Dec 18

Has anything changed?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

It’s been another rough stretch for the S&P 500 as prices tumbled to the lowest levels of the year. Monday crashed through 2,600 support, triggering an avalanche of defensive selling that didn’t stop until we fell another 50-points. Tuesday was a little bit better since prices closed unchanged, but that disguised the fact early gains didn’t stick and we stumbled back to breakeven. Few things are more disheartening than fizzled rebounds.

Bears want us to run screaming from this market because it is so obviously doomed. Unfortunately for them, they are living in the rearview mirror. They are beating their chest over what has happened. But in the market, we only profit from what is ahead of us. Currently, the market rests 13% under the 2018 highs. The question we need to be asking is if it better to be selling these discounts, or buying them?

A quick history lesson. The S&P 500 has only fallen more than 15% from all-time highs 11 times. The last two times were the dot-com bubble and the 2008 financial crisis. Do current conditions resemble the dot-com bubble where average p/e’s of tech companies were nearly 100? Or the financial crisis where the entire banking sector was so overleveraged it nearly went out of business? Some people think so and clearly they should be selling everything they own and burying it in the backyard. But for the rest of us, do we really believe the economy is on the verge of a collapse that has only been seen a handful of times over the last seven decades???

No doubt bears will crow that I was bullish two months ago in October when the market dipped to 2,600 support, and then again when it fell to the low 2,600s in November. I guess they were right since we now find ourselves under those levels. But the thing to note is it took two full months to fall another 50-points. That’s less than one-point per day. Wow, terrifying stuff!!!

While bulls and bears have been arguing passionately over who is right, I have been quietly grinding out profits riding the waves between these two extremes. I even wrote about it a couple of weeks ago in a post titled “Q: Who is right, Bulls or Bears? A: Neither!

“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.”

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Has anything changed? No, of course not. Bears are as confident as ever, and bulls are cowering in the corner. This is a mirror image of two weeks ago when the market was challenging 2,800. The last seven times bulls and bears were bragging about their success, the market reversed ran them over. Will this time be any different? No, probably not. But I don’t mind. I will continue betting against the crowd, and so should you.

While I like these discounts, the looming Christmas and New Years holidays complicate the situation. What would normally be an attractive buying opportunity might struggle to get off the ground since big money is leaving for vacation. That puts impulsive retail investors in charge and that is rarely a good thing. Luckily, these little guys have small accounts and their emotional buying and selling doesn’t go very far. We saw the emotional selling from Thanksgiving week erased the following week when big money returned to work. And the same could happen here.

Most likely the market will muddle into year end and the bigger bounce won’t happen until January. That is if nothing significant occurs between now and then. The one big thing that could happen is the Fed backing away from the widely expected rate hike on Wednesday. That would send the market surging higher. But if that doesn’t happen, expect the market to muddle along between 2,500 and 2,600 for the next two weeks. After that, if the financial world doesn’t collapse, expect the market to recover from these oversold levels as reality turn out far less bad than feared.

In my long-term investments, I love buying these discounts and hope prices fall even further so I can buy even more. In my shorter-term trading account, I would rather be buying these discounts than selling them, but I’m not eager to rush in ahead of what could be a volatile holiday.

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Dec 13

What this market needs to do to keep my faith

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Thursday was a fairly uneventful day for the S&P 500. Early strength gave way to midday losses, but rather than tumble lower, prices recovered and we finished flat. While the price action was fairly “meh”, meh isn’t a bad thing given how dramatic volatility has been. A little bit of nothing helps calm frayed nerves, and that is never a bad thing.

This neutral price action continues what I wrote about on Tuesday:

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.

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On Monday, the S&P 500 briefly broke under October’s lows. But rather than trigger an avalanche of defensive selling, supply dried up and we bounced 60-points above the intraday lows. That was four days ago and so far the market resisted the invitation to collapse under those lows.

That said, the last three day’s has seen early gains fizzle and we closed well under the intraday highs. Multiple weak closes is never an encouraging sign. And as usual, the market is giving us conflicting signals. It is up to us to determine what it means.

I really like how decisively the market held support this week. But I’m disappointed we couldn’t add to those gains and these weak closes are a concern. What does this mean for what comes next? Unfortunately, this is one of those situations where we don’t have enough information and we need to see what the market does next.

A decisive rally Friday tells us all is well and we are on our way back up to 2,800. But a fourth weak close means a near-term test of 2,600 is ahead. And of course the most frustrating outcome, another indecisive day like Thursday that doesn’t tell us anything.

I continue to give the market the benefit of doubt because Monday’s reversal was so decisive. But my faith isn’t infinite and unless the market starts doing something constructive, we will likely stumble back to 2,600 support. From there, the situation gets more precarious because few things shatter confidence like screens filled with red. But if we withstand that second test without collapsing, the market is generously giving us another dip-buying opportunity.

The headlines have been overwhelmingly bearish lately between arresting a key Chinese executive to Trump threatening to shut down the government. While none of this is good, the pullback in prices means a good chunk of the negativity has already been priced in and these discounts compensate us for taking the risk. Most of the time reality turns out far less bad than feared, and that is probably what will happen this time too. But 2,600 is our line in the sand. Fail to defend that level and things will get worse before they get better.

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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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