Dec 01

How low can ZM go?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Zoom reported blowout earnings Monday after the close, but rather than cheer 367% revenue growth, the stock was whacked 15%. Quarterly results were great across the board, unfortunately, investors were looking for outstanding.

Stock pricing is all about expectations. “Less bad than feared” launches powerful rallies in beaten-down names and “not as great as hoped for” triggers massive selloffs in highfliers.

ZM had already run into a wall this fall, retreating more than 30% from the October highs. The stock was attempting a bounce off of the November lows and was making good progress, that is, until today. While ZM remains above recent lows, there isn’t much margin for error.

There are few things more worrying than a stock that falls on good news. That signals unrealistic expectations and once the selling starts, it usually doesn’t stop. The market loves symmetry and rallies that go too high are almost always followed by pullbacks that go too low.

While ZM could bounce off of recent lows and that would be a valid entry point, if this dip undercuts recent lows, look out below. If the bubble is truly bursting, don’t expect the selling to stop until prices fall 80%. For anyone tempted to hold the dip, that means this still has room to fall another $300!!!

Don’t let a huge profit turn into a spectacular loss. If the stock retreats under $375, get out no questions asked. You can always buy back in if this selloff turns out to be a false alarm. But this is definitely one of those times when it is better to be safe than sorry.

And for the most aggressive traders, short a break under November’s lows with a stop just above this level.

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Nov 30

The good and bad of Monday’s price action

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 slipped on the first Monday after the Thanksgiving holiday.

Last week was a good one for the market and prices rallied 2.3%. But as is often the case during holiday weeks, stocks tend to undo whatever happened during the low-volume period when institutional investors were on vacation. Big money managers want to start where they left off and that often means undoing what retail investors did the previous week. In their mind, a move isn’t real until they are the ones making it happen. Hence today’s modest dip that erased a portion of last week’s rally. 

I don’t see anything alarming or even concerning about Monday’s give-back. In fact, the early bounce off of 3,600 is far more positive than negative. The day started weakly, but rather than trigger a bigger wave of selling, supply dried up because most owners would rather hold for higher prices. When confident owners refuse to sell, it doesn’t matter what the headlines are telling us.

As bad as the current Coronavirus situation is, investors don’t price stocks based on what is happening today, but what they expect six months from now. While infection rates are dreadful and only getting worse, most stock owners expect the situation to be under control by next summer. No one wants to sell their favorite stocks at a discount today when they know the situation will be a lot better in a few months. Or at least that is the logic bullish owners are using. Only time will tell if their optimism is warranted.

The indexes are trading well, but we are at the upper end of the trading range and a lot of bullish vaccine news has already been priced in. Stocks are expensive and a lot of the near-term upside potential has already been realized.

While momentum will likely continue pushing us higher, the risk/reward is fairly marginal and not at all stacked in our favor. We can own stocks at these evels, but we need to be careful if the market’s mood sours. Modest upside with a lot of air underneath us is not a great place to be adding new money. We can ride this momentum higher, but we need to have a plan ready to go if the tide turns against us.

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Nov 23

The biggest risk facing us this week

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 popped Monday morning after a 3rd vaccine candidate proved 90% effective in preventing Covid-19.

Multiple successful vaccine candidates and the dramatically increased manufacturing capacity that goes along with multiple vaccines is a huge step in getting life back to normal. But as far as the stock market goes, vaccine breakthrough headlines are quickly running up the curve of diminishing returns. We saw a huge pop after the first candidate proved 90% effective. Then a modest pop after the 2nd. And this 3rd bounce struggled to even hold its early gains and briefly turned red in midday trade.

This is the Thanksgiving holiday week and that means less participation and lower volumes. Most years this is a sleepy period where the few professionals still around are itching to getaway. But occasionally, the lower volume can lead to increased volatility.

Which will this year be? That’s hard to say. If we hold current levels, it will be fairly boring. Where things get interesting is if prices retreat under recent lows. While a lot of people might not be trading this market, many have standing stop-loss orders that will execute even if they are not there to do it themselves. At the same time, dip buyers are also gone and unlike the sellers, they don’t have standing orders to buy the dip. This means there won’t be anyone to save us once the selling starts.

But rather than fear stocks if they crash over the holidays, we should recognize the source of the weakness is nothing more than retail investors overreacting to the headlines and subsequent weak price action. When big money returns from vacation, things will go back to normal, which means grinding sideways between 3,500 and 3,650.

Personally, I don’t see anything compelling to trade. The market isn’t breaking out and it isn’t breaking down. Stocks are not undervalued or overpriced. Without a risk/reward skewed in my favor, I’m left watching this one from the sidelines. Which, isn’t a bad way to enjoy a little R&R over the holiday.

If stocks fall under 3,540, I’ll short the weakness but I have low expectations this trade turning into anything worthwhile. The same goes for a breakout above 3,640. I’ll buy it, but without much enthusiasm. But sometimes the next big move starts when we are least expecting it and is why we have to follow our trading plan no matter what we think will happen.

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Nov 20

Weekly Analysis: The biggest problem with this market

By Jani Ziedins | Weekly Analysis

End of Week Analysis:

The S&P 500 finished the week down a modest 0.8% but remain within a stone’s throw of all-time highs.

As expected, the rate of gains slowed as we approached last week’s intraday highs and the market is quickly settling into a 3,500(ish) to 3,650(ish) trading range ahead of the Thanksgiving holiday.

Stocks rallied 10% in early November and anyone predicting that rate of gains to continue clearly doesn’t understand how this game works. I still like this market and am anything but bearish, but two steps forward, one step back. That’s how this works. Always has, always will.

Most of the big headlines are already behind us. Investors who are afraid of this spike in Covid infection rates have already sold. Those that wanted to buy the vaccine breakthroughs have already bought. And now everyone is sitting around waiting for what comes next.

Maybe these infection rates moderate naturally without oppressive government-imposed shutdowns. Or maybe we fall back into another round of punishing stay-at-home orders. At this point, no one knows for sure.

While things turn out less bad than feared most of the time, the biggest challenge for this market is prices are already near the highs. That means there isn’t much margin for error. Stocks are priced for a good outcome and any hiccup will send us lower.

Limited upside if things go right and lots of downside if things go wrong. That makes this a poor place to own stocks. I don’t mind holding long-term investments because that time horizon is measured in years, not months. But for anything shorter-term, we need to be careful because the risk/reward is currently skewed against us.

More interesting trading opportunities will come along soon enough. This just isn’t one of them.

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Nov 19

How to trade ahead of the holiday week

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped at the open, extending yesterday’s weak close. Fortunately, those early lows were as bad as it got and prices bounced into the green in the second half of the day.

Coronavirus headlines continue to be dreadful, but investors don’t price stocks based on where we are today, but where they think we will be six or twelve months from now.

As bad as these headlines are, most investors don’t want to sell their stocks at big discounts when they know things will get better if they hold on a little longer. And it is hard to argue with that logic. Between the expected stimulus, ultra-low low-interest rates, and highly promising vaccine candidates, the light at the tunnel gets brighter every day.

As I wrote last week, it looks like we are settling into a 3,500(ish) to 3,650(ish) trading range. And so far that’s been the case. There isn’t a reason to throw fresh money at stocks near the highs and there isn’t a reason to abandon good positions either.

Swing traders should take profits near the highs and those with cash should wait for something more interesting. Short a break under 3,500(ish) or buy a breakout above 3,650(ish). Until then, there isn’t much to do other than wait for the next trade. (and enjoy the holidays!)

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