FIRE? Or Fire Sale on Stocks?

Updated: Aug 8, 2019

Yesterday was a truly bloody day in the markets. Given the magnitude and context, this has the potential to be something much more significant as the key levels continue to get violated as investors hit the panic button (or the algorithm does it automatically, typically around 10%). For now, it's just a really bad selloff that's lasted 5 days in a row, but if buyers continue to stay on the sidelines it could get ugly fast, because more and more these days, the machines do the executing and the humans do the oversight as opposed to yesteryear's.


So the question remains...is this an opportunity to pick up stocks on the cheap or is this the beginning of another 2008, 2016 or potentially something worse? Fun fact or apropos piece of data, the last time the FED lowered rates was the dotcom bust and the credit crises (hmm, insert pause for dramatic effect). Does that mean we should start heading to our underground bunkers? Maybe or maybe not -- do you actually have a bunker? For now, just put it in your arrow quiver because it may come in handy (or not).


As we discussed yesterday, every long-term macro bear or bull market begins on a 1 minute chart (or smaller), see "Fed FOMO? Dissecting the S&P 500 post FOMC" here ---> https://www.principles1.com/post/fed-fomo-dissecting-the-s-p-500-post-fomc But for now, stay focused on the speed and tempo of the selling as well as how the markets close each day. Constructive questions to ask -- Was there a rally into the close? Was there a late dump as the clock approached 4pm eastern? These are all clues in how the mood and exchange between buyers and sellers will dictate the action going into the close of 2019 (and beyond).


Let's lift the hood and explore whether we can discern any valuable information that may give us an edge of the rest of the market. Note how intense the sell off was in yesterday's session (60 minute chart below) on the S&P 500 Futures contract. Elevator down anyone? Typically, you can expect larger players to find value if the broad markets are down 1% and especially 2% in a single trading session, but today's price action was marked by 3.5% losses and upwards of 5.3% overnight with little to no buyers.

Look how demoralizing the daily chart below feels, much more dramatic given the steep, continuous, vertical red bars. Most investors respond to this by saying, "So what, I'm in it for the long haul and the day to day action is meaningless." Was 2008-2009 a non-event? Remember, when the market is down 40%, we need to gain 80% to get back to even. And that doesn't include inflation, fees, opportunity cost, etc.

Lastly, if we focus our attention on what we know for certain, i.e., previous behavior, as opposed to what we will never know, the future, we can isolate the most significant swings. In this case, it's the most recent one (green line), just behind today's down move, which is hovering right around the same size as the last major swing. Why is this significant? Because, if the buyers that were willing to own stocks on the way up, no longer want to buy them in the same area, then fresh buyers are needed to show up. If they are unwilling to cover the lack of demand then the supply/demand dynamic rotates like a seesaw from one side to another. That said, if the 2740ish level gets beaten, there aren't many battle-tested areas where buyers proved they were willing to purchase the market at former perceived value areas...and that could spell trouble for the bulls. Remember, the markets take the stairs on the way up and the elevator on the way down, so get your ducks in order.

As always, there is so much more to learn about these charts so we can observe where the money is flowing and ultimately stay ahead of the curve or at least keep from waking up to a 2008 with our proverbial pants down, ie, make more strategic decisions as investors.


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