"Are We There Yet?" (OK to Buy?)

Feb. 25, 2022 – Last Thursday was a “face ripper”. A massive gap down (overnight) followed by a big rally into the afternoon. So . . . that’s “it”, right? First off, no one knows, but let’s take a step back and see what happen. On Thursday morning with the world markets in a free fall, as the US market opened there were sell order in place and virtually no buy orders. The market went lower. A few minutes later “sell stops” (resting sell orders) where hit; the market drops more. And the whole thing repeats since no one wants to step in front of a moving train. This continues until all of the stops are hit, then a brief moment of calm, then short term traders see opportunity and step in to buy.

Note that the volume on Thursday was very high touching the red line, but on Friday it came back to the 20 day average (the blue line). So Yes, there was a big reversal that flushed out all of those stops and Friday continued higher but only in an “average” way. Likely we’ll see a “test” of a lower price, maybe the low of Friday or mid-range of the Thursday bar, but if something breaks over the weekend, well that’s a different story. My point is that we need confirmation and right now we don’t have it. I’d like to see longer term traders / investors return first before re-entering this market. Oh and yes . . . volatility is not dead. We’ll likely see some pretty sharp ups and downs over the next 2-4 months.

One thing that I am looking at is the appetite for risk. I’m watching the spread (difference between) the large cap SPY vs the small cap IWM. We’re starting to see that in the very short term reflected in the table below. Longer term investors consider small cap stocks risker because they are less liquid and more susceptible to economic hardship; they are more exposed. (more discussion at: www.special-risk.net) Have a good week ! ............. Tom ...............

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