Mar 02

A little good and a lot bad

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Monday the S&P 500 produced its biggest gain since last summer. On Tuesday it gave back a chunk of those gains. Two steps forward, one step back.

There is nothing wrong with a minor step back following such a large up-day. The key is hanging on to what’s left. Stay above 3,850 and everything is fine. Falling under 3,800 so soon after bouncing off this key support level tells us there is a serious demand problem and the selling is only just getting started.

This bull market deserves the benefit of doubt because it hasn’t let us down yet. Until we experience a more material breakdown, expect every dip to bounce within days, if not hours. If this market was fragile and overbought, it would have collapsed a long time ago. (Pro-tip for all the cynics out there, weak fragile don’t keep setting record highs.)

But enough about the indexes. One of the most noteworthy stock performances of the day came from ZM. It announced blowout quarterly results Monday after the close and the stock popped Tuesday morning. Unfortunately, that was as good as it got. Within hours, that impressive 8% opening gain turned into a dreadful -9% closing loss. That’s a 17% swing from the highs to the lows.

There are few things in the stock market that look worse than this. In fact, I cannot think of anything worse than such an epic midday collapse. Rather than cheer the news, most owners did their best impersonation of rats abandoning a sinking ship.

A stock that cannot go up on good news is in desperate shape and destined to keep going lower. ZM is a strong short as long as it remains below $400.

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Mar 01

The mistake bears are making

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 popped 2.4% in the biggest up-day since last summer. There wasn’t a clear headline driving Monday’s flurry of buying. Instead, this was a sharp snap-back from last week’s reflexive herd selling that got too carried away.

As I wrote last week, 3,800 was the tipping point. Either we fall over the edge or we bounce decisively off of support. Given the elevated volatility, there really wasn’t anything in between. And fortunately for the bulls, we got that decisive rebound off of support.

Like many people last week, I believe rising interest rates are what is going to kill this bull market. I just don’t think this is that time. Despite everyone trying to call a top, bull markets don’t die with the flip of a switch. Topping in a process that takes months.

We are only days removed from the last record high. If there is one thing we know about weak markets, they don’t keep setting new record highs. Until we see a clear pattern of lower-highs, assume this bull market is very much alive and well.

This bull market will die like all of the others that came before it. But this is not that time.

(Note: The one thing that would make me reconsider all of this above is if the index retreats back to 3,800 over the next few days. If this bounce is the real deal, it shouldn’t look back. If prices retest support so soon after the bounce, the selling isn’t over.)

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Feb 27

A simple trade for next week

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis: 

It’s been a rocky couple of weeks for the S&P 500. Rather than bounce back from last week’s string of down days, we added to them. This week’s 2.4% loss was the largest since the final week of January and the second-biggest since November’s election.

As bad as that sounds, these periodic pullbacks keep turning into bullish higher-lows. At this point, the index remains above a trendline stretching back to just after the Covid lows. This pullback needs to keep going if it is going to do any meaningful technical damage.

That said, everything could change next week if the selling resumes. But until that happens, this isn’t anything more than a routine and healthy step-back on our way higher. Two-steps forward, one-step back. Rinse and repeat.

This leaves the market at a key tipping point. If this dip is truly like every other step-back over the last several quarters, the bounce is just around the corner.  Rebound back to the highs and nothing has changed. Extend the selloff and we are entering uncharted territory.

Investors have become fixated on rising 10-year Treasury yields. Is this finally the start of something new and we should be concerned? Maybe. But this bull market ignored a once-in-a-hundred-year global health pandemic, it shouldn’t surprise anyone if it shrugs off a jump in interest rates from 0.5% to the still absurdly low 1.5%.

Is the bull market dying? No, probably not. But we will learn a lot about the market’s intention next week when either the index bounces or it continues lower.

As for a trading strategy, it is pretty straightforward. The market is buyable above 3,800 and sellable under this level. It doesn’t get any more complicated than that.

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Feb 25

Why the cynics are right but they will probably still lose money

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Volatility exploded this week as the S&P 500’s last three trading sessions produced some of the largest intraday swings of the year.

The biggest wild card continues to be 10-year Treasury yields, surging from 0.5% last autumn to 1.5% today. While 1.5% is trivially small by historical standards and investors are not afraid of these 1.5% rates, they are afraid this surge will turn into 3% or even 5% over the next several months.

Remember, the investors don’t price stocks based on where we are today, but what they think we will be in six to twelve months.

Stocks are stupid expensive by conventional measures (forward P/Es, etc). But these valuations are actually reasonable given these historically low interest rates. That’s because the lower interest rates are, the more valuable future cash flows become.

The problem is one percent interest rates justify really high stock valuations. Four percent interest rates do not. And that’s the million-dollar question, where are interest rates headed?

With all of this money printing supporting the Covid economy, most people assume inflation and higher rates are inevitable. But you know what? They said the same thing after the Fed pumped the economy full of cash following the housing bubble and 2008 financial crisis. Quite a few “forward-thinking” hedge funds lost a ton of money a decade ago when they bet on higher inflation and ended up being wrong.

Now I will count myself as one of the people concerned about inflation and higher interest rates. As I described, these crazy high stock valuations are built on a foundation of low interest rates. Take that away and the whole thing comes crashing down.

I have little doubt higher interest rates are what will kill this bull market. The problem is I don’t know when it will happen. As I’ve written previously, these rallies go so much further and last way longer than anyone thinks possible. While we might already know how this ends, the demise is still probably a few innings away.

The one thing we know for sure is dying markets do not keep making new highs. If the S&P 500 returns to the highs over the next few days, all of this talk of the end is premature. If prices retreat under recent lows, then we have to take this more seriously.

The great thing about being independent investors and traders is we don’t have to predict the future. We are small enough that we can react to these developments in real-time as the future unfolds in front of us. If the market bounces tomorrow, buy and hold. If prices retreat under the lows, sell and even consider going short.

It doesn’t get any more straightforward than that. Volatility is picking up, meaning the next move will be large. We just need the market to pick a direction and then hang on.

My intuition and educated guess is higher, but I have no problem being wrong. (In fact, I’ll make more money if stocks decline sharply, so here’s to hoping I’m wrong!)

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Feb 24

Is GME making a comeback?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finally bounced in a meaningful way on Wednesday, resulting in the best trading session since early February. As bad as things felt following five consecutive losses, Wednesday’s gain puts the index within 0.2% of yet another record close. Funny how that works.

But this shouldn’t surprise anyone. As I wrote Tuesday:

The market took the long route, but Tuesday’s small gain finally broke the five-session losing streak. And more than than just ending a losing streak, the decisive rebound off of 3,800 support looks a lot like capitulation. It was an ugly day, but fortunately it had a happy ending.

The index is in good shape and at this point, fresh highs are pretty much a foregone conclusion. But that’s not what I want to write about tonight. There are so many exciting things going on in the FAANG highfliers, TSLA, and Bitcoin. But just when everyone stopped talking about GME, it came roaring back with a 100% gain and it surged another 200% in the after-hours session.

Can you believe someone paid nearly $200 for GME when the stock was selling for $48 just a couple of hours earlier??? As Forest Gump famously said, “Stupid is as stupid does.”

Haven’t we already seen this movie? But people never learn and this was entirely predictable. Back in early February, I wrote:

As for what comes next, GME will be insanely volatile for weeks and even months. That means 50% and 100% moves in both directions. But at this point, a 50% bounce only gets us back to $75. Maybe we get back to $100 or even $125, but waiting for anything higher is just wishful thinking.

For weeks late-to-the-party GME buyers were praying for a chance to get out and recover some of their foolish losses. Well, thank your lucky stars because here is your chance.

Unfortunately for many, those feelings of regret will quickly be overcome by a second wave of greed and they will start dreaming of that $1k payday again.

There is nothing wrong with riding this wave higher as a quick trade to make a buck. But anyone thinking this is going to the “moon” has no idea how the market works.

Keep holding for higher prices but use a trailing stop and get out when this turns south because this stock won’t get back above $100 after this dead cat bounce fails.

“Fool me twice, shame on me.”

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Feb 22

Is this finally the top?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped for the fifth consecutive session and Monday’s losses were the worst yet. That said, this -0.8% “tumble” still leaves us little more than 1% from all-time highs. (Hardly panic material.)

As boring as the market has been the last few weeks, things have started getting a little spicier:

  • Bitcoin exploded higher and nearly hit $60k Sunday…before tumbling 20% Monday.
  • The surge in 10-year Treasury yields has doubled from last year’s lows. (Most people blame this latest stock market wobble on the rise of interest rates.)
  • And few stocks are taking this rise in rates worse than the highflying FAANG darlings, with most of them down between 10% and 15% from their highs. (GOOGL is the lone exception but it is doing its best to catch the others.)

Last week I said this recent bout of selling wasn’t meaningful and Monday’s loss doesn’t change my mind.

While this selloff could be the real deal, odds are strongly against it. If something bounces two dozen times and it reverses only once, what is the most likely outcome of any individual occurrence? As obvious as the answer seems, every time prices slip from the highs, people reflexively start calling it a top.

While these naysayers will eventually be right, like a broken clock, they will be wrong dozens of times first. Is this the one time they get it right? Probably not.

That said, I’m not willing to ride this one all the way down if I’m wrong. I have clearly defined stops in the mid 3,800s and if the market falls to those levels, I’m out, no questions asked.

And you know what, I actually hope I’m wrong because a larger pullback would create far more profit opportunities than if this is just another minor dip and bounce.

I’m holding for higher prices until my stops are hit. And if I’m wrong, even better!

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