The markets had a terrible finish yesterday, turning a nice opening gain into a material loss. Yesterday was a boilerplate “buy the rumor, sell the news” as the markets opened higher on Spain and then sold off aggressively with a 2%+ intra-day decline.
Today the markets struggled for direction early, but in late morning recovered some of yesterday’s sell-off. What does this mean going forward? It is hard to say because we are stuck in the middle of the trading range and things are more balanced as they could tip either way. Maybe it is a tad lower to retest 1280, or higher to push up against the 50dma at 1350. At 1315, we are smack dab in the middle of this range
Yesterday’s sell-off no doubt tempted a lot of shorts to jump back in the market with stop-losses just above yesterday’s high. This adds even more fuel to a potential short-squeeze above 1335. Like I said yesterday, I think a near-term move above this region is inevitable; the only question is if it happens before or after we test the 200dma. Did yesterday’s sell-off clear out enough longs and temp shorts to set the market up for a contrarian move higher? Or are there a few too many bulls left hanging on by their fingertips that need to get shaken out first?
As you can tell from the ambiguous commentary above, it is easier to anticipate market moves when the markets and sentiment are lopsided. When the market is in the middle of the range and sentiment is mixed, there is far less clarity. My earlier analysis expected a move up to the 50dma before turning lower, so if I had to call it one way or the other, that is what I would chose. But at this point it is simply a coin-flip. Of course this is nothing more than splitting hairs over a couple percent in the indexes either way. Hardly a material matter unless you are a too-big-to-fail investment bank cranked up on 30 to 1 leverage. The real story will come later this summer when the markets are finally ready to break out of this range.
Individual stocks continue being a mixed bag as some are holding up, others are breaking down; some are above the 50dma and others below. The thing about CAM SLIM investing it is it a calm weather sport. Much like sailing, who wants to go out when the water is choppy, the wind is swirling, and clouds are threatening? Just like sailing, investing is far easier on nice sunny days with a predictable and constant breeze. Most leading stocks are volatile and it is best to only ride them under the most favorable conditions. No doubt we are giving up potential gains from stocks making new highs, but to be successful, it isn’t just about picking winners, it is also about also balancing risk and reward. To win at this over the long-term, we must make more money than we lose; sticking to the best conditions moves the odds in our favor.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.