Jul 26

Fixed Link: Enjoy the calm, but don’t expect it to last

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 added modest gains Tuesday, easily erasing the last three days of nominal selling and pushing us back into record territory. Earnings reports were good enough and the Senate voted to allow debate on healthcare reform. That put traders into a buying mood and pushed us closer to the psychologically significant 2,500.

While today’s strength broke a three-day losing streak, a 4-point dip over three days hardly qualifies as a selloff. In fact the last three days of restrained selling is actually quite bullish. The market opened the door and gave owners an invitation to take profits, yet the vast majority chose to stay put. They don’t want to sell because they are patiently waiting for higher prices. No matter what the pundits tell us should happen when complacency is this widespread, when confident owners don’t sell, supply stays tight, and prices remain firm. This calm cannot last forever, but it will last far longer than most people expect.

While it is still early in earnings season, if there was a major problem with the economy, it would have shown up by now in the companies that have already reported. The same goes for the other side, if we were going to have a blowout quarter, we would know that by now too. Instead earnings have been good enough to keep our slow climb higher going, but not so great as to launch us higher.

Politics in D.C. is a circus as usual, but it hasn’t been bad enough to affect the markets yet. In fact the market seems to be largely ignoring politics. I’m not sure if that’s because traders are giving Trump and the GOP benefit of doubt and assume everything will work out in the end. Or the market has such low expectations for Trump and Co. that this shit show is hardly a surprise. Either way the market is ignoring politics for the time being and so should we. It will matter at some point, but this is not that point and a trader can lose a lot of money jumping on a good trade too early.

For most of the last eight years people have been saying buy-and-hold is dead, but paradoxically this has been one of the greatest times to buy-and-hold. This is especially true over the last few months. This half-full market simply won’t selloff and that makes it hard find swing-trading opportunities. Only the most nimble day-trader can take advantage of these five-point, two-hour long dips. The rest of us are better off sticking with our positions. That means continuing to hold our buy-and-hold stocks, or sticking with cash while waiting for a better trading opportunity. (Ideally a diversified trader has a bit of both.) The choppy nature and quick reversals in this market make trading dangerous because it is far too easy to get tricked into buying high and selling low. The key to long-term success doesn’t come from our winners, but avoiding giving back all of our profits during slow times. It is hard for a trader to sit on his hands, but that is the best call here.

The path of least resistance remains higher. Trade accordingly. 2,500 is easily within reach, even if it takes us a little while to get there. Things will get a lot more interesting this fall once big money managers return from vacation. The S&P500 is up 10% for the year, but the chances of us finish the year at these levels is highly unlikely. Either everything will go according to plan and Trump’s policies will shift the economy into the next gear. Or our leaders will fail us and the air will come out of the Trump rally. While I don’t know which way we will go, I do know good trading opportunities are just around the corner.

Jani

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If you disagree, tell me why in the comments.

Jul 25

Enjoy the calm, but don’t expect it to last

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 added modest gains Tuesday, easily erasing the last three days of nominal selling and pushing us back into record territory. Earnings reports were good enough and the Senate voted to allow debate on healthcare reform. That put traders into a buying mood and pushed us closer to the psychologically significant 2,500.

While today’s strength broke a three-day losing streak, a 4-point dip over three days hardly qualifies as a selloff. In fact the last three days of restrained selling is actually quite bullish. The market opened the door and gave owners an invitation to take profits, yet the vast majority chose to stay put. They don’t want to sell because they are patiently waiting for higher prices. No matter what the pundits tell us should happen when complacency is this widespread, when confident owners don’t sell, supply stays tight, and prices remain firm. This calm cannot last forever, but it will last far longer than most people expect.

While it is still early in earnings season, if there was a major problem with the economy, it would have shown up by now in the companies that have already reported. The same goes for the other side, if we were going to have a blowout quarter, we would know that by now too. Instead earnings have been good enough to keep our slow climb higher going, but not so great as to launch us higher.

Politics in D.C. is a circus as usual, but it hasn’t been bad enough to affect the markets yet. In fact the market seems to be largely ignoring politics. I’m not sure if that’s because traders are giving Trump and the GOP benefit of doubt and assume everything will work out in the end. Or the market has such low expectations for Trump and Co. that this shit show is hardly a surprise. Either way the market is ignoring politics for the time being and so should we. It will matter at some point, but this is not that point and a trader can lose a lot of money jumping on a good trade too early.

For most of the last eight years people have been saying buy-and-hold is dead, but paradoxically this has been one of the greatest times to buy-and-hold. This is especially true over the last few months. This half-full market simply won’t selloff and that makes it hard find swing-trading opportunities. Only the most nimble day-trader can take advantage of these five-point, two-hour long dips. The rest of us are better off sticking with our positions. That means continuing to hold our buy-and-hold stocks, or sticking with cash while waiting for a better trading opportunity. (Ideally a diversified trader has a bit of both.) The choppy nature and quick reversals in this market make trading dangerous because it is far too easy to get tricked into buying high and selling low. The key to long-term success doesn’t come from our winners, but avoiding giving back all of our profits during slow times. It is hard for a trader to sit on his hands, but that is the best call here.

The path of least resistance remains higher. Trade accordingly. 2,500 is easily within reach, even if it takes us a little while to get there. Things will get a lot more interesting this fall once big money managers return from vacation. The S&P500 is up 10% for the year, but the chances of us finish the year at these levels is highly unlikely. Either everything will go according to plan and Trump’s policies will shift the economy into the next gear. Or our leaders will fail us and the air will come out of the Trump rally. While I don’t know which way we will go, I do know good trading opportunities are just around the corner.

Jani

If you found this post useful, return the favor by Re-Tweeting it.
If you disagree, tell me why in the comments.

Jul 21

Don’t fight what’s working

By Jani Ziedins | End of Day Analysis

End of Day Update:

Even though the S&P500 traded flat Thursday, holding near the highs was a win for bulls. We opened the day with modest losses, but little more than an hour later traders were enthusiastically buying a five-point dip. Selloffs that used to last multiple days and set us back several percent are now being bought within hours and a handful of points. But this shouldn’t come as a surprise. Any defensive sale over the last 12-months was a costly mistake and traders have learned their lesson. Hold no matter what. Headlines stop mattering when no one sells them.

Conventional stock market wisdom warns us about this type of complacency, but what conventional wisdom fails to mention is that these periods of complacency can last a long, long time. Confident owners don’t sell and that keeps supply tight. It is really hard for any selloff to build momentum when so few owners sell the weakness.

More recently this market transitioned from a fearful, half-empty outlook to today’s everything is fine, half-full attitude. Rate-hikes? Political dysfunction? Expanding investigation into our president? Meh, whatever. The market is giving the benefit of doubt to Trump, Congress, and the Fed. Since we trade the market we are given, we need to give them the benefit of doubt too. But that doesn’t mean we trust absolutely.

I get nervous when everyone else is calm and confident. And right now this is the most nervous I’ve been since the 2009 market bottom. This market used to be afraid of its own shadow and that uneasiness kept prices in check. But that is no longer the case. Risk is a function of height and these record highs make this the riskiest place to own stocks since the 2007 top. The path of least resistance remains higher and it is definitely premature to fight this market, but we need to be careful.

As small traders we have the nimbleness that allows us to jump in and out of the market at a moment’s notice so we don’t need to adopt a defensive strategy prematurely. Unlike big money managers, we can wait for the market to tell us it is time to take profits and start trading the other direction. But we are not there yet. This remains a buy-and-hold market at least until the end of summer. After that things will get a lot more interesting. Until then enjoy the slow climb higher.

Jani

If you found this post useful, return the favor by Re-Tweeting it.
If you disagree, tell me why in the comments.

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