Another rough day for the bears

By Jani Ziedins | Intraday Analysis

Aug 24

S&P500 weekly @ 3:20 EDT

MARKET SENTIMENT

Markets are bouncing off 1400 today after briefly falling under this key psychological level in early trade.  The rally is sending bears running for cover and no doubt a large chunk of this move is a short squeeze.  The bigger question remains if there will be more buying from other market participants to continue this rebound higher.

Supply and demand moves markets plain and simple.  Some traders obsess over the news and others focus on technical levels, but what really matters is how all these various traders are positioning themselves.  Everyone comes to the markets with biases and it is impossible to interpret anything without looking through those tainted lenses.  If a person is bearish, they grab on to the bearish side of any story.  If a person is bullish, the get excited about the smallest positive nuggets.  Truth is if news and technicals actually mattered, they would be far more reliable than they are.  Good news would always make the go up and bad news would make the market go down.  If technical were reliable, then every breakout would work.  But it only takes a little experience in the markets to realize nothing works the way it gurus say it should.

This is why I try to see past the news and technical levels because following those signals sends off waaaay too many false signals for my tastes.  Instead, I focus on what other market participants are thinking and how they are positioned.  Have we run up and everyone is giddy?  Then chances are everyone is already invested and no matter how good the news or technicals are, the market is going to run out of available buyers and prices will head lower on weak demand.  On the other side, if everyone is expecting horrible news, then they have already traded this opinion and supply is about to tighten because all the selling has already happened.

This is a simplified explanation of the pricing dynamics behind contrarian investing.  But while most people think of themselves as contrarian, logic tells us the majority can’t be contrarian because then the contrarian view would be the majority?!?!  The trap most people fall into is thinking contrarian investing means going against a stock that made a large move.  This is why people get in trouble shorting a stock that is “too high” or buying a stock that is “too cheap”, only to get taken to the cleaners as it keeps going.  Contrarian has nothing to do with price and everything to do with the crowd.  Figure out the popular opinion and then trade against it.  Let supply and demand work for you and against the crowd.

There are a lot of people who are confused by this market.  The headlines are horrible, the world is falling apart, and yet the market is at four-year highs.  But if the market did what it was supposed to, we’d all be rich right now.  Don’t let yourself fall into the trap of thinking about what the market should do, but instead focus on what all the other people think the market should do and use that insight to plan your trades.  In the current market there are too many bears and the market is rallying because of that imbalance.  Don’t get mad at the markets, don’t accuse it of being unfair, reality is the market doesn’t care what you think.

MARKET BEHAVIOR

Stocks are rebounding after a sell-off this week. But any experienced trader knows red weeks are a healthy part of a bull rally and should be expected and embraced.  The trend remains higher and while this week’s price action was a little wider than the last few weeks, volatility is fairly benign by historical standards.

TRADING OPPORTUNITIES

Shorts had a good counter-trend trade in place if they got in near the 52-week high on Tuesday, but a counter-trend trader needs to be very nimble and take profits quickly.  Anyone who jumped on the short trade late or got greedy and didn’t cash in is having a bad day.  The market doesn’t care how sound your logic and reasoning is, it is far larger than any of us and it will run over us if we get in the way.  Trade the market, not opinion.

Timing is everything in the markets.  In fact, your view on the markets doesn’t matter as long as you have good timing.  Paradoxically enough, both a bear and a bull can be right at the exact same time.  Think about how crazy that sounds for a moment.  But its true, direction doesn’t matter as long as you pick the right time frame.  A bear could have made good money on this counter-trend trade if he knew when to pull the trigger and cash in.  And a bull could make money with a longer view if he sat through the dip.

Of course the other edge of this sword is both can also be wrong at the same time if they have poor timing and this is the trap reactive traders fall into.  Those with good timing are proactive, act confidently, and make the hard trade.  This lets them get in early and get out early.  But reactive traders are always a step behind the curve.  They wait until a trade feels safe before buying and then they hold until the market moves against them and they are forced to sell for a loss.  Bears make money, bulls make money, but pigs and sheep get slaughtered.

WPI weekly @ 3:19 EDT

INDIVIDUAL TRADES

AAPL is holding strong near its highs in spite of most investors’ fear of heights.  When most people think something is too high, hold tight because it is headed higher.  But be on the watch out for when too many people start talking about AAPL breaking $1k, or you start day dreaming about what car you want to buy with all your profits.  When that happens, sentiment is too positive and it is time make your exit before demand dries up and the price pulls back.

HAIN is adding to yesterday’s breakout.  What seems to be too-high usually only goes higher.  But remember chasing is a dangerous sport as you put yourself at risk of getting run over.  Yesterday buy was risky, but today’s buying seems safer.  Remember the hard buy is usually the right buy.  The easy buy is what will put a hole in your account.

WPI is breaking out today from a three-weeks-tight or alternately a cup with high handle.  Medical industry has been hot lately between Obamacare and big money’s attraction to recession proof industries.  It might be worth a look.

The hardest part about the current market is there is so much merchandise screaming to be bought.  Part is luck picking the breakout that will make a huge move, but the part that isn’t luck is being in the market.  You have to play the game before you can get lucky.

Stay safe

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About the Author

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.