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By Jani Ziedins | End of Day Analysis
While volatility has definitely picked up in recent weeks, the S&P500’s propensity to trade sideways remains the same. This summer we were stuck in a tight range between 2,170 and 2,190. Now we find ourselves marooned between 2,120 and 2,150. The more things change, the more they stay the same.
The last couple of days have been low-volume throwaways as most traders sit on their hands ahead of the Fed’s interest rate decision due Wednesday. The brief September swoon was fueled by fear of an impending rate-hike, but the reactionary selling was short-lived as the consensus quickly determined the Fed doesn’t have the courage to bump interest rates this month. In less than 24-hours we will know if the crowd got this one right.
I side with the consensus and think the Fed will hold off until the final months of the year. But just because the Fed remains stationary doesn’t mean stocks will rally. If the crowd expects no change, then that decision is already priced in. We could very well see a brief pop as uncertainty and risk evaporates following a no-change policy statement, but after that we are more likely to see a sell-the-news than a runaway rally. Delaying the first rate-hike by a few weeks isn’t going to change anything and the market is likely to see it the same way Wednesday afternoon.
While I remain bullish and expect stocks to finish the year strong, three-months is a long time and a lot can happen between now and then. Clearly the September selloff lost momentum as we keep bouncing off 2,120 support. Gone is the anxiety and fear as owners feel more comfortable following a rebound off of the recent lows. But the thing that concerns me is our inability to break out of this consolidation. If we were truly oversold, we would have bounced higher and not looked back. That means we are not oversold yet.
The longer we hold near support, the more likely we are to violate it. If we cannot escape this trading range by the end of the week, expect the next move to be lower. Breaking 2,120 support will launch another wave of reactionary selling as we trigger all the stop-losses under this widely followed technical level. That will be followed by another wave of reactive “sell before things get worse”. But not long after that, expect the supply to dry up like it did on September 9th. Most owners know a 0.25% bump in interest rates doesn’t change much and will continue to confidently hold their stocks, just like they did through the Brexit, the last rate-hike, and all the other bearish headlines that came across the wire this year. No matter what the “experts” think should happen, when confident owners don’t sell, supply remains tight and prices firm.
If we pop following a no-hike decision Wednesday, I wouldn’t chase it because we will likely run out of buyers near 2,180 like we have so many other times this year. But if we crash under 2,120 support in a sell-the-news reaction, stay calm and let other people dump good stocks for steep discounts. The most ambitious of us take advantage of the opportunity and buy the bounce off of 2,100 support. If the selloff is sharp and volume extremely high, that will finally be the capitulatory bottom we’ve been waiting for.
Jani
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By Jani Ziedins | Weekly Analysis
My August 30th free blog post was titled “The Next Big Move is Coming“. By almost all standards Friday’s 2.5% freefall qualifies as that move. We’ve been lulled into complacency by this summer’s tight, sideways trade, but we knew it couldn’t last forever.
Friday’s volume was the highest we’ve seen since the Brexit, but certainly not over heated considering the size of the accompanying price move. The selloff crashed through all kinds of technical levels and triggered most automatic stop-losses, but the relatively constrained volume suggests we didn’t set off a frenzy of reactive and emotional selling. That can be good or bad depending on how you look at it. It is nice to see most owners remain calm during a painfully ugly period. That bodes well for a rebound if these owners keep their composure next week since confident owners keep supply tight. But the opposite argument is Friday’s turnover didn’t look capitulatory. That could lead to further losses if emotions and fears flare up next week.
A major theme in my August 30th blog post was the risks associated with holding a sideways market. Every day we own stocks we expose ourselves to the unknown. When we buy right, the market moves in our direction and we get paid for holding that risk. But in a sideways market, we don’t get compensated for holding risk. All risk and no reward is a lousy trade. Long-term investors can sit through these flat stretches and subsequent gyrations, but shorter viewed traders should avoid owning flat markets. Quoting William O’Neil, “all stocks are bad unless they are going up”. While it is helpful to critique the past, what everyone really wants to know is what comes next.
The widely circulated explanation for Friday’s selloff was disappointment over no additional stimulus from Europe and the prospects of a near-term rate-hike by the U.S. Fed. Allegedly this “news” turned traders into sellers on Friday. The question for us is if this was a one-day tantrum, or the start of something far more significant.
The key is figuring out the real reason people were selling on Friday. Anyone who honored their stop-loss levels was flushed out automatically as the market smashed through every technical level established over the last few months. While this technically driven selling added fuel to the fire, there are not many technical levels left to violate. That means most of the autopilot selling is behind us, allowing us to focus on the trading decisions made by humans.
Humans sell for rational reasons and they sell for emotional reasons. Let us start by examining the rational hypothesis. The Fed is going to raise interest rates at some point in the near future, the only real debate is if that 0.25% hike comes in a few days, or a few months. You have to be living under a rock if you don’t know it is coming because the media has been obsessing over it for years. We survived the first rate-hike last December and even traded higher following it. Were traders really selling on Friday because they are afraid of a 0.25% rate hike? Let me ask you, are you afraid of a 0.25% rate hike? Or is something else driving people to sell?
I believe very few stock owners are personally afraid of this rate-hike. This is old news and 0.25% isn’t that meaningful. Certainly not enough to derail our improving economy. And if someone really is terrified of rate hikes, they would have cashed-in months, if not years ago when we first started debating this. People who are afraid of rate-hikes don’t own stocks in this environment plain and simple. If they don’t own stocks, they are not selling stocks. (most investors don’t short stocks)
If traders are not selling because of the rate hike, why are they selling? It comes down to Game Theory. People are not selling because they are afraid of a rate-hike personally, they are selling because they think other people are afraid of a rate-hike. The financial press has conditioned us to believe stocks are going up because of easy money and prices will fall once the spigot is turned off. Say something enough times and people believe it.
We make money in the stock market, not by predicting the future, but predicting what other traders will do. Even though we might not fear something personally, if we think the crowd will get spooked by a headline, we will sell ahead of the anticipated decline. That is what really happened Friday. Traders are not selling the economic damage of a rate-hike (real), they are selling ahead of what they think will cause a selloff (imagined).
What does it mean if most traders are only selling because they think other people will sell? It means there is no meat to this selloff. If no one is changing their personal outlook about the economy, then they will continue to have the same appetite for stocks. While they might cash in some chips ahead of the widely expected “rate-hike crash”, they will jump back in once the waves settle down.
Value investors are not afraid of a trivial bump in interest rates and will start buying the dip once prices get so attractive they cannot resist. This pullback also gives underweight money managers the opportunity to salvage their year by buying stocks at prices they wish they had bought earlier in the year. When there is no real fear in the market, traders jump back in quickly and is why this rate-hike weakness will be short-lived. No doubt emotion and fear could flare up Monday as traders sell “before things get worse”, there is very little substance behind this move and we should be looking to buy it, not sell it. There is no reason to rush in and catch a falling knife, but once prices stabilize, don’t dally and miss these bargains because they won’t last long.
Are you personally afraid of interest rate hikes? Or are you going to take advantage of these discounts? Let me know in the comments below.
Jani
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By Jani Ziedins | End of Day Analysis
It’s been a painfully slow summer. The last time I blogged was 26-days ago when the S&P500 finished at 2,164. Today we find ourselves 12-points higher at 2,176. Holding nearly three-weeks of market risk netted owners an average of 0.02% profit per day.
This year the market gapped lower 20-points or more at the open on multiple occasions. This means owners have been risking a 20-point loss for a measly 0.5-point per day gain. Over this period the potential downside has been at least forty-times the gain! All risk and almost no reward makes this a very poor time to be invested. Big money knows this and is why they have largely been absent as noted by the extremely low trading volumes. They haven’t been wasting their time on this mindless chop and neither should we. Stay in, stay out, but don’t try to trade this.
While the market netted a measly 12-points, we witnessed far more intraday volatility. Ten, fifteen, twenty-point intraday moves and reversals have been common. Even though the market gained 12-points over three-weeks, very few active traders made that much because they have been faked out by these phony breakouts and breakdowns. Trading mindless chop makes it way too tempting to buy high when things look good and sell low when second-thoughts creep in. That’s why I’ve been in cash for the last several weeks. The hardest thing for a trader to do is not trade, but that’s been the right call.
But that was then and this is now. We are quickly approaching the market’s next directional move. Big money managers will return from summer vacation after Labor Day. With just a few months left in the year, they will start positioning their portfolios for year-end. That either means chasing these record highs even higher, or cashing in and taking profits. Since big money hasn’t been active the last several weeks, we don’t have enough information to discern if they are more inclined to chase, or alternately are in the mood to take profits. By mid-September we will have more data and a better indication of their intentions.
Over the near-term, since the market has stubbornly held near record highs in the face of falling oil prices and the threat of rate-hikes, that shows most owners are confidently holding for higher prices. If we were over-bought and vulnerable, we would have fallen by now. That means the market wants to test the psychologically significant 2,200. Expect this slow, choppy grind higher to continue for the next couple of weeks. But what happens after that is anyone’s guess. That is when underweight big money will get desperate and start chasing prices higher. Or they will get cautious and start taking profits.
The most likely outcome? Both! Four-months in the market is an eternity and plenty of time to have crisis in confidence, dip to 2,100 support, and rebound to all-time highs before year-end. Or maybe it happens the other way, desperate traders chase the 2,200 breakout up to 2,300 where we run out of demand and slip into year-end.
The great thing about being a little fish is we are nimble enough that we can wait for more information. If the market does something unexpected, we can cash-in, evaluate, and adjust. While this mindless summer trade is putting us to sleep, this is the time to wake up and start looking for the next big trade because it is just around the corner.
Jani
By Jani Ziedins | Intraday Analysis
End of Day Analysis:
The S&P500 extended its streak of listless summer trade Thursday as we remained stuck inside a tight trading range stretching back several weeks. Tuesday’s selloff was the biggest move in a while, but even that failed to motivate traders to trade.
Barring a calamity, we shouldn’t expect volume to pick up until after institutional money managers return to work after Labor Day. In the meantime little guys will continue ruling the roost. Their erratic trade drives these wild intraday swings, but they have so little money that these gyrations peter out hours later. Up five-points, down-five points, repeat until thoroughly seasick.
Friday morning we get the monthly employment report. Unless it is truly shocking, we shouldn’t expect much from it. The first six-months of the year we were stuck in a half-empty mood. But now that we’ve held near all-time highs for a month despite numerous bearish headlines, it seems we shifted to a half-full mindset. That means the market will likely cheer a strong employment report because it means the economy continues to improve. If July hiring is weaker than expected, that means interest rates will stay low for longer. No matter which way employment goes, owners will have the excuse they need to keep holding. When owners don’t sell, prices remain firm. The Brexit and all the other negative news we received this summer failed to rattle owners’ resolve and I don’t expect anything we hear Friday morning will change that. If prices fall in a knee-jerk reaction, that will be yet another buying opportunity.
I apologize for the two-week delay since my last free blog post, but I’ve been busy working on the backend of my website. The most noteworthy item you will notice is I changed my domain from “crackedmarket.com” to “cracked.market”. Both addresses work identically and will take you to the same place, but I’m rebranding the website “cracked.market” because I like the way it looks. Now that I have several major behind the scenes items taken care of, I’m working on the layout and you will see those changes in coming weeks. I will probably post with a lower frequency for the remainder of the summer as long as the market continues trading sideways. If something dramatic happens, I’ll be sure to share my thoughts, but hopefully the remainder of the summer will be quiet and dull. For readers that want daily analysis, don’t forget about my Premium Subscription, which includes a two-week, risk-free trial.
Jani
By Jani Ziedins | End of Day Analysis
End of Day Update:
The S&P500 slipped a negligible amount Tuesday in one of the lowest volume sessions of the year. To this point stocks are holding the recent breakout as they trade in a tight range between 2,155 and 2,170. Quite a reversal in fortune from the turmoil and uncertainty we faced earlier in the year. The biggest question on everyone’s mind is if these record highs are the real deal, or these are the last gasps before the crash.
Last year many bull market skeptics claimed they would have a lot more confidence in this rally if we pulled back and refreshed. Many were quoting how many months it’s been since we had an X% pullback. Since then we’ve had two dramatic selloffs, the first occurring last fall and an even more dramatic one this winter. Now that we checked that box and reset the clock, have we won over the skeptics? No of course not. But now they have to be more creative when coming up with a reason to disbelieve this strength.
For years I’ve been firmly in the secular bull camp. Over the last 100-years, “lost decades” have been followed by monstrous secular bull markets lasting a dozen or more years. That makes this seven-year old bull market relatively young in comparison. That said, secular bull markets contain brutal and terrifying selloffs. The infamous Monday in 1987 where stocks lost over 20% in one day was inside a phenomenally profitable, two-decade long bull market. This bull market will die like every one that has come before it, just don’t expect it to rollover any time soon.
But that is the big picture and mostly applicable to long-term, buy and hold investors. Those of us with shorter timeframes can look at this 150-point rebound from the Brexit lows with a more cynical eye. Even in powerful up-trends, we experience the inevitable (and healthy) step-backs. Having moved as far as we have over the last few weeks, it is little surprise we ran out of buyers willing to chase prices higher. But even though we are struggling to find new buyers, stock owners are confidently hanging on for higher prices. Even without strong demand, prices are holding up well because so few owners are selling stocks. When supply is tight, it doesn’t take much demand to keep us levitating near record highs.
At this point it seems many traders are watching 2,155 and 2,170 levels and waiting for prices to breach either of these benchmarks before making their next move. A wave of profit taking will hit us if we slip under 2,155 and jumping above 2,170 will trigger the next round of chasing. But since we remain in the low-volume summer months, we shouldn’t expect either of these moves to get too carried away. The breakout will likely stall near 2,200 while a dip would most likely bounce before testing 2,100 support.
Even though we broke out to all-time highs, for short-term traders we are better off trading against these moves. That means buying weakness and selling strength. The sustainable buying won’t officially begin until big money managers return from their summer vacations this fall.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
Tuesday the S&P500 stumbled modestly following last week’s shocking rebound that recovered nearly all of the Brexit losses. We lost 100-points in the two-days after the Brexit, but bounced back over the successive three-days as if nothing happened. That dramatic whipsaw leaves most traders confused and wondering what comes next.
It is fairly obvious why the market sold off after the widely unexpected Brexit vote shocked the world, but even more unexpected was the powerful recovery that pushed us back near all-time highs. If the world is falling apart, shouldn’t the market be reeling? While that was the initial reaction, it didn’t take long for opportunistic traders to realize central banks would respond to this political calamity by pumping even more stimulus into the economy. Any talk of rate hikes was quickly replaced by reassurances of further easy money. It seems market thinks this medicine is more attractive than the Brexit is bad.
But the above analysis assumes all of last week’s buying was thoughtful and rational. While it would reassuring to think that’s the case, the size and speed of the rebound reeks of emotional, reactive, and desperate buying. Anyone who sold or shorted the Brexit headlines quickly came to regret that decision and was forced to rush back into the market. Shorts were squeezed and the imminent close of the second quarter forced money managers to buy back their books ahead of their quarterly reporting. They certainly didn’t want to be the guy who had to explain to investors why they reactively sold at the exact wrong moment. Further proof of this quarter-end phenomena is the frenzied buying ended on the last day of the quarter and July’s prices have been floundering without fresh buyers. Given the way overnight futures are trading, it doesn’t look like things will get any better Wednesday.
None of this should come as a surprise to experienced traders. One-hundred point moves over three-days are clearly not sustainable and bound to run out of steam at any second. Tuesday seemed to be that day for this rebound. Now that we stumbled back under the widely followed and psychologically critical 2,100 level, expect profit-taking and defensive selling to continue replacing last week’s reactive buying. I don’t foresee this turning into a big crash, just a bit of consolidation following last week’s dramatic swings. Two-steps forward, one-step back. Nothing unusual about that.
I shared the following analysis with subscribers early Friday afternoon when the market was up, but the momentum was stalling:
“the time to buy the dip was earlier in the week, not now that we’ve raced 100-points in three-days. If anything, I’m more interested in shorting this strength because over the near-term, moves like these are not sustainable. Most of the short-squeezing and chasing has already happened. Any bear who had a reasonable stop-loss has been chased off by this relentless climb higher. And this afternoon we are running out of momentum as we struggle to find new buyers at the upper end of the Spring’s trading range.
I have zero interest in buying the market after we’ve run this far. But a short here could be interesting. Not because I’m bearish this economic environment, but because we priced in an awful lot of optimism the last few days. Invariably sentiment will swing the other way when someone important says the wrong thing. The long-three day weekend means there is even more time for us to stub our toe.”
Looking forward to Wednesday and how to trade this, we tested and held 2,080 support and the 50dma Tuesday. Unfortunately these things are rarely one-day events and if overnight futures accurately predict tomorrow’s open, we will find ourselves slipping under this first line of technical defense. From there the next key level is 2,050 and expect at least temporary support. If we trade sideways in this area for a couple of days, that counts as our step-back and things start looking more optimistic. But if we cannot hold this level, expect another wave of defensive selling to swamp the market and the next stop is the 200dma near 2,025.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
It’s been a dramatic few days for global markets as the near universally expected “Bremain” turned out to be a shocking “Brexit” instead. The S&P 500 was complacently resting near all-time highs the night before the vote, but a few short hours later we found ourselves in the middle of a panic driven selloff. Friday’s selling extended through Monday morning, but by Monday afternoon we were running out of fearful sellers and found support near 2,000. Then Tuesday we surprised nearly everyone when we rebounded 1.8%. The question on everyone’s minds is what comes next? Is this a dead cat bounce before tumbling lower, or is the worst already behind us?
It’s been analyzed to death from countless other sources, but the Cliff Note’s version is the Brexit is more political than economic, especially when viewed from U.S. shores. A strong dollar, weak oil, and potential economic slowdown in Europe will be headwinds for our energy and export companies, but this is nothing new. Our service based and import heavy economy survived these headwinds all year and this is largely more of the same. This means the “Brexit” selloff is a buying opportunity, not a precursor to something much worse. If anything, this political uncertainty delays a Fed rate hike on the short end of the yield curve and the flight to safety is pushing down yields on longer end. Low interest rates leads to investors bidding up the prices of stocks and the risk to the markets from increasing rates gets put off yet again.
That’s the big picture. But what we really want to know is how to trade this and for that we need to zoom in. The Brexit is a large, ambiguous mess that no one understands because nothing like this has happened before. It would be a mistake to assume two-days of selling is all it took to fully price in the risks and headlines that will come out over the next weeks and months. While it was nice to see global markets bounce Tuesday, it is premature to call this thing over. Currently the market is expecting a rather smooth and painless transition for Britain. But all it takes is for one loud-mouthed politician to start spouting off that now is the time to reconsider and renegotiate these free trade agreements. Or another from Europe to say that London won’t get a free pass and needs to suffer the consequences of their decision. Right now politicians on both sides of the English Channel are humbled and meek from this gigantic rebuke. But give it a couple of days and soon they will find their big mouths again. When they do, expect the market to shutter and reel. At best we should expect the market to remain range bound for a while. That means these pops should be sold, not chased. We will survive this and pull out of it this fall, but expect it to be a bumpy ride between now and then.
What can we learn from this? Was the vote as unpredictable as people are claiming? I’ll be the first to admit I fell for it. I was nearly certain Britain would vote to stay in the EU. But just because that was the most likely outcome doesn’t mean it was a good trade. The previous runup in price ahead of the vote created a very poor risk/reward and is why I chose to be in cash ahead of the vote.
Quoting last Thursday’s Premium Analysis sent to Subscribers the day before Britain’s historic Brexit vote:
Traders are fixated on Thursday’s Brexit vote and this drift up to 2,100 resistance tells us the crowd is optimistic and expecting a favorable outcome. This positive outlook is somewhat unusual because more often than not the market fears uncertainty and typically prices in the worst, but this time traders are buying ahead of what they think will be a Stay result. Unfortunately for those positioning for pop, they will be disappointed because a big chunk of this buying is happening ahead of time. If no one is left to buy the headline, we could actually stumble into a sell the news situation. The market hates to be predictable and right now the least expected outcome would be a selloff following what most bulls are hoping for.
While I agree with the crowd that a Stay vote is the most likely outcome, I don’t want to buy ahead of the vote because much of the upside has already been realized. Since this Brexit drama never really pressured prices, there is not a lot of upside to be realized once this weight is removed. While we could surge 20-points in a knee-jerk relief rally, we could also open down 40-points if the Leave crowd surprises everyone. That is a poor risk/reward even if the reward is a higher probability outcome.
Jani
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By Jani Ziedins | Intraday Analysis
End of Day Update:
Tuesday morning the S&P 500 extended its selloff, crashing through 2,080 support and the 50dma on its way to the mid-2,060s. But by late morning we exhausted the supply of sellers and closed 10-points off the intraday lows. Justifications for this week-old selloff come from two sources, oil pulling back from its highs and growing fear of a Brexit.
Last Tuesday evening I warned readers to be wary of a near-term pullback in oil and equities and that is exactly what happened. We don’t need be psychic to know what the market will do next, all we have to do follow the swings of sentiment and supply and demand. Last week traders were giddy as oil broke through $50, leading many to predict $60 oil wasn’t far away. Instead of surging higher, oil prices peaked and stumbled back into the $40s. So much for the wisdom of consensus. Stocks followed the same flight plan when it looked like we were headed to all-time highs, yet found ourselves stumbling under the 50dma instead. But that’s the way this works. One week’s giddiness gives way to the next week’s pessimism.
This week oil prices have been bumped off the front pages as the financial press fixates on next week’s Brexit vote. This was supposed to be a slam dunk for the “stay” vote, but the Brexit camp has surged in recent polls. That uncertainty is unnerving markets as traders start to fear the unknown. While this will be a hugely disruptive event if Britain votes to leave the EU, the economic consequences will be less bad than most fear. This is a referendum on refugee immigration, not trade. British citizens want to close their borders to Middle East refugees and given EU laws, the only way they can do that is by pulling out of the union. This isn’t a dispute over trade and no one wants to start a trade war since both sides are so dependent on the other. This means we should expect British and EU politicians to quickly sign into law comparable trade agreements to replace the previous EU ones. This will take place within weeks if not days because both sides want to minimize the economic disruptions. But politicians are not promoting “Plan B” because they are trying to use fear of economic calamity to persuade people to vote “stay”.
A Brexit vote would send the S&P 500 down a few percent because it is not currently priced in. But this will be a buyable dip for those who have the courage to be greedy when others are fearful. A week or two after the Brexit vote, many of the unknowns will have been ironed out and we will move forward with a plan. Norway and Switzerland survive quite successfully without EU membership and instead are part of a European Free Trade Association. Britain will do the same thing and life moves on. Since Britain never adopted the euro and still used the pound, there won’t be any of the financial entanglements that drove concern over a Grexit a couple of years ago. All the Brexit is doing is shifting from standardized EU trade agreements to ones made separately. Six one-way, half-a-dozen another. For all intents and purposes it will do the same thing no matter what the document is called.
As for how to trade this, Tuesday’s dip undercut popular technical stop-losses, purging a good bit of that supply from the market. The relentless slide under 2,070 also combined with the Brexit headlines to convinced emotional traders to get out “before things get worse”. Unfortunately for them reacting emotionally doesn’t pay very well. While the Brexit story isn’t done, we are closer to a buy-point than a prudent place to sell defensively. The best profit opportunities come from trading against an emotional crowd and the anxiety is ramping up as the VIX surges above 20 for the first time since February. Those with cash, get your shopping lists ready. Those with buy-and-hold stocks, don’t let the fear-mongering convince you to sell at a discount.
Jani
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