When it comes to market sell-offs, the slow bleed is my least favorite. I prefer the quick distribution, letting all the weak hands get shaken out and keep the price action moving up and to the right. Another reason I’m not a fan of ‘slow bleed’ selling is bloggers and traders alike don’t know what to do with themselves. They begin to over analyze the move as the boredom seeps within their minds. The thing is, it doesn’t need to be that difficult.
While I like to dig down into the internals of the market, it’s important to always come back to price. Price is of course what pays. Below is a simple chart of the S&P 500 ($SPX) with the 50-day and 100-day moving averages. We’ve been wrestling with the 50-day moving average for nearly a week now as rumors out of DC attempt to keep things interesting. I’ve been talking about the 100-day moving average as past support a few times (here, here, and here) this year. It’s hard to become more bearish while we are still above these two levels of support. Not to mention the clear uptrend off the November 2012 lows. From a price perspective, that’s all I really need to know.
Until these levels give way and open the flood gates for potentially more selling, patience should be a practiced virtue. With that, the one clear difference between this sell-off and past dips has been the steady pace of the bulls banging their drum. We can see examples of this in the latest rounds of sentiment surveys – investors still are widely bullish on equities. When we look at the performance of the indices, what’s been one of the best performers since the S&P topped out? Small caps ($IWM)! If traders were actually fearful, why would they be loading up on small caps!?
When I began to get concerned with the equity market in late-September I said there was a chance we’d see a year-end rally due to the under-performance of hedge funds. That could still happen, who am I to say it can’t? But it seems everyone is on the same ship and hoping it docks at higher equity prices. 2013 has been the year of buy-able dips and anyone who has had a slight interest in the market has likely picked up on this little secret. The thing is, Captain Market doesn’t typically steer the ship in the direction that’s most desired. We’ll see if this time is any different.
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