Sep 25

Time to be patient

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 traded sideways for a second day as it consolidates last week’s breakout to all-time highs. Trump and his trade war continue dominating economic headlines, but so far our stock market doesn’t mind. As usual, confident owners refuse to sell and that is keeping a floor under prices. But stubbornly tight supply is only half of the story. To keep going higher, we need demand and right now that is in short supply.

This market’s restrained breakout isn’t a surprise to readers of this blog. Two weeks ago I wrote the following after prices finally reclaimed 2.900 support:

“Since we are not refreshing through a bigger dip, that means we should expect a prolonged sideways period. When the market doesn’t scare us out, it bores us out. Things still look great for a year-end rally, but we need to be patient and let those profits come to us. This is a slow-money trade and we will have to wait a while before the next fast-money trade comes our way.”

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This market most definitely doesn’t want to go down. All summer it refused countless opportunities to tumble on bearish headlines. As I’ve been saying for a while, a market that refuses to go down will eventually go up. And that is precisely what happened here. But at the same time, there is enough headline uncertainty to keep those with cash from chasing prices higher. Their lack of buying is keeping a lid on this market. No doubt we will keep going higher over the medium- and longer-term, but it will take time for those with cash to warm up to these record high prices.

There is nothing to do with our favorite long-term positions except keep holding them and letting the profits come to us. This is a slow-money market and it rewards patience. As for our short-term money, there isn’t a lot to do here. Either we sit in cash and wait for the next trading opportunity (we cannot buy the next dip if we don’t have cash!), or we stretch our time horizon a little and enjoy this ride higher. But if you are buying, be prepared to ride through a few dips along the way. Remember, this is a strong market and we buy the dips, we don’t sell them.

This market is still setting up nicely for a year-end rally and we should keep doing what has been working. Don’t let the bears convince you otherwise.

AMZN and AAPL continue consolidating following last month’s impressive, but ultimately unsustainable climb higher. Pullbacks and consolidations are a very normal and healthy part of every move higher. These stocks are acting well and I would be far more worried about them if they didn’t pause to catch their breath.

FB and NFLX are basing following last month’s disappointing earnings. But this is a good thing. Traders that missed these highfliers had been praying for a pullback so they could jump aboard. Unfortunately, many of these same people are now too afraid to take advantage of these discounts. The thing to remember is risk is a function of height. These are some of the least risky places to be buying these stocks in six months. Without a doubt, this is a better time to be buying than a few months ago when the crowd thought everything was great.

Bitcoin continues holding $6k support, but I wish I could say that was a good thing. While we held $6k support firmly for nearly six months, every bounce has been getting lower. First, we bounced to $17k. Then it was $12k. $10k came next. After that $8.5k. Earlier this month it was $7.5k and this weekend we stalled $6.8k. At this point, it is only a matter of time before we tumble under $6k support. As long as owners are more inclined to sell the bounces than buying them, prices will keep getting lower. It is only a matter of time before owners are kicking themselves for not selling when prices were above $6k.

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Jani

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Sep 20

A market that refuses to go down…..

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 surged to fresh highs as investors chose to ignore trade war headlines and instead embraced optimistic third-quarter forecasts.

Fortunately, readers of this blog saw today’s breakout coming from a mile away. I wrote the following two weeks ago when the market was threatening to tumble under 2,870 support:

“The economy continues to hum along and that is the only thing that matters to the stock market. As long as the economic numbers look good, expect prices to keep drifting higher. Institutional money managers that were hoping for a pullback will soon be pressured to chase prices higher or else risk being left even further behind.Their buying will propel us higher through year-end. Unfortunately that doesn’t mean the ride between here and December 31st will be smooth and uneventful. Expect volatility to persist, but unless something new and unexpected happens, every dip will be another buying opportunity.”

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While it is easy to say the market doesn’t care about Trump’s trade war after we surged to record highs. It wasn’t nearly as obvious three weeks ago when a lot of owners were selling the fear and uncertainty, causing prices to fall four days in a row, and five out of six trading sessions. We get paid for seeing these things before everyone else, not after it is obvious to the crowd.

Nothing has been resolved between the US, China, Europe, and Canada and no doubt things will get worse before they get better. But our market has been telling us all summer it doesn’t care. These events haven’t put a noticeable dent in our economy or corporate profits, so most investors are ignoring the noise.

So far Trump’s trade war went from $15 billion in steel and aluminum tariffs to now we are taxing more than 50% of everything that comes from China, and they are taxing 85% of everything we send their way. The way both sides are going, a further escalation is inevitable, That means we are not far away from both sides taxing everything. But if the market doesn’t care about 50%, bumping it up to 100% won’t make much of a difference.

Without a doubt, we are living in a “half-full” environment where most traders assume things will turn out for the best. That’s why owners overlook negative trade headlines so quickly.

This is a typical trait of an aging bull market. Five years ago traders were afraid of their own shadow and panic-sold every bump in the road. The catastrophic injuries suffered during the 2008 financial crisis were fresh in most investors’ minds, and they lived in fear of a repeat. But here we are nearly ten years later and every defensive sale proved to be a costly mistake. After years of getting burned selling prematurely, most traders learned to stop reacting defensively. That’s how we ended up in this situation where the market refuses to sell off no matter what the headlines are.

While conventional wisdom tells us complacency precedes the fall, what conventional wisdom fails to mention is periods of complacency last far longer than anyone thinks possible. No doubt this bull market will die like all the others that preceded it, but it will not be dying anytime soon and we should enjoy the ride higher.

There is nothing to do with our longer-term investments expect to hang on and enjoy the ride. Things are a little more challenging with our short-term money. We are left with a choice of either staying in cash and waiting for the next buyable dip. (Cannot buy the dip if we don’t have cash!) Or shifting our time horizon and sticking with a medium-term buy-and-hold. Neither choice is wrong; it largely depends on a person’s trading philosophy and risk tolerance.

The next significant milestone is 3,000 and at this rate, it is only a few weeks away. Bad news won’t take us down and good news will push us higher. These record highs are scary, but a market that refuses to go down will eventually go up.

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Jani

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Sep 18

The Chinese retaliation that would crush the US economy

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 popped Tuesday and reclaimed the psychologically significant 2,900 level as trade war rhetoric escalated. As it stands, the US will start applying tariffs to 50% of all Chinese imports and China will retaliate by taxing 85% of our China-bound goods. As bad as that sounds, the market doesn’t care.

But this reaction from the market is not a surprise for readers of this blog. Last week I wrote:

“Confident stock owners made it abundantly clear this summer that trade war headlines and White House scandals don’t matter. If nothing can take us down, it is only a matter of time before we go up.”

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Some pundits claim the market rallied because these headlines “were less bad than feared.” But that’s hogwash. Trump’s trade war keeps escalating, and it doesn’t look like it will stop until both sides are taxing everything. I’m not sure how a full-on trade war is “less bad than feared,” especially when it is crushing Chinese growth.

No, the real reason the market doesn’t care is a lot simpler than that. We didn’t dip today because everyone who fears Trump’s trade war sold months ago and were replaced by confident dip buyers who don’t mind holding these risks. When there is no one left to sell the news, it stops mattering.

Conventional wisdom tells us complacent markets are ripe for a pullback. But what conventional wisdom fails to mention is periods of complacency last far longer than even the bulls expect. When confident owners refuse to sell, it doesn’t take much demand to prop prices up, and that is exactly what is happening here.

As far as these events being less bad than feared, things could definitely take a turn for the worse. While Trump believes he has China backed into a corner, they still have the nuclear option. They could most definitely wreak total havoc on our economy, and many of Xi’s advisors are pushing him to use it.

While tariffs on imported Chinese goods are most definitely inconvenient and will affect corporate profits and consumer discretionary spending, that is far better than the alternative. Some Chinese advisors want to prevent Chinese companies from selling critical components to US manufacturers. Nearly overnight that would bring our manufacturing sector to a grinding halt. Ford, Chevy, Chrysler, Boeing, Caterpillar, and nearly every other manufacturer uses at least a few components made in China. Take those away, and our manufacturers would be forced to shut down for weeks and even months as they scramble to adjust. The temporary layoffs and inability to sell finished products would trigger a nearly instantaneous recession. “Less bad than feared” could quickly turn into “oh my god, what just happened?”

China’s nuclear option definitely qualifies as Mutually Assured Destruction because it would be equally crippling to the Chinese economy. But just the threat of such a move could send our markets tumbling and force Trump to reconsider his threats. While Trump might have China backed into a corner when it comes to tariffs, you never know what a cornered animal capable of.

I certainly don’t expect the above scenario to play out, but it would be incredibly painful if it did. The market isn’t even considering this, and its “half-full” outlook assume everything will work out in the end. But fear is contagious this is definitely something we need to keep an eye on.

Baring the above scenario, the market is acting exceptionally well. A market that refuses to go down will eventually go up, and we are setting up nicely for a rally into year-end. Assuming Trump and China come to a reasonable compromise, that will be the catalyst for the next leg higher. But if things get ugly and fear starts to spread, get out before things get worse.

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Jani

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