Stocks are taking a hit to start the week: With much of Asia on holiday and China closed for the entire week in observance of Lunar New Year, this appeared like a prime opportunity for a quiet start to a potentially heavy week. But that was not to be; selling in Europe started on the open and hasn’t really calmed down yet. Given that we’re in a fresh start to the week and there’s been essentially no data to feed into these declines, this would indicate that we’re seeing either a) technical selling or b) a broader, ‘bigger picture’ theme take place. From most available signs, the latter would appear to be the operative case.
We discussed such a theme last week in relevance to the S&P 500, and how market turns often take time as investor sentiment flips. After the initial scare (such as we had in August and September of last year), many investors will often still remain bullish. This is when that buy the dip mentality comes back, and we had outlined that back in October of last year as Chinese stocks were enjoying a rip-roaring run back to the up-side. But, do all investors come back? After a fright of that nature, some investors are rightfully scared and stay on the sidelines. Some may even open short positions; whatever the case, this often leads to lower-highs as bullishness begins to wane.
This means that, unless something fundamentally changes, there are fewer buyers to push prices to new highs. This also means that there are likely fewer buyers on the sidelines waiting to ‘buy the dip.’ On the other side of this coin, the motivation to sell increases as a market is unable to make a new high. This leads to even fewer bulls and even more bears, and then this leads to lower-lows to go along with those lower-highs. This is the cycle that markets are constantly repeating. As the lower-lows get even lower and as lower-highs become even less frequent, the market moves on from a bullish to a bearish state and that old prior bias no longer ‘works.’ This is why price action is such a key tool for those that trade, it strips out the noise and focuses on what matters (executable prices and people actually backing their opinions with capital by taking on risk). We discussed this gyration as it had begun to happen in US Stocks a month ago.
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