Strong start, lousy finish

By Jani Ziedins | Intraday Analysis

Oct 01

Markets started strong, but then gave back all those gains.  While not encouraging, the market is holding up and if the markets were going to crash, they would have already.

S&P500 daily @ 3:52 EDT

MARKET BEHAVIOR

Markets jumped over 1450 in early trade after the strongest manufacturing report in months.  Initially this pop put the rally back on track and recovered most of last week’s selloff, but in the last hour of trade the market gave back the bulk of those gains.

While it is disappointing to see the market give back this headway, selloffs typically happen quickly and violently, so the buying at these levels shows this market is not grossly overvalued or on the verge of imploding.  If there were serious structural issues, the bears would have ripped the market wide open last week and that didn’t happen.  The market held together well enough and buying, not selling has been the smart move so far.

Markets always correct and without a doubt this one will too, but in the markets timing is everything   As many bears are finding out, early is the same thing as wrong.

MARKET SENTIMENT

Bears have been humbled yet again and their ranks are thinning by the day.  They are passionate over their research and analysis, but their portfolio and ego can only sustain so much damage before they are forced to reckon with reality.  We’re all in this to make money and price is the ultimate truth.

The key to succeeding in the markets is recognizing when you are wrong and changing sides as early as possible.  Obviously this minimizes losses and maximizes profit opportunities.  But unfortunately the human brain, especially the ego, is not wired for these dynamic flip-flops.  We want to be right, we need to be right, but that too often creates a blindness to evidence showing otherwise.

Remember, we’re not trading fundamentals or news.  Heck, we’re not even trading companies.  What is the benefit from owning a non-dividend paying stock?    We don’t even receive those ornate paper stock certificates anymore.  (and people complain about the USD being worthless)  For traders this is just a game and the most successful  realize they’re trading other traders. The way to make money in the markets is to anticipate the changing tide of trader sentiment in.  Prices fully reflect what people currently expect, but to make money we need to anticipate how those views will change tomorrow.  And the best way to do this is by getting in the head of other traders.

As I’ve shared earlier, this rally is getting fairly old and gains will be harder to come by.  I don’t think the market can rally for the remainder of the year given how far we have come already and the perceived headline risk out there.  The question is, do we correct now and then rally into the end of the year?  Or rally now and then sell off into year-end?   The election will be a major psychological event and that could likely trigger a change in trend in either direction.

TRADING OPPORTUNITIES

If I were a betting man, which as a trader I am, I think the high probability trade remains sticking with this trend into the election and then looking for a new trend to close out the year.  Volatility is coming back as the balance between bears and bulls is evening out and both sides are putting up a good fight.  In volatile periods it most often pays to buy weakness and sell strength.  Don’t fall into the money pit of buying strength and selling weakness.

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.