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Friday, January 27, 2023

The Real Reason S&P 500 Crashed on Thursday

 

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The Real Reason S&P 500 Crashed on ThursdayS&P 500 Daily Chart

The S&P 500 crashed more than 100 points Thursday morning after someone yelled “fire!” and impulsive traders climbed over each other trying to get out.

What was the catalyst for Thursday’s selling? Easy, there wasn’t one. This panic resulted from impulsive traders spooked by their own shadows and the herd following them out the door.

But this isn’t a surprise. This was the second to last trading session before the Christmas holiday, and institutional investors are already at their vacation chalets.

Without big money’s guiding hand, there was no one to keep impulsive retail traders in check, and like irresponsible teenagers given too much responsibility, these retail traders made poor decisions.

Lucky for us, these retail traders have small accounts and quickly run out of things to sell. By early afternoon, supply dried up, and the index rebounded 60 points from those oversold levels, easily reclaiming 3,800 support.

As Forest Gump famously said,

“Stupid is as stupid does.”

And on Thursday, retail traders proved why they have such a poor reputation.

As for how I traded this, I came into Thursday holding long positions I bought earlier in the week. Lucky for me, I already had a nice profit cushion and moved my stops above my entry points Wednesday, making this a low-risk trade.

As much as I wanted to see Wednesday’s rally continue, it didn’t turn out that way, and I got dumped out at my trailing stops. To the cynics, that makes me wrong, but if my mistakes end in modestly profitable trades, I can live with that.

And, after pulling the plug at my stops above 3,800 support, the waves of impulsive selling allowed me to rebuy those positions under 3,800 when the market bounced a few hours later.

So not only did I get out of my last trade for a small profit, I could get back in at even better prices. If that’s what being wrong looks like, I don’t mind being wrong.

As for what comes next, a big wave of impulsive traders bailed Thursday morning and are no longer a risk to the market. I liked Thursday afternoon’s bounce, which means I’m already a buyer.

If the selling resumes Friday, no big deal, I get out at my stops and try again next week. And if I’m fortunate, prices crash hard Friday, and I get to buy even lower prices.

Source: Investing.com

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