Why Today’s Market Dip Shouldn’t Spook Traders - 5 August 2024

Today, as the market seemed to take a nosedive, my phone was buzzing non-stop. Texts, calls, frantic messages from amateur traders, all asking the same question: "Is it over?" “Is the market collapsing?” 

As a professional trader, I’ve seen this panic before, and I’m here to tell you - the short answer is... probably not...don’t freak out just yet. Here’s why:

1. Companies Are Still Making Money... & The Market Recognizes It

First and foremost, remember that companies are still making money. Yes, even in what looks to be a downturn. In fact, many are using this opportunity to right-size themselves, trimming the fat and becoming leaner, more competitive entities. This process may cause some short-term pain, but it often leads to long-term gain.

For the 2nd Quarter of 2024 [month ended June 30th], 78% of S&P 500 companies have reported a positive EPS surprise so far. This means that these companies have reported earnings per share that were higher than what Wall Street analysts had expected. This is a strong indicator that despite high borrowing costs and the rising cost of labor, a significant majority of companies are still performing well financially. It’s important to keep this in mind when considering the overall health of the market.  As the YTD version of the wall above suggests, there are plenty of names still significantly higher on the year.

2. Markets Never Go the Way You Anticipate

Secondly, consider this: if everyone is asking whether the market is going to collapse [with many even anticipating said collapse], it’s unlikely that the massive decline will happen. Why? Because markets almost never go the way the majority of people anticipate. They are influenced by a myriad of factors, many of which are not immediately apparent. So, when too many traders start predicting a collapse, it’s often a sign that the market will do just the opposite.  Further, the so called smart money looks through current circumstances and bets on the future.  That's why markets always put in lows and highs before the data tells the story.

3. Strong Support Levels

Lastly [but perhaps most significantly], there are strong support levels in place that will likely help stem any additional fall. These are price levels at which demand is thought to be strong enough to prevent the price from falling further. While they’re not foolproof, they do provide a buffer against a total market collapse.

Note, the S&P 500 Stock Index has decent support at 5,000... to say nothing of the bulwark right behind at 4,800.  No guarantee of course, and a good bit from where we currently are, but nothing even resembling a collapse.

Similarly, the DJIA has good support close by... 38,000 right around the corner and 36,000 close behind.

Tech has taken it on the chin recently [especially most of the Magnificent 7], however it's hard to say that the Nasdaq 100 Index has collapsed... especially with good support close at hand.

Finally, the financials continue to hold up well.  They would need to fall much deeper into the support box here to even be in any real danger.

In conclusion, while today’s market dip may have seemed scary, it’s important to not let fear dictate your trading decisions. This is not a suggestion to buy immediately, but rather a reminder to pay close attention and look for buy signals with good risk profiles to guide your entries. Remember, the market is a rollercoaster, and like any rollercoaster, the biggest drops can [and often do] lead to the most thrilling rises. Stay calm, stay informed, and happy trading.