Aug 17

Much ado about nothing

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Thursday was one of worst days for the S&P500 this year as we plunged 1.5%. There wasn’t a clear catalyst driving the selling. Instead it was a combination of Asian weakness, D.C. dysfunction, weaker than expected earnings, and terrorism in Europe. It was simply one of those days where nothing went right. Even this “half-full” market couldn’t find anything to be positive about.

Given the size of the selloff, volume was suspiciously light. The waterfall price-action gave the impression the market was overwhelmed by a giant wave of panic selling. But the below average volume tells us that’s not what happened. Today’s weakness was more about a lack of buying than fearful selling.

The above shouldn’t come as a surprise since confident owners have propped up the market up all year long. If confident owners were not scared out of their positions through all of this year’s countless bearish headlines, was today’s news any worse? Not really. And that’s why most owners continued to hold their stocks through today’s brutal selloff. Their confidence is aided by the fact most owners are having a great year and are still sitting on a pile of profits. To them this is just another bump on the way higher and nothing to worry about. That’s why despite the gruesome price-action, few owners sold and volume was uncannily light.

Instead the damage was primarily done by the lack of demand. This is not new and has been an issue all year. Every breakout fizzled because those with cash refused to chase prices higher. That forced us into this slow grind higher. Today’s dip was larger than most, but it isn’t unusual to see sideways churn before staging the next move higher.

I’ve been defending this market all year. Every dip has been a buying opportunity and I don’t feel any different this time. Many have criticized my analysis, but so far the market has proved me right dozens of times. Can this time be different? Might this be the end? Sure. But the thing to remember is while a trend continues countless times, it reverses only once. Which side do you think has the better odds?

We could see another day or two of selling, but as long as owners remain confident, supply will dry up and prices will rebound like they have every other time this year. Without a doubt this bull market will die like all of the ones that came before it, but confident owners need a reason to change their outlook and “too high” ain’t it. We need something new and unexpected. Something that threatens corporate profits. I didn’t see anything like that in today’s news flow and is why most confident owners will brush off this dip like all the others that happened this year.

Holding through a dip is not easy but this is a better time to be buying stocks than selling them. The best trades are the hardest ones to make. That means holding when you don’t want to hold and buying when you don’t want to buy. Maybe this time is different, but the odds are against it.

Jani

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Aug 15

Why this market refuses to go down and what it means for us

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 traded flat Tuesday. While it would have been nice to extend Monday’s rebound, holding ground is still constructive. If traders remained nervous, another round of selling would have hit the market today as owners took advantage of this strength to lock-in profits. Instead most owners remain confident and choose to keep holding for higher prices.

Conventional wisdom tells us complacency is bad. What it fails to mention is periods of complacency last far longer than anyone expects. Confident owners don’t sell and that keeps supply tight. In a self-fulfilling prophecy, when confident owners don’t sell a dip, we stop dipping. Tight supply has propped up this market all year-long and it doesn’t look like last week’s headlines and volatility changed that.

Last week I told readers North Korea still doesn’t matter and how to profit from it. Those that listened are a little richer this week. I don’t have a crystal ball and I wasn’t predicting the future. There is no magic in this, it is simply a matter of using common sense. This was not the first time a war of words broke out with North Korea and it won’t be the last. But these things never go anywhere because neither side can afford to escalate it beyond words. And that is exactly what happened this time. Reactive traders who acted without thinking were simply giving money away to those who better understood the situation.

Something will eventually break this bull market. Every bull market eventually dies and this one will be no different. While it is okay to be cautious after eight years of strong gains, being bearish just because we’ve “gone too far” is a great way to give away money. Don’t fight what is working.

Confident owners keep supply tight and the only way this market will crack is by convincing these stubbornly confident owners to sell. So far Brexits, rate hikes, and a dysfunctional Congress haven’t spooked owners. Over the last several years, every time an owner got nervous and sold a dip, he came to regret it. After making that mistake one too many times, most owners have now swung to the other extreme and are not selling anything for any reason. And for the time being this supreme confidence is working. Markets don’t dip when no one sells bad news.

As a trader, I enjoyed last week’s bout of volatility and am hoping more is on the way this fall. While this calm has been nice for many investors, it would be foolish to expect this period of historically low volatility to last much longer. I expect a return to more normal levels later this fall when big money managers return from summer vacation and start positioning for year-end.

But thing to remember is volatility can occur in either direction. At this point nothing is convincing confident owners to sell and I doubt there is much that will change their mind. That means the likely outcome is we will see underperforming managers be forced to chase stocks higher into year-end. There is a smaller probability that further dysfunction in D.C. could finally get to this market when we don’t get the promised tax reform. But so far this market doesn’t seem to care about politics and is why I think this outcome is less likely than a chase higher into year-end.

The great thing about being an independent traders is our account size allow us to enter and exit full positions with the click of a mouse. That means we don’t need to know what will happen this fall and can instead wait for the market to tells us what it wants to do. Until then expect this slow creep higher to continue for a few more weeks. Markets that refuse to go lower will eventually go higher. Keep doing what is working and enjoy the ride

Jani

Aug 10

North Korea still doesn’t matter and how to profit from it

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 sold off for a third day following Trump’s “Fire and Fury” threat to North Korea. The first two days of selling were relatively benign, but today’s defensive selling crashed through 2,460 support and the 50dma. This was the biggest single-day loss since mid-May and it puts us back to levels not seen in a month.

Thursday’s selloff felt especially dramatic since it came following a period of historically low volatility. Many traders assumed there was nothing to worry about and we would coast into the end of summer. Unfortunately for them today’s steep selloff reminds us there is no such thing as easy money in the market.

It is hard to talk about what is going on in the stock market without first dipping into geopolitics. This isn’t the first time we’ve gotten into a war of words with North Korea and it won’t be the last. But this situation is unique because no one knows how far Trump or Kim Jong Un will take it since both leaders are new to this high-stakes game of chicken. One miscalculation by either side could escalate this situation from words into something far more deadly.

Kim Jong Un’s primary “Trump” card continues to be the thousands of artillery cannons armed with chemical and biological weapons pointed at Seoul’s ten-million plus citizens. There is nothing North Korea can do to prevent us from bombing their nuclear program, but they can retaliate by attacking the civilians in Seoul.

Millions of hostages are what makes this situation so much different from the ones we face in the Middle East. Trump can talk a tough game, but unless he is willing to sacrifice millions of South Korean civilians, his hands are tied just like they were for all of his predecessors.

Most of the time these situations with North Korea diffuse themselves over a few weeks and things return to “normal”. There is a 99.9% probability this is what will happen here too, but that hasn’t stopped traders from reacting strongly to these headlines.

What started out as a little uneasiness earlier in the week turned into a mass exodus Thursday. This weakness was compounded by all the technical traders using stop-losses to automatically get them out of the market. While this strategy sounds good in theory, it can be tricky in practice because people often use similar support levels to trigger their stop-losses. That means any dip through a widely followed level will trigger another wave of autopilot selling.

2,460 has been support for several weeks and we violated that this morning. That lead to the first cascade of selling that pushed us down to the 50dma. Then Trump told the world his “Fire and Fury” threat wasn’t strong enough and that was enough to extend the selloff under the 50dma.

While this selloff feels scary, the thing to remember is risk is a function of height. Last week when we were trading at record highs and everyone was in a cheery mood was actually a far riskier place to own stocks than jumping in and buying this dip. While it definitely doesn’t feel like it, the discounts sellers are offering make this a safer place to buy stocks because a big chunk of the selloff has already been realized.

For months I’ve been saying this is a buy-and-hold market. Holding is an easy thing to do when the market is gently gliding higher, but holding through a dip hard to do when everyone around us is selling. Our natural instinct is to join the crowd and get out before things get worse, but then that is no longer buy-and-hold.

Every dip this year bounced and this time will be no different. If you don’t think the U.S. will start a war with North Korea, then this is a better place to be buying stocks than selling them. It takes courage to go against the herd, but take comfort in knowing it is a lot safer to buy this fear than last week’s complacency. Many of us have been praying for a buyable dip, here it is. Don’t lose your nerve now.

Jani

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