Traders nervously eyeing retail investors for next shoe to drop

Traders work on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., February 5, 2018.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., February 5, 2018.

If you're looking for a bottom, Monday isn't the day for it.

It's was a confusing day, with stocks trying to rally and then failing. What's going on? When markets move this fast, stick to the fundamentals. Watch volume and prices, and it will tell you about where the buyers and the sellers are.

Look at the S&P 500. The low point was initially right at the open, with the S&P at 2736. The rally that followed in the following hour, which took the S&P 500 up more than 25 points, was accompanied by weak volume, meaning buyers were not particularly enthusiastic.

When the S&P drifted below the early morning low of 2736 around 12:20 ET, volume picked up, but selling pressure again abated and we started drifting higher. But once again the volume on the up move was much lighter than the volume on the down move, and buyers again ran out of steam.

When the S&P again drifted below the 12:20 low (2734), the volume accelerated to the downside.

What does this tell us? We know that the volume as the market was rising was not as great as the volume when the market was dropping. For most of the day, more volume has been going to stocks that were declining than to stocks that were advancing.

The conclusion: sellers are not yet exhausted, and buyers are not yet enthusiastic about the lower prices.

As we continue to drop, we start to hit important technical levels. 2,717 was the 50-day moving average for the S&P 500; selling again picked up as we passed below that level about 2:23 PM ET.

The concern now is that the character of the sellers might change. Up until now, the consensus is that this selling is professionally driven. The worry now is that selling could extend beyond professionals, to the retail trader.

Remember, an historic ocean of money came into ETFs in January--north of $55 billion into stocks, according to ETF.com. Much of that were retail investors eagerly putting money to work on the back of strong earnings and an expanding global economy.

The Volume Weighted Average Price (VWAP)--the average price for the S&P 500 this year--is now roughly 2,787. We are 50 points below that. That means that on average anyone who bought this year is slightly under water.

How will the average retail investor react when he discovers that he is now underwater by about two percent, after buying the unstoppable S&P 500 just a month ago?

No one knows, but traders are now nervously eyeing ETF volumes which will be out Thursday night and Friday morning. After historic record inflows in January, will the retail investor stay put after pouring money into the market in the beginning of the year?