Confusion, Contention, Curiosity. Those are just a few of the words I'd use to summarize the past couple weeks of trading, which began with the selloff on Feb. 2.
Traders and investors are confused because the selloff seemed to come from nowhere. There wasn't a particular event that sparked the violent move lower -- just a slow selloff that accelerated into the biggest one-day drop the Dow had ever experienced... one that reverberated through global markets.
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Pundits have blamed the drop on everything from normal profit taking to interest rates and government deficits.
What I know from my years of experience is that humans don't panic and push prices that far that fast without a catastrophe or catalyst. Algorithms and computerized trading in general certainly had a hand in the action, along with a sea of stop losses designed to protect investors' major gains from the past year. It's still hard to say what triggered it, but I do know that emotions are now playing a huge role in the action, as traders doubt the market's staying power.
At the end of the day, I believe the selloff was a much-needed wakeup call for lackadaisical investors. The shock reminds us that stocks cannot go straight up forever (or even for very long).
Ironically, the same factors that the market deemed inconsequential just a week ago (high valuations, sporadic EPS growth, increasing oil prices) are now front and center in most of our minds. What was A-OK just days ago is now fodder for market bears.
Add in the fact that both the Dow Jones and the S&P 500 have now both dropped below their respective 50-day moving averages, and you have reason to question the next leg up. Last Friday's initial failure really had be worried, the late day recovery calmed my fears of another algorithmic drop.
I Saw This Coming...
To be very frank, I knew this was going to happen and was nervous all the way up. Now that the correction has come, nearly every one of the put trades we recently closed for a loss would have paid off in spades, but I was obviously a few weeks late on my expiration selection. Curiously, I looked at UPS and saw that the stock has now disintegrated almost down to the $100 mark. In fact, every single put trade I had selected since December more than paid off.
I'm not saying this to brag, as I have no real reason to, but rather to remind you all that I was anticipating this. I am also prepared for the days to come and welcome this correction.
And speaking of curiosity, it seems the majority of us are closely observing what the market does in the coming days to help determine if this is a hiccup or a full-on reversal. I think we could go lower, but fundamentals still look strong.
As long as the Fed doesn't start to tighten rates quicker than expected, we should see the market up at least 10% from current levels by summertime.
Due to the extreme volatility and a lack of direction, it's been tough to find suitable trade candidates for our successful market "raiding" strategy over at Profit Amplifier. That's OK. I don't like to chase or get whipsawed... and I'm sure you don't either. That being said, I anticipate that changing as soon as the dust settles. I'm already on the hunt for a fresh trade to recommend this week.
Editor's Note: My stock market "raiding" technique is the best way to get in and out of trades quickly, while magnifying your returns from small moves in stock prices. We're talking about a 36% gain from a 3% move... an 80% gain from an 8% move -- and more.