Markets traded flat for another day. The stability was encouraging after the prolonged market shutdown and the devastation caused by Sandy. But we can’t stay at this level forever and we are bound to breakout one way or the other.
Remarkably stable trade following Sandy and the extended market closure; we were up a little, down a little, and then the S&P500 closed unchanged. The question we have to ask ourselves is if the market last Friday so perfectly anticipated the hurricane and news out of Europe it didn’t need to adjust prices today? Seems a far-fetched notion and no doubt the market still needs to fully account for these events in coming days. Of course while the market was flat overall, there were some dramatic moves in individual stocks. AAPL and the tech sector tanked, and hurricane recovery related companies popped like a cork.
Technically the market continued trading around 1410 and closed just above it at 1412. While we’ve seen 1% intraday ranges recently, we continue closing at practically the same level for the last week. This tight trade is coiling up the spring for a more dramatic move once we breakout of this range. The longer we stay here, the bigger the move out of here.
It felt like a patriotic day in the markets, as no one wanted to short after all the devastation and suffering from Sandy. But at the same time no one wanted to jump in and start buying either. So we traded around for a bit before finishing flat. No doubt this stalemate between bulls and bears will resolve itself one way or the other. On Friday is the jobs report and who can forget about the election on Tuesday given the visual and auditory pounding many of us are taking from the relentless stream of campaign commercials.
It will be telling to see how the market acts leading up to the election. Can we continue holding this range until the outcome is announced, or will the market anticipate a winner and make it’s move late this week or early next? Romney is making the race more competitive than it’s been, but the electoral map still favors Obama. If Romney continues gaining strength, we could even find ourselves with Romney winning the popular vote, but Obama taking the Electoral College. But no matter who wins, the markets and economy will march on. It always has and it always will regardless of what the partisans claim.
The market is setting up for a bounce, the only question is when. Will we bounce right out of this consolidation? Or will we see a drop that flushes out weak holders and we rebound only after breaking 1400? In no way will we see a massive selloff given any of the headlines people are currently talking about, whether that is Europe or an Obama reelection. If the average Joe is discussing the economic impact of these events, the savvy trader can safely assume it is already priced in the markets.
Our job as opportunistic traders is anticipating what isn’t priced in. Right now my best guess is the world won’t disintegrate when Obama is reelected and trading that relief rally is probably the next high probability trade in front of is. We might see an initial drop ahead of or after the election, but that weakness is giving us an even better price to get in at and creating more profit opportunity for the savvy trader.
Trade the market and other market participants, not what you think the market should do. Too often is does the exact opposite of what most people expect and that is what makes contrarian investing so successful.
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.