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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
After tumbling five out of six sessions and challenging 2,800 support Monday, the S&P 500 has been on a rip ever since. Prices are still underneath the highs, but this rebound has done a lot to alleviate last week’s trade war fears.
But this shouldn’t come as a surprise. Monday evening I wrote the following:
“But here is the thing about this latest round of trade war headlines, how much worse can they get? Both sides are already taxing so much they are quickly running out of new things to tax. Even if this doesn’t get solved, we are not far from the point where this cannot get any worse simply because both sides are running out of options to make it worse.
In my opinion, the headlines over the last seven days were the worst of what we will see. The market was blindsided by this escalation since it was anticipating a deal. But after the shock wears off and the market comes to terms with these headlines, most of the downside will have already been realized.”
And that is exactly what happened. The trade war headlines climaxed Monday morning and so did the selling.
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Rather than fear Monday’s tumble, smart traders were buying the discounts. People always pray for a pullback. Unfortunately, when the market gods finally answer their prayers, most people end up being too afraid to buy.
And even worse, reactive traders sold the dip and are stuck buying back in at higher prices. Sell low and buy high. Do that a few too many times and they won’t have any money left to trade.
Now that Monday’s lows are 75-points behind us, the question is what comes next?
The market is acting well. Pullbacks to support are perfectly normal and healthy. Unfortunately, most people forget about this fact when we are stuck in the middle of one. As long as we continue holding 2,800 support, all is good.
That brings up the one nuance we need to be wary of. There are few things more bearish than a bounce that fails to stick. If this rebound fizzles and prices tumble under the lows, that tells us demand evaporated and lower prices are ahead. But that is the worst case scenario. As long as this week’s gains stick, then all is good.
In fact, things are great. We challenged support and the bulls won. That doesn’t mean prices will continue racing higher, in fact, they could retreat some over the next few days. But as long as they remain above 2,800 support, that tells us the bull market alive and the uptrend will continue. If this market was fragile and on the verge of crashing, it would have happened by now.
Stick with what has been working, whether that is buying the dips, or patiently sitting on your favorite buy-and-hold stocks. Let the other guy give away his money by overreacting to these normal and healthy dips.
What’s a good trade worth to you?
How about avoiding a loss?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN
By Jani Ziedins | End of Day Analysis
Free After-Hours Update: Special Edition
I normally publish free blog posts on Tuesday and Thursday evenings, but Monday’s dramatic tumble warrants a special edition.
TL;DR: At the end.
The S&P 500 tumbled Monday in the second largest drop of the year, shedding 2.5% after Trump and China escalated their trade war to the next level. Last week Trump followed through on threats to increase tariffs to 25% and China retaliated this weekend with reciprocal tariffs. As bad as it sounds, stocks are still holding critical 2,800 support, even if just barely.
While dramatic, no one should have been surprised by Monday’s tumble. On May 2nd when prices were near all-time highs, I told readers to be mindful of a larger pullback to support;
“If prices tumble under 2,900 and finish near the day’s lows, that is a very bearish development and it means further selling is ahead of us. The most obvious next level of support is 2,850. After that, far more meaningful support is back at 2,800. While it would feel scary, either of these would be reasonable levels to test in a normal and routine pullback. Two steps forward, one step back.”
Here we are 11 days later and traders are running around like the world is ending. The thing to remember is these things are not nearly as scary when we see them coming and can develop an intelligent trading plan ahead of time.
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Markets go up and markets go down. That’s what they do and everyone knows it. Pullbacks to support happen all the time and shouldn’t surprise anyone. Yet they always do. By rule, they have to. If they didn’t, no one would sell and we wouldn’t dip in the first place. Every dip, no matter how trivial it looks after the fact, always felt real in the moment.
And now that we find ourselves at support, we have to ask ourselves if this is just another routine, buyable dip. As I already stated, every dip feels like it is about to get a lot bigger. That’s the only reason people sell the dip. Yet every dip in history ended in a bounce. And every time that bounce happened when people were the most pessimistic.
A funny thing happens when pessimism climaxes. That is the point when everyone who could be scared out of the market is finally scared out of the market. When the crowd finally gives up hope is the exact point when we run out of sellers, supply dries up, and prices bounce.
Are we at that point now? In a normal market, yes, we are moments away from the bounce. Maybe prices dip under 2,800 before supply dries up and prices bounce. Or maybe we already hit that capitulation point Monday afternoon. Either way, we are only talking about a handful of points either way. A dip buyer would be sitting on nice profits next week or the week after even if they got in a little too early or a little too late.
But that is only if this is a normal market and this is a routine pullback to support. That means the million dollar question is if this pullback is normal or abnormal.
The edge case occurs when things get wonky and the market goes into full-blown panic mode. Not only do the typical Chicken Littles run around claiming the sky is falling, but the far more confident dip buyers have second thoughts. That is what happened last year when prices tumbled more than 400 points in December.
Could that happen here? Sure. It can happen anywhere at any time and is one of the biggest risks to owning stocks. But as bad as it is, these panics are rare.
The line in the sand is 2,800. This support level stretches back to last fall’s big selloff and was major resistance for several months. Once prices finally break through resistance, it becomes support. And right now it is our lifeline.
Hold this level for a few days and all is good. The things about stock crashes is they are brutally quick. They happen before people have time to think and make rational trading decisions. This is the land of sell first and ask questions later. But if that is how this works and the market holds 2,800 support for several days, then we can be fairly certain the emotional selling died up. At least as far as last week’s headlines are concerned. Meaning it would take a new round of headlines to knock us lower.
But here is the thing about this latest round of trade war headlines, how much worse can they get? Both sides are already taxing so much they are quickly running out of new things to tax. Even if this doesn’t get solved, we are not far from the point where this cannot get any worse simply because both sides are running out of options to make it worse.
In my opinion, the headlines over the last seven days were the worst of what we will see. The market was blindsided by this escalation since it was anticipating a deal. But after the shock wears off and the market comes to terms with these headlines, most of the downside will have already been realized.
The thing to remember about falling stock prices is they are actually less risky to buy. That’s because a lot of the damage has already been realized. People are afraid of falling off of buildings, not falling off the ground. Yet paradoxically in the stock market, people are most comfortable on the top of tall buildings and most afraid when standing on the ground. Even though prices could fall a little further tomorrow and the day after, it is still far less risky to buy today’s dip than last week’s highs.
Most Likely Next Move: This is a buyable dip and if the market didn’t bottom Monday, it will happen Tuesday or Wednesday.
Trading Plan: People pray for a dip so they can get in at cheaper prices. But every time the market answers their prayers, they lose their nerve. Don’t lose your nerve.
If I’m Wrong: Prices tumble under 2,800 support and the reactive selling intensifies instead of dries up. Dipping under 2,800 is okay as long as we bounce back above not long after. But if we crash through support and finish the day at the lows, fear is taking over. But rather than fear the fall, take comfort in knowing even better bargains are coming.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Thursday was another rocky session for the S&P 500. China countered Trump’s trade war rhetoric with some of their own. That threw cold water on global stocks overnight and the S&P 500 tumbled at the open, crashing through minor support at 2,850. While it looked like it was going to be another ugly day, Trump lifted hopes when he said a deal was still possible, sending a wave of relief through our markets and erasing a big chunk of those initial losses.
This is a headline-driven market and nothing else matters. Trump’s self-imposed deadline is Friday and no matter what happens, expect something dramatic. If Trump strikes a deal, stocks will surge in relief. If talks break down and Trump follows through with his punitive tariffs, markets will tumble. While that is stating the obvious, the most likely outcome is a combination of the above, a postponement and continued negotiations. That is half-full enough to keep the optimists in the stock market and half-empty enough to keep wary traders from buying the dip.
While the market’s next move hinges on what Trump and the Chinese do, those outcomes will have less impact over the medium- and long-term. Trump started his trade wars last year and has long said he is willing to tax everything imported from China at 25%. The market lived under these clouds for a long time and the risks have not prevented stocks from rallying to all-time highs. No doubt the same will happen this time too.
Even if Trump escalates the trade war for the umpteenth time, the market will react, get used to it, and then move on. Good news, bad news, it all gets priced in and then forgotten. Trump’s trade war is no different.
Up, down, or sideways, the next question is how to trade this. Personally, I don’t have any insight into whether Trump and the Chinese will strike a deal Friday or not. I don’t try to predict the headlines and I’m not going to start now. That said, how the market reacts to these headlines will give us something good to trade.
If a deal is reached: All is forgiven. The stock market is off to the races and we should stick with what has been working, which is buy-and-hold. The market will rally in relief as one more risk falls by the wayside.
If negotiations continue in a constructive way: The market will rally some as we avoid the worst case scenario. The market is buyable for anyone with a longer-term investment horizon. But as we’ve seen countless times over the last 12 months, there is lots of back and forth during these protracted negotiations. That means we should expect some dips and gyrations along the way as the inevitable snags drag us down. That means better prices might be ahead of us if someone wants to take advantage of a short-term move. As long as the market trades sideways and remains volatile, buy the dips and sell the rips.
And if talks fail: Let the market tumble. But rather than fear the collapse, get ready to buy the inevitable oversold condition. Emotional traders make poor decisions and that includes selling stocks at unreasonably low prices. Their pain becomes our gain. (You remembered to keep some cash handy to buy the dip right?)
Get a resolution and prices will quickly return to the highs. Protracted negotiations mean we could see further weakness. And a busted deal will lead to a sharp, but buyable selloff.
It is cliche, but only because it is true, “Plan your trade, and trade your plan.”
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What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN