There has been quite a bit of grumbling recently about the very flat and dull action in the indices. The Nasdaq closed nearly unchanged four days in a row and traders were growing weary of the lack of movement. It is well known that tight trading ranges usually lead to strong moves, but the bulls thought they had the advantage. After all, we aren't supposed to short dull markets.
Although that conventional wisdom proved wrong, the dictum about a tight range leading to a big move did prove correct. The indices had the biggest downside move since October. Not only did the S&P 500 fall more than 1% but it closed near the lows of the day and the Russell 2000 ETF (IWM) was hit for a hefty 2.75% loss. Breadth was extremely poor with just 1,370 gainers to nearly 5,400 decliners.
It was the first real victory for the bears this year, but now the big question is whether they can follow through. The bears have been incapable of generating any downside momentum since the week before the presidential election. Those who rush to play defense are often extremely frustrated and underinvested when the bulls bounce right back.
The bears have been warning us for a while about a slew of negative arguments. It didn't help today that the Republicans are obviously struggling with the Obamacare repeal and replace and tax reform has probably been pushed down the road. The bears will also warn us about valuation, a hawkish Fed and the fact that this bull market is quite elderly.
What the bears have been missing is price action to back up their arguments. Now they have some weakness and we shall see if they can run with it.
Days like this can hurt, but we have needed it for a long time. The only way a new crop of opportunities will develop is if we have period corrections. I have no idea how deep this pullback will go, but I had no choice but to raise substantial amounts of cash. The next step will be waiting for new setups to develop.
Have a good evening. I'll see you tomorrow.
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