Over the past 2 years, investors have been conditioned to buy each and every dip. This psychology was at the forefront of the market when the S&P 500 (^GSPC) pulled back to 1300 multiple times over the past few weeks. Each time, investors wanted in, and each time they wanted a little bit more. But, the complexion of buy the dip changed when the market convincingly broke this line in the sand, pulling dip buyers down with it, and starting a psychological game of chicken… a game that is probably in the early innings and won’t end until we see images of frustrated investors throwing their hands in the air. The multiple reversal action (down, up, down, up) in and around 1260-1290 over the past week, and subsequent investor uncertainty -also see the S&P 500 SPDR (SPY)- will likely serve as a precursor to the ultimate frustration, as this volatile action has left many investors dazed and confused.
During the 2 year bull run, each dip and subsequent upward thrust bred more confidence, and the additional confidence pushed more money and leverage off the sidelines and into the market pot. This deep seeded psychological interest in the market will take at least another 3-4 weeks to burn off. Down 7% or so doesn’t sound so bad, but under the surface, stocks are beaten down, and many are begging to be bought. But the begging can go on for some time and it is important for investors to remain patient during this pullback. There will be plenty of trades, but “core” positions should be built with patience in mind.
Many reasons have me fighting off the urge to buy in size. They are, in no particular order: unfavorable seasonality (i.e. “Sell in May”), an uptick in volatility, Greece and the collective PIIGS situation, and monthly, weekly, and daily TD (Tom DeMark) analysis. A nibble here and a trade there, but limited core building and nothing in size… yet. There will be plenty of time for opportunities and entries, so investors must navigate with caution. As seen in the charts below, volatility has picked up over the past couple weeks and TD indicators have a downward bias. And with this comes additional uncertainty.
Previously published as a blog by Minyanville.
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