David Fabian: This week has been chocked full of surprises for investors. Monday started out with a gut wrenching tumble of more than 2% across the majority of the investment universe. It was then followed up with some tepid buyers stepping in to support stock prices through mid-week. We were then treated to a disappointing non-farm payrolls report on Friday that many thought would tank stocks to new lows. Instead the SPDR S&P 500 ETF (NYSEARCA:SPY) rallied to within striking distance of its next major resistance point.
The bulls are likely fixated on buying the dip in stocks and reasserting the notion that 2013 wasn’t just a fluke. Nearly every 3-5% pullback last year was bought with vigorous enthusiasm and stocks overcame a host of potentially disastrous obstacles. So far we are seeing some of those same price responses this year as well.
The bears on the other hand are focused on taking out Monday’s lows and pushing the market down below its 200-day moving average. The S&P 500 Index has not broken below its long-term trend line in well over a year now, which is a significant length of time. In fact, we would not even be in a true correction until the S&P 500 Index falls 10% from its high of 1,850. That would put us somewhere around the 1,665 level which I have noted on the chart below.
No matter what side of the fence you come down on, it’s best to have a plan for both sides of the trade. As an advisor, I am having conversations all day with clients and colleagues about the direction of the markets. Everyone expects you to have an opinion on whether it’s going up or down despite the fact that markets don’t behave in a rational manner. In fact, one of my favorite investing axioms is that “the market can stay irrational longer than you can stay solvent”.