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By Jani Ziedins | End of Day Analysis
Free After-Hours Update
The S&P 500 surged to the highest levels in history on Tuesday. This completed the final chapter in 2018’s sharp, but brief correction and it is officially in the history books. The upside is we can start talking about something else……starting tomorrow.
As is often the case, the market is attracted to levels the crowd is fixated on. This occurs on both the low and high side. Obvious support levels get breached while obvious resistance levels are broken through. That’s why it is no surprise we got here. But the lingering question remains, what happens next?
Recent strength came from corporate earnings being less bad than feared. As often is the case, reality ends up being better than the naysayers predict. And while there is no end in sight for Trump’s trade wars, these headlines are ancient news. If they haven’t affected us yet, they are not going to start anytime soon.
Over a month ago I wrote the following after the market crashed through 2,800 support.
“Last week’s dip was the perfect setup to trigger a bigger selloff if that is what this market was inclined to do. We’ve come a long way since the December lows and a pullback is a normal and healthy thing to do following such a strong move. But rather than use the excuse to lock-in profits, most owners stood their ground and refused to sell.”
Conventional wisdom tells us complacent markets are vulnerable to collapse. What it fails to mention is how long complacency lasts before the collapse. And as we are finding out, complacency can last a long, long time.
The thing we have to remember about complacent traders is they are not afraid of anything. The obvious problem is if complacent traders don’t sell spooky headlines, where does the supply come from that fuels the big dips?
As this market is proving, that lack of supply nips every dip in the bud. This year’s biggest pullbacks barely lasted more than a few days. This bull market will die like all the others that came before it. I have no idea when that will happen, but it is acting well enough at the moment to continue giving it the benefit of doubt.
As I wrote last week, this remains a buy-and-hold market:
“This continues to be a buy-and-hold market. Those with the patience to stick with their favorite long-term investments have been rewarded as the profits came to them. Unfortunately, the environment has been less good for swing-traders since the dips and bounces have been so fleeting. Sometimes the best trade is to not trade. And that has been the case here. Profiting from these small gyrations takes impeccable timing and is all too easy to get wrong.”
Nothing has changed since then. Stick with what has been working and that is buy-and-hold. That said, keep a little cash available for the next trading opportunity. We cannot buy a dip if we don’t have any money.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 finished Tuesday almost exactly where it started. And not only that, this was the third close in pretty much the same spot. Regardless of what is going on around us, the market is very content at this level and reluctant to leave it.
How a person interprets this lack of movement largely depends on how they view the market. Bulls call it resting. While bears claim it is stalling. Which is it? That’s what we are going to figure out.
Last week I wrote the following:
“If this market was overbought, fragile, and vulnerable to collapse, [last] Tuesday’s headlines and dip were more than enough to kick off an avalanche of selling. The fact prices held up tells us the ground under our feet is solid and there is a lot of support at these prices. This continues to be a strong market and the path of least resistance remains higher.
That said, we burned through a lot of demand since the start of the year and it is no surprise the rate of gains is slowing. We are quickly transitioning to more sideways than up as we approach the old highs. That means we need to be patient and expect a little more back-and-forth.”
And so far this is exactly what happened. Prices resisted the temptation to tumble while at the same time struggling to find the energy to continue higher.
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This week’s lethargic price action doesn’t change anything. In fact, it confirms and reinforces what I thought previously.
It is far easier for a market to tumble than it is to go up. Given how quickly prices fall, simply holding steady is an encouraging and constructive sign. If this market was going to breakdown, it would have happened by now on any number of bearish headlines and negative price action we’ve seen over the last few days, weeks, and months. The defiant act of resisting the temptation to fall proves this market is far more resilient than the critics and cynics want you to believe.
And having survived so many attacks from trade war, rate hikes, and slowing growth headlines, that tells us most of these headlines have already been priced in. If the first, second, and third retelling of these headlines didn’t break this market, why should we fear the fourth, fifth, or sixth? The simple answer is we shouldn’t. And so far that’s proven to be the right call. The longer a headline sticks around and the more people talk about it, the less it matters. If the market doesn’t care about these things, then neither should we.
Prices have been rallying on a reality that is turning out far less bad than feared late last year. Given how dire predictions of doom and gloom were last fall, it didn’t take much to beat those expectations. And even in the face of slowing global growth, the market is still enjoying relief that things could have been so much worse.
That said, “less bad than feared” was good enough to get us back to the highs. But to keep going, we need to transition to “good” headlines. At this point, we’re not there yet and is why the rally has stagnated. We can rest easier because we are not standing on the edge of a precipice, but we shouldn’t expect an explosive move higher either.
This continues to be a buy-and-hold market. Those with the patience to stick with their favorite long-term investments have been rewarded as the profits came to them. Unfortunately, the environment has been less good for swing-traders since the dips and bounces have been so fleeting. Sometimes the best trade is to not trade. And that has been the case here. Profiting from these small gyrations takes impeccable timing and is all too easy to get wrong.
Continue sitting on your favorite long-term investments. But keep a little cash handy for when the next opportunity pops up. We cannot take advantage of the next dip if all our money is tied up in stocks. Even though things are pretty boring right now, without a doubt, they will get a lot more exciting when we least expect it. Be ready.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM