AM: Fear QE ending?

By Jani Ziedins | Intraday Analysis

May 30
S&P500 daily at 1:07 EDT

S&P500 daily at 1:07 EDT

AM Update

MARKET BEHAVIOR
The zig-zag continues as we rebound from yesterday’s selloff.

MARKET SENTIMENT
It’s becoming clear neither side has control over this market as each directional move stalls and reverses.  Markets only rise and fall when people buy and sell stocks, and people only buy or sell stocks when they change their mind.  Right now bulls are confident in their positions, bears know we are over-valued, and everyone is waiting for the market to do what they think it should.  When everyone stands around, markets trade sideways because no one is changing their mind.  To get things moving again we need to spook bulls out of their positions or make bears fear being left out of a risking market.  Will this stubborn standoff continue through summer?  Only time will tell.

All this talk of QE ending is diminishing the impact of the actual announcement and eventual money tightening.  Everyone remembers what a disaster Y2K was, right?  While we can joke about it now, it was a serious matter at the time, but the reason it was a non-event is because everyone talked about it, feared it, and ultimately prepared for it.  When everyone is adequately prepared for something, it passes without an issue.  The more people talk about and fear the ending QE, the sooner we can ignore it.  People trade their outlook and expectations.  If traders fear the end of QE, they will move out of the market and that QE driven selling will be long behind us by the time it is actually announced.  In fact it will likely lead to a sell the rumor, buy the news event.  How crazy will it be if markets rally on the ending of QE?  Crazy enough to work.

TRADING OPPORTUNITIES
Expected Outcome:
Until one side changes its mind, expect stocks to trade sideways as both bulls and bears stubbornly stick to their outlook.  The market is incapable of standing perfectly still, so expect some up and down gyrations, but this is a swing-trader’s paradise; buy weakness and sell strength.

Alternate Outcome:
No one knows what the market will do and we simply trade probabilities.  To protect ourselves we will watch for breakouts or breakdowns that show the market is ready for its next directional move.

Trading Plan:
Markets move sideways most of the time and that is what we should expect here.  We need a rest after a strong directional move and the widespread expectation of a pullback mean mutes the downside risk.  At this point, plan on buying weakness and selling strength until we make a decisive break either direction.  Lower support is back at 1600 and sticking with round numbers, expect 1700 to act as overhead resistance.  Breaking either of these levels forces us to evaluate the potential of a new directional move.

Plan your trade; trade your plan

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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.

Tom Schoene May 30, 2013

OK. The mkt moved up the whole time everyone was worried that Y2K would wreak havoc on the business community. So the mkt marched up because everyone pushed forward their tech buys to avert any Y2K problems. Y2K comes and nothing happens so we go up for a WHOLE TWO more months…THEN the mkt gets cut in half during the next 2 yr BEAR mkt. Oh yeah! They called it a “tech bubble burst”! Ever hear the term “BOND BUBBLE”? I can’t say when it’s coming but…it’s coming!

    Jani Ziedins May 30, 2013

    Buffet called bonds the biggest bubble he’s ever seen. That was back in 2008. The thing about bubbles is they have exponential gains before a spectacular implosion. Tech bubble, oil in 2008, Dutch Tulip, etc. Everyone’s been calling a top in bonds for most of the last ten years, why is it going to be different now? People are in bonds for safety, security, and income. Few in bonds are speculating on equity appreciation and the lack of speculators is why we won’t see a speculator type of meltdown either. Most will simply hold their bonds to expiration and roll them over at higher rates down the road. No fuss, no muss.

LT May 30, 2013

Great article Jani. It will be interesting when QE officially ends and see where the market goes. Who knows by the time QE ends it would have been priced in. Its already June and market has yet to correct even 5%. Very odd indeed. Reminds of last year but than it corrected in April into May. Interesting time we live in.

    Jani Ziedins May 31, 2013

    Pullbacks always happen. This time it might get pushed into the fall. Markets hate being predictable and summer corrections were becoming a little too obvious.

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