key target for the large-cap index, and being a round number, 1700 was already going to be a big psychological line in the sand. Tuesday’s S&P 500 peak of 1698.76 and Wednesday’s high of 1698.38 — followed by a sizable dip — lead me to wonder if the market got “close enough” to that likely turning point to actually say it reached its target.
If it has, and if we’re to take Wednesday’s knee-jerk response at face value, then the next several days could be anything but bullish.
The nearby chart tells the tale. The S&P 500’s rally was already slowing down as the 1700 level was being approached … the first red flag. But when it came time for the bulls to do or die on Tuesday, while they didn’t die, they certainly didn’t “do.”
One failure to hurdle a critical ceiling doesn’t inherently mean a rally has come to a close; sometimes it can take a few days for the market to muster enough guts to blast past an important level and rekindle a rally. To see the same hesitation on Wednesday, though — and once again, just a couple of points shy of 1700 — we have to entertain the possibility that this is the beginning of a relatively substantial pullback.
Don’t be shocked about how and where the budding rollover effort took shape, and no, it’s probably not a mere coincidence. The market loves to use those big, round numbers as targets, and more specifically, loves to use them as exit and entry points (exits, in this case).
The so-called “smart money” and institutional traders know that all bets are off and that anything can happen once a significant target price is reached. Some computerized “program” trades are specifically triggered when indices reach certain levels; it’s likely 1700 was one such trigger level.
While those triggered trades can often spur stocks upward, after a 7% runup from June’s low in addition to the 25% runup since November, pros and amateurs alike are far more ready to lock in profits than go fishing for more bullish trades … despite what the media might be implying.
At the same time, the fact so many analysts (and therefore investors) were eying 1700 as a pivotal level meant it was dangerously overwatched, setting up even more tension than was already in the cards.
In other words, the selling pump was primed. All traders needed was an excuse. The fear of a violent adverse reaction at 1700 was just enough of an excuse send stocks reeling.
Wednesday might end up being the worst day for stocks since the implosion in late June just because we were all ready to take action near today’s and yesterday’s highs.
Call it the market’s version of the observer effect.
Truth be told, there’s still a small chance the market could shrug off today’s woes and rekindle the uptrend we’ve all enjoyed since June 25. That’s a very low-odds possibility, however. A dip is the more likely outcome here.
But it’s crucial that true long-term investors don’t read too much into that dip. It’s not the beginning of a bear market. It’s just apt to be a garden-variety correction.
As of right now, there are no (reliable) organic support levels in place for the market. There’s still a key floor at 1538 in place, and the 200-day moving average line is going to be at that level soon. The 1598 mark was also something of a resistance line and then a support line in Q2. The 100-day moving average is around there too, currently at 1607, but rising. And there’s a Fibonacci retracement line (not shown) at 1562.
Any and all of them could be the spot where a pullback stops and reverses. A trip back to none of them, however, could be considered a portfolio-killer. Even a slide to the lowest of those potential floors would still only translate into a 9.5% pullback, though, which is roughly the market’s normal-sized corrective move.
Point being, while traders might be on edge as of today, for true investors, Wednesday’s red flags don’t mean a whole lot.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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