Sep 22

Weekly Scorecard: North Korea still doesn’t matter

By Jani Ziedins | Weekly Analysis

Welcome to Cracked.Market’s weekly scorecard:

This post includes a summary of the week’s market developments, links to the free posts I published, and analysis on how accurate each post was since I wrote it. 


Weekly Analysis:

Tensions with North Korea flared up again as Trump threatened to “Totally Destroy” North Korea in a speech to the U.N. and North Korea retaliated by threatening to test a nuclear bomb in the Pacific Ocean. Last month headlines like these sent the market tumbling 1.5%. This month the market barely flinches.

News gets priced in over time. That’s because owners who are afraid of these headlines sold weeks ago and were replaced by confident dip-buyers who demonstrated a willingness to hold these risks. Since everyone who is afraid of North Korea already bailed out, there is no one left to sell this latest round of headlines. When no one sells the news, it stops mattering and that is exactly what happened here.

The other significant development was the Fed announced it would start winding down its bond portfolio and they left the door open to a third rate-hike later this year. While both of these developments are potentially bearish, the market expected these policy decisions and they didn’t move the market. It’s been years since a Fed decision moved prices in a meaningful and sustainable way and this time was no different.

The market’s price-action has been incredibly resilient given the headline uncertainty. A market that refuses to go down will eventually go up. Keep doing what has been working and that is sticking with this bull market.

Read my daily posts for deeper insights and analysis on these topics and more.


Tuesday Sept 19th: Stick with this Bull

“As we saw today, the North Korean rhetoric no longer matters to the market and we can safely ignore it. Next item coming up is the Fed’s policy statement on Wednesday. Consensus is the Fed will start winding down its balance sheet. This is an anti-stimulus move, but the market is largely ready for it. Yellen and the Fed have done a great job telegraphing their moves to minimize disrupting financial markets. While we should expect a brief bout of volatility, it’s been years since a Fed decision affecting the market in a significant and lasting way. I don’t expect tomorrow to be any different.”

Score 10/10: This analysis was spot on. North Korean headlines failed to ignite a selloff and the market barely moved after the Fed announced exactly what everyone thought they would. Read the entire post for more insights into why the market reacted to these events the way it did.


Thursday Sept 21st: Don’t fear a routine and healthy dip

“If we are expecting the market to collapse on bad news, Thursday’s “news-less” day definitely won’t cut it. This market withstood a nearly constant barrage of negative headlines over the last month and barely sold off two-percent. If those headlines couldn’t break us, there is definitely nothing in the current news cycle that tops ballistic missile launches, nuclear bomb tests, and back-to-back hurricanes. That resilience means we can safely cross news-fueled selloff from the list of vulnerabilities. If this market was going to crash on bad news, it would have happened weeks ago.”

“As I write this, overnight futures slipped on Asian weakness. But as I said above, testing support is a normal and healthy part of moving higher. There is nothing to worry about if we dip under 2,500 support. A wave of selling might hit us as recent buyers’ stop-losses are triggered. But that selling will quickly dry up like it has every other time this year. Confident owners didn’t sell far more dire headlines last month and there is no reason to think they will start bailing out now. Confident owners keep supply tight and prop up prices. That has been happening all year-long and there is no reason to think something has changed here.”

Score 10/10: This analysis from Thursday night perfectly described Friday’s price-action. Predicting what the market will do isn’t hard if you take your time to thoughtfully think about what is happening and resist the temptation to join the crowd’s overreactions.


Cracked.Market University: Contrarian Investing: Why most people screw it up

I started a new educational series and will publish new articles each Monday and Wednesday. Sign up for Free Email Alerts to be notified when new articles are published.

“All too often people mistakenly think they are contrarian investors when all they are doing is arguing with the market. If a price is going up, they sell it. If the market is going down, they buy it. At this point many of you are scratching your head because that sounds exactly like what I described in Part 1. Isn’t it?

“Nope, not even close. Don’t feel bad, this is an easy to mistake to make and it costs a lot of smart people a lot of money every day. Contrarian investing is not going against the price or the trend. Never forget price and trend have nothing to do with contrarian investing! The only thing that matters to the contrarian is what the crowd thinks.

“More often than not the contrarian trade is actual follows the market trend and buys something that has gone “too far”. Or sells something that has gone “too low”.”

This post generated quite a bit of enthusiasm and was enjoyed by many of my followers. Click the link above to read the full post.


Knowing what the market is going to do is the easy part. Getting the timing right is where all the money is made. Have insightful analysis like this delivered to your inbox every day during market hours while there is still time to act on it. Sign up for a free two-week trial.


Have a great weekend and I hope to see you again next week.

Jani

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Sep 21

Don’t fear a routine and healthy dip

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Thursday the S&P500 experienced the largest drop in over two-weeks. As dramatic as that sounds, we only lost 0.3% in a relatively benign pullback to support. This was the lowest volume day this month and the first time trade has been below average since August.

As far as pullbacks go, this one was as mild as they get. There are two ways to interpret this. Either this dip was the best bears could manage in such a resilient and strong bull market. Or these are the first cracks in what is about to become a larger selloff.

If a person thinks a bull market needs to go up every single day, they should be worried about this price-action. For the rest of us, we know markets moves in waves and down days are a normal and healthy part of moving higher. Prior to today the S&P500 was up seven out of the last eight days and a routine down day was long overdue.

The question is if this is the first signs of a larger down move? Headline wise not a lot happened Thursday. The biggest market news was a continued digesting of Wednesday’s Fed policy statement that announced the unwinding of their bond positions and the continued possibility of a third rate-hike later this year. While both of those actions are relatively bearish, the market widely expected these moves and no one was caught by surprise. We slipped a little in Wednesday’s intraday trade, but a late-day rebound put us back where we started by the close. Thursday’s dip retraced some of Wednesday’s selloff, but it didn’t undercut the lows.

If we are expecting the market to collapse on bad news, Thursday’s “news-less” day definitely won’t cut it. This market withstood a nearly constant barrage of negative headlines over the last month and barely sold off two-percent. If those headlines couldn’t break us, there is definitely nothing in the current news cycle that tops ballistic missile launches, nuclear bomb tests, and back-to-back hurricanes. That resilience means we can safely cross news-fueled selloff from the list of vulnerabilities. If this market was going to crash on bad news, it would have happened weeks ago.

The next possibility is this bull market is extended and exhausted. Markets that rally too-far, too-fast are prone to collapse because everyone who could have bought has already bought and there is no one left to keep pushing prices higher. But the thing about exhaustion tops is prices race ahead and climb at a steeper rate than the prior uptrend. Is that price-action happening here?

The last several months were a sideways consolidation that ended with a double bottom and rebound off of the 50 day moving average. That looks more like sustainable base building than overextended exhaustion.

If this market is not vulnerable to negative headlines and the recent consolidation looks more supportive than threatening, do we really think Thursday’s dip is the start of something bigger? Or just one of those normal and healthy down-days that accompany every increase in prices?

As I’ve been saying for over a month, if this market was fragile and vulnerable, we would have crashed by now. While the rate of gains is nothing to get excited about, a market that refuses to go down will eventually go up. I see no reason to think anything has changed in the last several days. That means keep doing what has been working. Continue holding your favorite positions and adding more on the dips.

As I write this, overnight futures slipped on Asian weakness. But as I said above, testing support is a normal and healthy part of moving higher. There is nothing to worry about if we dip under 2,500 support. A wave of selling might hit us as recent buyers’ stop-losses are triggered. But that selling will quickly dry up like it has every other time this year. Confident owners didn’t sell far more dire headlines last month and there is no reason to think they will start bailing out now. Confident owners keep supply tight and prop up prices. That has been happening all year-long and there is no reason to think something has changed here.

Jani

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Sep 20

Contrarian Investing: Why most people screw it up

By Jani Ziedins | Free CMU

Welcome to the new Cracked.Market University educational series. Look for new articles every Monday and Wednesday. 

Spend any time following the market and you will come across the term “contrarian investing”. For those that don’t already know, this investing strategy takes a position in the opposite direction as the larger crowd. If the crowd claims something is a sure-thing, the contrarian sells it. If the crowd is rushing for the exits before things get worse, the contrarian jumps in and buys the dip. That description is simple enough to understand, but less clear is why this counter-intuitive trading strategy works so well and how come the crowd gets it wrong so often.

The first thing to realize is the crowd’s ideas are not wrong. Wisdom of crowds is a very real and powerful phenomena that I will cover in another blog post. For the time being, trust me when I say the crowd is smarter and more insightful than any of us can ever hope to be. But where following the crowd’s ideas gets investors into trouble is these ideas are already priced-in. That means most of the profit from investing in these ideas has already been made. I will use the following basic supply and demand model to show you how this happens.

The first thing to understand is stock prices are set exclusively by active buyers and sellers. I will dig deeper into this topic in another blog post, but for the sake of this discussion, people who sit in a stock or stay on the sidelines don’t affect the price. Only traders actively trying to buy and sell the stock determine the current market price. The price they agree to is the exact balance point between supply (sellers) and demand (buyers) at that precise moment in time.

The other key concept in this illustration is people trade what they think. If an investor loves Apple and he believes the stock is going to double or triple, we can be fairly certain this investor is already fully invested in AAPL. It doesn’t matter if a trader uses intuition, fundamentals, or technicals, as soon as he is convinced a stock is a good buy and he has the money, he buys it.

But the thing to realize is no matter how much this investor believes in this stock, once he buys, he places his bet and from that point forward is simply a passenger on the market’s rollercoaster.

If this is early in the process and the investor’s point of view is unique, he can spread the word and encourage other investors to follow his lead. But as his view becomes more and more popular, it is harder to find new people who don’t already believe in the idea. At this point the crowd of believers is so large that new recruits are hard to find. Even though owners have never been more optimistic, serious problems arise when there is no new money left to buy the stock.

Remember, price is the exact point where supply and demand are balanced. If we cannot find new buyers willing to join this party, it doesn’t matter how enthusiastic the crowd is, demand shrivels up and is overwhelmed by supply. The crowd is still extremely excited about this stock’s future, but without new buyers to keep pushing the price higher, supply and demand forces punish the stock.

This is an example of a bubble forming and the subsequent climax top, but the exact same process happens in reverse during capitulation bottoms. “Sell now before things get worse”, but the scariest point is usually the bottom of the dip because that is where we run out of sellers. Once that happens, supply dries up and prices bounce. Headlines stop mattering when no one is left to sell the bad news.

While these are extreme examples of climax tops and capitulation bottoms, the same process happens to a lesser extent every day across every timeframe. It’s no secret prices move in waves and almost everyone acknowledges this on a cognitive level. Yet every time prices move too far one direction or the other, rather than acknowledge this is just a normal and healthy gyration, human emotions take over and we assume this small move is the beginning of the next big move.

We can call the previous section Part 1. This is most obvious example of contrarian investing because it goes against the market’s price trend. But just as important to the contrarian investor is Part 2, when he goes along with the market’s trend.

All too often people mistakenly think they are contrarian investors when all they are doing is arguing with the market. If a price is going up, they sell it. If the market is going down, they buy it. At this point many of you are scratching your head because that sounds exactly like what I described in Part 1. Isn’t it?

Nope, not even close. Don’t feel bad, this is an easy to mistake to make and it costs a lot of smart people a lot of money every day. Contrarian investing is not going against the price or the trend. Never forget price and trend have nothing to do with contrarian investing! The only thing that matters to the contrarian is what the crowd thinks.

More often than not the contrarian trade is actual follows the market trend and buys something that has gone “too far”. Or sells something that has gone “too low”.

I will use AMZN as an example. Two years ago the stock was “unbelievably expensive” at $400 and its valuation was widely viewed as “unsustainable”. Yet today AMZN is trading near $1,000! How did that happen? Quite simply,  the crowd didn’t believe in Amazon. Rather than have too many people buy the stock at $400, too few people were buying it and there was a lot of upside opportunity left in it.

Never forget contrarian investing is going against the crowd, not the price. Don’t make that costly mistake when you are tempted to short something that is “too high”, or buy something that is “too low”. More often than not the right trade is the exact opposite of the one you want to make. That’s because our primal instinct compels us to become a member of the crowd and believe what the crowd believes. This is a fascinating topic that I will save it for another post. Stay tuned!

I’m excited about this new series because my head is overflowing with ideas and insights that came from two-decades of trading experience. I hope you come back for the next post. 

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Sep 19

Stick with this Bull

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 added to last week’s breakout and continues its steady ascent into record territory. A tenth-of-a-percent is definitely not setting the world on fire, but these slow and deliberate gains tell us there is strong support behind these prices.

Rather than take profits near prior resistance, most owners are confidently holding for higher prices. While conventional wisdom warns us about complacent markets, what it fails to mention is periods of complacency last far longer than anyone expects. Confident owners don’t sell dips and the resulting tight supply props up prices. That description fits this market to a tee and I don’t see a reason for that to change anytime soon.

Several weeks of bearish headlines failed to dent this market and Trump was at it again Tuesday, telling the UN he will “Totally Destroy” North Korea. But by market standards, this is already old news and it barely reacted to those provocative headlines. Clearly these headlines matter to geopolitics, but they no longer affect the market because anyone who fears these North Korean headlines sold weeks ago. These nervous sellers were replaced by confident dip buyers who demonstrated they are not afraid of these headlines. When no one is left to sell the bad news, it stops mattering.

A market that fails to go down on bad news creates a powerful buy signal. It means the path of least resistance is higher and prices will pop once the flow of bad news abates. That is exactly what happened last week when we surged to record highs. While it is easy to say this after it already happened, readers of this blog knew this rebound was coming several weeks ago.

Going against the crowd and buying when everyone else is running scared is hard to do, but that is the best way to make money in this business. Keep your cool by carefully analyzing the headlines and price-action. The thing to remember is trends continue countless times, but they reverse only once. Keep that in mind every time someone tries to convince you this time is different. Without a doubt they will eventually be right, but they will be wrong an awful lot before that happens.

As we saw today, the North Korean rhetoric no longer matters to the market and we can safely ignore it. Next item coming up is the Fed’s policy statement on Wednesday. Consensus is the Fed will start winding down its balance sheet. This is an anti-stimulus move, but the market is largely ready for it. Yellen and the Fed have done a great job telegraphing their moves to minimize disrupting financial markets. While we should expect a brief bout of volatility, it’s been years since a Fed decision affecting the market in a significant and lasting way. I don’t expect tomorrow to be any different.

If this market was fragile and vulnerable to a crash, it would have happened by now. Last month’s dip and consolidation refreshed the market and gave us a solid foundation to build on. That said, the market likes symmetry and last month’s small and short dip will lead to an equally unimpressive rebound. We’re already most of the way there and it will take something new to keep prices rising.

Luckily there are a lot of recent sellers and underweight money managers under pressure because they are missing this rebound. Soon the fear of a selloff is going to be replaced by fear of being left behind. Expect this chase for performance to fuel a strong rally into year-end.

As I said previously, if we were going to crash, it would have happened by now. Markets don’t move in straight lines and expect volatility to continue, but the path of least resistance is definitely higher. Stick with what has been working: buy-and-hold and jumping on each dip.

Jani

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