Dec 11

Why buying the dip is still the smart move

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

It’s been an incredibly volatile week for the S&P 500. The last five trading sessions produced intraday swings that approached and even exceeded 3%. Tuesday’s price action was no different as a strong open gave way to midday losses, only to see an afternoon bounce push us back into the green, right before a second fizzle left us exactly where we started.

This market is definitely in a hurry, unfortunately, it cannot decide which direction it wants to go. These wild swings are giving both bulls and bears something to crow about, but nothing sticks and strong moves reverse days, if not hours later. This extreme volatility is definitely a concern, but what is it trying to tell us?

I wrote the following last Thursday, and nothing has changed:

It is shocking to see the amount of gloating going on every time the market moves to one edge of the trading range or the other. We’ve been bouncing between 2,600 and 2,800 for most of the last two months. Today’s dip and reversal count as the 7th time the market challenged and failed to break out of this range.

But rather than use “common” sense and assume each dip is a great buying opportunity, or rally a time to take profits, these impulsive bulls and bears ignore the evidence and proclaim this is finally the big move they’ve been waiting for.

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Since I wrote those words, the market again challenged and even briefly violated October’s lows before bouncing decisively off of 2,600 support. And the cycle of bulls and bears yelling at each other and proclaiming they are right continues. All while smart money is making a boatload of money trading against the crowd.

While this volatility is a red flag, even more noteworthy is how resilient this market has been to crashing through support. We had last week’s arrest of a high profile Chinese executive. Then Trump tweets he is perfectly willing to go ahead with his Chinese tariffs. Then today he tells Democrats he would be “proud” to shut down the government.

While the intraday moves have been huge, the directional moves have not. We are still stuck inside the two-month-old trading range between 2,600 and 2,800. The thing to remember about market collapses is they are breathtakingly quick. Markets don’t wait to see how bad things are before they tumble, traders race for the exits at the first hints of trouble. But that isn’t happening here.

Monday’s dip under October’s lows on awful headlines was the perfect setup for bears. But rather than trigger an avalanche of emotional selling, supply dried up and prices bounced 60-points above the morning lows. Rather than sell the weakness, big money is more inclined to buy these discounts. After two months of relentless bad news, it the market chased off most of the weak owners and replaced them with confident dip buyers. That’s why these relentless waves of bad news are failing to dent this market.

Every bottom always feels like things are about to get a lot worse. By rule, it has to. If it didn’t, no one would sell and we wouldn’t dip. At this point, I’m a lot more impressed with the market’s resilience than I am afraid of these fearmongering headlines.

That said, we need to continue respecting support. A dip back under 2,600 support over the next day or two tells us demand is absent and lower prices are ahead of us. But if we hold above the lows for the next few days, the trading range is intact and a run back to 2,800 resistance is in the cards.

Buy weakness. Sell strength. Repeat.

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Dec 06

Q: Who is right, Bulls or Bears? A: Neither!

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

It doesn’t get wilder than Thursday’s crazy ride in S&P 500. Prices plunged at the open after the US had the CFO of a major Chinese tech company arrested for violating Iranian sanctions. That was a significant escalation in Trump’s confrontation with China and it crushed all positive feelings following last weekend’s trade truce.

The selling intensified and by late morning we were down more than 3%. But then something happened. We ran out of sellers. And more than just run out of sellers, the market erased almost all of those losses and closed practically flat. We went from one of the worst days of the year, to a trivial 0.15% loss. Talk about an epic reversal.

A big chunk of the afternoon’s strength was fueled by the Fed’s slowing stance toward future rate hikes. Rather than dole them out at regular intervals like they have been doing, the Fed is quickly shifting to a wait-and-see outlook. A similar ideal launched last week’s 2.3% surge higher and today it erased 3% of losses.

But this market’s resilience shouldn’t surprise readers of this blog. After Tuesday’s 3.24% collapse, I wrote the following:

“I expect global stocks to get hammered Wednesday as the world reacts to the U.S. market collapse. But after that, expect cooler heads to prevail. As I’ve been saying for a while, this is a volatile period for stocks. That means large moves in both directions. But so far these wild gyrations have been consolidating October’s losses, not extending them. There is no reason to think this time is any different.

Trading so close to 2,700 support means there is a good chance we will violate it. But as long as the selling stalls and bounces not long after, that tells us most investors would rather buy these discounts than sell them.”

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I will be completely honest, I expected us to poke our head under 2,700 and bounce. There is no way I could have foreseen those Huawei headlines sending prices cratering nearly all the way to 2,600 and then bouncing. Even I am dumbfounded by today’s resilience. But it still isn’t a complete surprise.

It isn’t controversial to say the majority investors know the stock market trades sideways most of the time. But the paradox is that most of the time, the same people also almost always assume each day’s gyration is the start of the next breakout or breakdown.

It is shocking to see the amount of gloating going on every time the market moves to one edge of the trading range or the other. We’ve been bouncing between 2,600 and 2,800 for most of the last two months. Today’s dip and reversal count as the 7th time the market challenged and failed to break out of this range.

But rather than use “common” sense and assume each dip is a great buying opportunity or rally a time to take profits, these impulsive bulls and bears ignore the evidence and proclaim this is finally the big move they’ve been waiting for. Monday it was the bulls. Today it was the bears. And both sides got it exactly wrong.

The ironic thing is by the time these chronic bulls and bears realize we are stuck in a trading range is right before we break out of it. No one said trading is easy. But it is a lot less hard if we know what to pay attention to.

As for what comes next, the US taking one of China’s top business executives into custody isn’t going to go over well and this story is a long way from being done. We should expect the situation to evolve and that will exacerbate volatility, but as long as investors would rather buy these discounts than sell them, we should be in good shape. The bottom of every market selloff feels like things are about to get a lot worse, and this time won’t be any different.

By this point, most of the Trump’s trade war is already priced in and the only thing that would worry me is we start shooting at each other. Barring that, this is just another buyable dip.

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Dec 04

How to profit from Tuesday’s collapse

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

In the market, a lot can happen in a few days. My last free blog post was last Thursday after the S&P 500 smashed through 2,700 resistance. A buying frenzy pushed prices up to the 200dma after the Fed Chairman suggested interest rates were approaching his neutral target.

But rather than cheer those gains, I cautioned readers in that post from last week:

The market was a great buy Monday and Tuesday. But risk is a function of height and Wednesday’s large gains make buying now a lot less attractive. A big chunk of Wednesday’s buying came from chasing and short-covering. Those are both fleeting phenomena and now that they’ve come and gone, we need another group of buyers to come in and push us higher. Unfortunately, many of those with cash remain nervous, especially following such a large move higher. Their fear of heights will likely keep a lid on prices for a few days. And even a dip back to 2,700 wouldn’t be a surprise. Two steps forward, one step back.

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While I expected this step-back, even I was caught off guard by the speed with which it happened. But even that isn’t a surprise. The market operates in two speeds, infuriatingly slow, or breathtakingly fast. This time the hivemind got together and turned the last few days of frenzied buying into a mad dash for the exits. Easy come, easy go.

While it was nice to see this weakness coming and prepare for it, that was then and this is now. What readers really want to know is what comes next.

Stock prices popped Monday after Trump and China reached an agreement this weekend to de-escalate the trade war. But that relief proved fleeting as traders started analyzing the details. The primary catalyst for Tuesday’s collapse was Trump disclosing the strings attached to his pledge to not increase tariffs on Chinese imports. The shine further wore off when Trump reiterated his pledge to impose tariffs if the Chinese didn’t make substantial concessions. That sent risky stocks tumbling and safe-haven bonds soaring. So much for the relief.

But the thing we have to ask ourselves is if Tuesday’s collapse was lead by rational and thoughtful selling, or if it was nothing more than herd selling because people sold for no other reason than other people were selling.

There are few, if any, 3.25% declines that are led by rational and thoughtful selling. Today was no different. We opened near yesterday’s close and slipped to normal losses by lunchtime, but slipping under Friday’s close triggered an avalanche reactive stop-loss sell orders that didn’t stop until we shed another 60-points. As I wrote previously, 2,700 was a key support level and the market found support and bounced off that critical level in afternoon trade. Unfortunately, the bounce proved fleeting and we closed right back at 2,700 on the nose.

The market is closed Wednesday in observance of a national day of mourning for President George H.W. Bush. No doubt the inability to trade Wednesday caused many would-be dip-buyers to sit on their hands knowing they would be unable to trade for a day and a half. Better safe than sorry. But the other thing this extra day off does is give traders a chance to collect themselves and decide if they really want to be selling these discounts, or if they should be buying them instead.

I expect global stocks to get hammered Wednesday as the world reacts to the U.S. market collapse. But after that, expect cooler heads to prevail. As I’ve been saying for a while, this is a volatile period for stocks. That means we large moves in both directions. But so far those wild gyrations have been consolidating October’s losses, not extending them. There is no reason to think this time is any different.

Trading so close to 2,700 support means there is a good chance we will violate it. But as long as the selling stalls and bounces not long after, that tells us most investors would rather buy these discounts than sell them.

I bought the Thanksgiving massacre and sold the frenzied relief rally up to 2,800. And I will do the same thing again this time. If impulsive traders want to keep giving away free money, I will gladly continue taking it.

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Jani

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