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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Sep 13

Small dips lead to small rebounds

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Thursday morning the S&P 500 popped above 2,900 resistance after China said it was willing to talk with the U.S. This strength put last week’s dip in the rearview mirror and last week’s nervousness is turning into this week’s hope.

Even though the market fell five out of six sessions last week, the losses were modest and contained. As I wrote on Tuesday:

“I didn’t expect much out of this dip and that is exactly what it gave us. Since the market likes symmetry, we shouldn’t expect much out of this rebound either. The next move is most likely trading sideways near the psychologically significant 2,900 level. It will take time for those with cash to become comfortable buying these levels before we will start marching higher again.”

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Two days later the market inched its way above 2,900, but rather than trigger a surge of breakout buying and short-covering, the rally stalled and we traded sideways the rest of the day. Small dips lead to small rebounds, exactly as expected.

While there is solid support behind these prices, this market still struggles to find new buyers. There was almost no follow-on buying this morning when we broke through 2,900 resistance. Most of that breakout buying and short covering happened two weeks ago when we first crossed this line. That meant there were fewer people to buy today’s breakout. The slow summer months are winding down, but volume is still pathetically low and it will still take time before those with cash feel comfortable chasing prices higher.

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. The biggest near-term catalyst is the U.S. reaching trade compromises with Canada, Europe, and China. That news will push through 3,000. Unfortunately, politics is a slow and dirty process and it will be a while before we can put this episode behind us.

This market is resting and refreshing following last month’s rally to all-time highs. This is a normal, healthy, and sustainable thing to do. But 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.


FB is flirting with recent lows as it struggles to overcome the fear of government regulations limiting its ability to make money. But as I wrote the other day, these limitations won’t be as draconian as feared and the stock will recover once these headlines are behind us. Even though prices could slip further over the near-term, this is a buying opportunity, not an excuse to sell a good stock at a steep discount.

NFLX is doing a better job than FB in recovering from last month’s earnings fueled selloff. As expected, last month’s weakness was a buying opportunity and no doubt reactive sellers are already kicking themselves for being so weak.

AAPL is already recovering from Wednesday’s sell-the-news reaction to their new phone lineup. Nothing unexpected or exciting was announced, it was simply more of the same. But more of the same is a good thing because that is what pushed AAPL over a $1 trillion market cap a few weeks ago.

AMZN is recovering from last week’s dip, but this looks more like a consolidation than the start of the next surge higher. We came a long way over the last few months and sideways consolidations are a normal and healthy part of every sustainable move higher. Things still look good for further gains later this year as desperate money managers will be forced chase the biggest winners into year-end.

Bitcoin climbed to the mid-$6k level, but the total lack of demand continues to be a problem. Last month’s bounce to $7.5k fizzled and no doubt the same thing will happen here. We could drift up to $7k resistance over the next few days, but the downtrend is still very much intact. Nothing gets interesting until we recover the previous highs near $8.5k. Unless that happens, expect lower-lows to keep piling up.

If you found this post useful, Follow Me on Twitter so you don’t miss future updates: 

Jani

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How about avoiding a loss?

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