PM: Too-far, too-fast keeps going

By Jani Ziedins | Intraday Analysis

Mar 07
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Markets are holding recent gains ahead of the employment report.

MARKET BEHAVIOR

Another day of tight trade supporting the breakout.  This was the third-close above 1540 and shows holders are willing to hold and buyers are willing to buy.  Volume was average and slightly lower than recent days.    A fourth close above 1540 shows sellers are absent and this market wants to continue higher.

MARKET SENTIMENT

Every time the market starts making all-time highs, the academics descend from their ivory towers and warn of irrational exuberance, impending crashes, bubbles, euphoria, and all that jazz.  But the thing to remember is these guys are historians, not traders.  They call the top, the market rallies another year, and they still proclaim to the world how right they were when the market finally corrects twelve-months from now.

We are the one putting money on the line and theory just doesn’t cut it.  Telling us that markets go down after they go up is completely and totally useless.  Tell me when they will go up and down and now we have something to act on.  Without a doubt the market will pullback 7% or more at some point this year.  How do I know that?  Because the market always does.  That’s the easy part, all the money is made in figuring out exactly when that pullback is going to happen.

While I don’t pay much attention to what these academics and historians are preaching from their soapbox, the fact that they are getting airtime is meaningful.  Journalists are not analysts,  they simply report what other people tell them.  When the market is pessimistic, they interview pessimists and report pessimistic stories.  When everyone is in a good mood, they cover positive stories and interview bulls.

When the media tells us these gains are unsustainable, I know that is what traders are telling journalists.  The financial press is a great reflection of what the market is thinking.  Without a doubt this market will top and that top is coming, I just know the market won’t top when everyone is talking about it.  Whether it takes weeks or months of new highs to wring the pessimism from the markets I don’t know, but I do know the crowd and financial press usually get it wrong.  When they talk about corrections, we bet on the continuation.  I’m not saying it is impossible for the market to correct here, but it is less likely when everyone expects it.

I also want to point out financial history is a critical tool I use when analyzing the market and I don’t mean to demean the views shared by academics,  I’m simply pointing out they typically have poor timing.  We can actually broadening that statement even further by saying most people have poor timing.  If this were easy, everyone would be rich.

TRADING OPPORTUNITIES

Expected Outcome:
Last year the market was buzzing in anticipation of each employment report as the recovery was just taking hold, but recently the market is less obsessed with it.  It might be getting to the point where modest gains are taken for granted and only a big deviation will move markets.  And to be honest it really doesn’t matter one way or the other because the market reads into these numbers what it wants to see.  We don’t trade fundamentals, we trade expectations.  If bulls want to buy, they will invent reasons to buy.  If bears want to sell they will find excuses to sell.

If we take the view that the actual number is less important than what the market wants to do, we will be fairly constructive on this market because every sign is it wants to continue higher.  If we have a disappointing number, we might dip, but expect traders to find a sliver lining in the report and buy the dip.  That is what they did with negative GDP and is what they will likely do with a disappointing employment report.

Alternate Outcome:
If the expected outcome is the employment report is not a big deal, then the alternate is the market hinges on this report.  The only time this is true is when it materially changes people’s views of the future and they adjust their portfolio to reflect this new reality.  A negative employment report will not be meaningful for pessimists because they already expect it and adjusted their portfolio ahead of time.  To crash the market, the employment report would need to convince bulls to give up and sell.  While less likely, it is still a real possibility and why we start any trade with defense first.  We always know where our stops are and when the market doesn’t act as expected, we sellout and look for the next opportunity.

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.

MC brownshuga March 8, 2013

Maybe you’ve already read this…… http://www.nytimes.com/2013/03/08/opinion/krugman-the-market-speaks.html?_r=1&adxnnl=1&partner=rss&emc=rss&adxnnlx=1362758601-YH8WSZAmRe79kWmGoGFxXg
BTW, Maybe Bears have reasons to sell and Bulls have excuses to buy.

    Jani Ziedins March 8, 2013

    Not a Krugman fan, but I agree with about 75% of what he said. Our free market economy is so much bigger than one person and to give blame or credit to the president is complete and total nonsense. Market cycles are a function of, even a limitation of human psychology. It comes from our innate expectation that the future will be like the present. Business owners make the same mistakes as investors and for the same reasons. When business is good they expand, sell more product, and make even more money. Do this for a few years and they get caught up in the expectation of never ending flow of profits. They start getting more aggressive with their growth plans and use debt to speed things up because money is so easy, no one is worried about finance payments. But when everyone is doing this, eventually the market over-expands and grows to overcapacity. Then individual managers start cutting prices to move excess inventory, margins plunge and eventually profits turn to losses, leading to layoffs. Then optimism becomes to pessimism and we get carried away to the downside. The few business leaders that survived the downturn stay in their bunker and are afraid to start growing even when they cannot meet demand. And so the cycle continues.

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