Feb 21

Weekly Review and Look Ahead: Should we be buying this dip or selling it?

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis

The S&P 500 retreated from all-time highs set earlier this week as Coronavirus fears came rushing back. While nothing concrete popped up in the headlines, the creeping spread of this epidemic outside of Chinese borders is concerning investors. That said, prices only retreated 2% from the highs, hardly panic material.

Is the market about to fall off a cliff? Some people seem to think so and are abandoning ship before the big crash starts. But is that the way these things normally happen? A crisis happens. The market gives us a few weeks to think about it and lock-in our profits. And then it crashes??? I don’t know about you, but in my nearly three decades of trading experience, when things go bad, they go bad breathtakingly fast. Traders sell first and ask questions later. If you stop to think, you are left behind.

This Coronavirus thing first hit markets back in mid-January. Here we are more than a month later and the crowd is still talking about it. Should we be scared? To be honest, I don’t fear things the market’s been chewing on for this long. The owners who fear these things have been given plenty of time to bail out and they were replaced by confident dip buyers who didn’t mind jumping in front of these headlines. Out with the weak and in with the strong. That’s how news gets priced in. If these dip buyers didn’t care about these headlines when they bought two and three weeks ago, what are the chances they will change their minds now? Pretty small.

Typically, the reaction to a recycling of the same old headlines get smaller over time, not larger. We have the knee-jerk reaction where traders fear the worst. Next comes the “less-bad than feared” relief rally. Not long after we hear the first echo of the initial selloff. But like most echos, the intensity falls off with each reverberation. There is a good chance we are in the middle of the first echo.

Every once in a while, like 20 years once in a while, things actually turn out far worse than feared and prices continue to tumble. That’s what happened during the 2008 financial crisis. Investors thought things were as bad as they could possibly get, yet somehow they ended up getting even worse. That certainly could happen with the Coronavirus if it spreads to the point where hundreds of millions of people are infected. Of course, if that happens, we have bigger things to worry about than this latest swing-trade. We are not there yet and we most definitely shouldn’t trade as if that is where we are headed.

Successful traders focus on the high probability events and trade them when the risk/reward lines up in their favor. If we assume this modest pullback is nothing more than pausing after rallying 200 points to 3,400 resistance and that this Coronavirus echo will be smaller than the initial selloff, we could be very close to the bottom of this dip.

While no one knows what will happen next week, when the probabilities and the prices line up in our favor, we take a chance. A lot of times we get it right, sometimes we get it wrong. But as long as we are smart with our entries and stops, the cost of being wrong is low and if we buy right, the eventual rewards are quite nice.

Over the last few weeks, the way the market went into the weekend was the exact opposite of the way it came out. A “better safe than sorry” dip Friday afternoon was greeted with a relief pop Monday morning when things didn’t get worse. The “there is nothing to worry about” Friday afternoon rally was met with second-guessing Monday morning. Today the market stumbled into the close and if this pattern holds, this was actually a decent entry point because a lot of the selling already happened. If things don’t get much worse this weekend, expect prices to pop Monday.

The best way to buy this dip is to start with a small position and only add more money once the trade is working. Keep a stop under today’s lows. If we get squeezed out Monday, don’t worry about it, pull the plug and try again. Often these rebounds fail once or twice before the real one takes off. But if we are smart about our entires and stops, getting whipsawed a couple of times isn’t a big deal. Good Luck!

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Feb 20

Should we be selling the dip or buying it?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 started the day with modest losses and even rebounded back to breakeven. But moments before lunchtime, the crowd got spooked and prices fell off a cliff.

If you believe the financial press, this waterfall selloff was triggered by a renewed fear of the Coronavirus epidemic and the impact it is having on the economy. Were these recycled headlines really worth falling nearly 30-points over just a few minutes? Or was something else at play?

As I wrote previously, here, here and here, this market likes to slow down and consolidate gains near the round 100-point levels. It has been a nice, nearly 200-point rally since the February lows. To expect this rate of gains to continue indefinitely would be a tad nieve.

If the market was going to pause at these levels anyway, it doesn’t really matter what the headlines are. Supply and demand needs some time to catch up and is the real reason stocks stalled under 3,400 this week. If it wasn’t these headlines, it would have been something else. Rally this far and inevitably you run out of new buyers. It is that simple.

Now that we know the real reason behind the market’s stumble, we are in a better position to figure out what comes next. Since this wobble was triggered by a supply and demand imbalance, not a fundamental change in the market’s outlook, this is nothing more than a routine and healthy dip. The kind that bounces within days, if not hours.

If we understand why the market is doing what it is doing, we are far less likely to overreact to these periodic wobbles. If a reader has been following along, they knew this was coming and included this possibility in their trading plan. Hopefully, you were taking some profits proactively last week and had cash ready to buy the dip. If not, don’t worry about it, there is always next time. Just make sure you create a plan ahead of time that includes possibilities like this and you won’t worry about days like today. In fact, you’ll be happy to see them because they are profit opportunities for those of us that come prepared.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Feb 19

Making money with TSLA vs the S&P 500

By Jani Ziedins | Free CMU

Cracked.Market University

Alternate title: Why I swing trade the indexes

It is hard to ignore what is going on in TSLA with the stock up 43% this month alone! While it definitely feels like this shocking move left a lot of us behind, should we actually feel bad about missing it?

There are a lot of reasons why I settled on swing-trading the indexes using leveraged ETFs. One of these days I will write more about the fundamental reasons I like this trade. But for today, let’s focus strictly on performance. How does swing-trading the indexes using leveraged ETFs compare to holding a basket of the hottest stocks, including the record setting TSLA?

First, I am only comparing owning the underlying stocks since that is what sane people do. While there are plenty of internet stories of people turning $1,000 of far out of the money calls into a million bucks on TSLA, that is nothing more than gambling with lottery tickets. People who approach the market with such a total disregard for risk management go broke within a year. (There are responsible ways to structure Black Swan trades, but I doubt any of the people making headlines were doing it responsibly.)

Also in the name of risk management, let’s assume any sane person holds a basket of highflying stocks since putting all of their money into a single stock is also reckless. But not to give anything away, this hypothetical person is extremely aggressive and his entire portfolio is concentrated in this market’s hottest trades.

For the sake of argument, let’s say he holds five popular growth stocks: TSLA, NFLX, AMZN, FB, and let’s throw an IPO in there for fun, PTON.

How does this basket of stocks compare to UPRO, the 3x leveraged S&P 500 ETF, since the start of the month?

TSLA: +43% Outstanding!
NFLX: +12% Great!
AMZN: +8% Solid!
FB: +7% Good!
PTON: -17% Can’t win them all.

Average: 12%  For only a few weeks of work, that is a fantastic return!

Now for the boring index fund:

UPRO: +16%

Yup, you read that correctly. A borning index ETF outperformed a basket of the hottest stocks, including the nearly unpreceded surge in TSLA. Do I feel bad about missing TSLA? Nope, not in the least.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN $TSLA

Feb 18

Why we don’t need to predict the headlines

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 slipped from record highs following the long Presidents’ Day weekend. The biggest market-related headline was Apple warning investors Coronavirus interruptions would cause the company to miss its revenue forecast. That disclosure renewed concern about the financial impact of this health epidemic half a world away. While today’s headlines and declining stock prices threw some cold water on the market’s previously blasé attitude, a 0.3% decline is hardly panic selling.

As I wrote last Friday, the market is quickly approaching 3,400 and that seems like a good place for the rate of gains to take a break. I didn’t have any insight into this weekend’s headlines, but I didn’t need to. The market is a pendulum and after swinging in one direction, it is only inevitable that it comes back the other way. If it wasn’t these headlines, it would have been something else.

The market receives mixed messages every day. There is never a day when the news is all good or all bad. What matters more than the headlines is where we are in the supply and demand cycle. The higher we go now, the harder it is for us to make that next push higher. Eventually, every wave higher runs out of momentum and the rate of gains either stalls or pulls back. Most of the time it has nothing to do with the headlines the journalists are pointing to. It is simply the laws of supply and demand coming back into balance.

Last Friday I suggested readers lock-in some worthwhile profits. Not because I knew something bad was going to happen. But because it was time. If we are in this to make money, the only way we do that is by selling our winners. Friday felt like a good time to lock-in profits and that’s what I did.

But the thing to remember, once we are out, the very first thing we do is start looking for the next opportunity to get back in. Maybe prices slip a little further and give us a nice dip-buying opportunity. Or maybe prices firm up over the next few days and we consolidate under 3,400. Hold here for a week or two and the market will be ready for its next rally leg. I don’t need to predict what the market will do if I have a trading plan that factors in these different outcomes.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL

Feb 14

Weekly Review and Look Ahead

By Jani Ziedins | Weekly Analysis

Free Weekly Review and Look Ahead:

It was a good week for the S&P 500 as it put Coronavirus fears out of its mind, gained 1.5%, closed at record highs. While this health epidemic is far from over, previous contagions didn’t have a lasting impact on stocks and traders are assuming the same will happen this time too.

The problem with this optimistic outlook is it already prices in a favorable outcome. With stocks selling at record highs, buyers are not being compensated for holding this risk. While the market will most likely be correct in this assumption, why would anyone want to own the risk if they are not getting paid for it in terms of buying stocks at a discount?

The market’s ambivalence skews the risk/reward against us. With stocks at record highs, the upside is already priced in there is a fair amount of air underneath us. This is skew is even more pronounced ahead of a three day weekend. If things go well over the next three days, that is what the market expects and stocks will rise a modest amount. If something goes wrong, there is a lot of room to fall.

Now don’t get me wrong, I’m not a bear in any shape or form. I actually like this market a lot. The problem is I don’t like paying full price for stocks. I prefer waiting for nervous sellers to give me free money.

The correct time to buy was two weeks ago when fear and uncertainty were peaking. Now that calm and complacency returned, this is the time to be taking profits. Rather than pay premium prices, we should be the ones selling them and that is exactly what I’m doing. This market likes to pause at the round 100-point levels and given the nearly 200-point rebound since the Coronavirus lows, 3,400 is a good place for the market to slow down and catch its breath.

I’m taking some profits off the table proactively and moving the trailing stops up on my remaining positions. We only make money when we sell our winners and for me, this is a good time. While I might be getting out a little early, if the market trades well next week, I can always buy back in.

Enjoy the long weekend.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

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