AM: Buy high, sell low

By Jani Ziedins | Intraday Analysis

Aug 27
S&P500 daily at 2:43 EDT

S&P500 daily at 2:43 EDT

AM Update

MARKET BEHAVIOR
Stocks are lower by a percent on fears of US involvement in Syria.  This dip undercut the lows of last week as many traders take a sell first, ask questions later approach to the news.  While the move is lower, we are still well within the summer’s trading range and this sideways chop is consistent with recent behavior, so at least for the time being, the market is not signaling the start of something new.

MARKET SENTIMENT
Paradoxically wars are good for markets, it is the uncertainty leading up to the initial confrontation that weighs heavy on them.  The start of armed conflict is a relief to markets and leads to powerful rallies as seen in WWII and the first Gulf War.  The Syria “conflict” will likely be nothing more than a few cruise missile, or at worst air support for rebels like we saw in Libya.  While we might experience a 25 or 50 cent spike in the price of gas, we lived through $4/gal gas before and will do it again.

Through uncertainty comes opportunity.  Everyone is fairly confident this Syria thing won’t be a big deal, but we don’t know for sure and that keeps buyers away.  Traders selling this weakness are offering attractive discounts to those willing to take the risk.  For one side it will be a good deal at the expense of the other, but only time will tell if this is the end of Syria based selling, or just the start.  The gap lower at the open and the progressive slide lower is heightening the pain for those trying to hang on and is the cleansing process of setting the market up for the eventual rebound.  No one can consistently pick bottoms and tops and I won’t try, but all these previous Middle East selloffs created buying opportunities and this one will likely end the same way.

TRADING OPPORTUNITY
Expected Outcome:
Markets often act irrationally and emotionally.  As frustrating as that feels in the moment, those cracks in efficient markets allow us to profit from other people’s impulsive behavior.  I have no idea how low this dip can go and picking bottoms is a fool’s game, but this weakness is creating opportunity.  As for Syria, we’ve seen this story many times before and the worst fears are never realized, but we need to wait for the market to sort this out before jumping in front of it.

Alternate Outcome:
We long knew Tapering was a non-issue and it was going to be something else that brought this rally down.  Syria is new and few are actively promoted the impending Debt Ceiling.  Together these two headlines could conspire to kill this rally since they are not currently priced in.

Trading Plan:
Stay cautious, but be ready to buy with both arms when the missiles start flying.  Syria is a non-issue, we just need to wait and see how much of a discount sellers are willing to give us first.  Shorts can keep riding this down, but take profits early and often in this sideways, summer chop.

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.

John Sliwa SOC August 27, 2013

I can understand your post and agree whole heatedly with the beliefs… Seems realistic to me! Problem I see with it all is the ENTRY. With the volitility at extremes… the Spreads are Huge and Running Stops is a Kings table feast for those that can afford Giant Stops and are willing to enter the Risk.

Soc

    Jani Ziedins August 27, 2013

    Exactly, it is easy to predict what the market will do, but all the money is made in getting the timing right. For now we wait for this anxiety to push the market down. Syria is a minor conflict and won’t pressure the markets the way a major military mobilization like the two Iraq wars did. Of course that also means we don’t get as big of a discount on oversold shares.

Richard Clinton August 28, 2013

Huge fan of your site, however I think this situation has more disastrous potential than Libya. Gaddafi didn’t use sarin gas on it’s civilian populace, nor did they launch cyber atacks. Assad is acting more desperately and apparently, he has his military’s support. Having seen Gaddafi anus-shanked to death on YouTube, Assad might leave no WMD behind. What are their capabilities? What is their willingness to go ugly early?

SEA claimed responsibility for hacking NY Times, Huffington, and Twitter. Were they responsible for the Saudi Aramco attack this time last year? If so, was destroying 30,000 office computers a warning shot or the Full Monty? Could they have hacked / sabotaged production and operations, thus cutting off 10% of the world’s oil supply? Was the SEA behind the Saudi DNS attacks in May of this year? The anonymous group said the attacks were in response to Saudi support for FSA. Will the mystery group strike the US and it’s allies? In the world of HFT trading, just hacking news outlets can spark a flash crash. How much panic could they incite? What casualties could Syria draw by firing artillery loaded with nerve agents into Israel, whom they share a border with? The Israeli Iron Dome system won’t be an effective countermeasure as it is with rockets from Lebanon. Will Iran hold it’s committment to shutting down the Strait? Could Iran get drawn into a fight? How many regime changes will Iran witness before they draw their line?
This time it’s different….or maybe it’s not.

    Jani Ziedins August 29, 2013

    I agree with you, Gaddafi was an old and tired man on his way out. Assad is far more motivated to keep his hold on power. But that is the biggest advantage we have because Assad is not suicidal and he knows exactly what will happen if he goes after western targets directly. Right now we just want to slap his wrists and call it good enough. If Assad escalates this, he leaves us no choice but to topple him.

    As for computer hacking, there are far more savvy criminal minds throughout the world that would love to manipulate our market for obscene profits. If the smartest hackers in Eastern Europe, Russia, and Asia cannot break the system, a rag-tag group in the Middle East doesn’t stand a chance. Of course that is the risk premium slipping into the market because we really don’t know what will happen.

      Richard August 29, 2013

      Perhaps. Seems to me like the rag-tags, as well as the sophisticated groups conduct successful cyberattacks on a daily basis. Google search, “cyber attacks 2013.” The volume and scale are disconcerting. Even the DOD has been hacked, hijacked, raided and shut down.
      Hopelessly out-gunned rag tags, from the most impoverished holes in the world, manage to inflict casualties on the most elite fighting force in human history. More broadly, Americans are exhibiting hubris and under assessing risk. Lobbing cruise missles at a force with chemical weapons can produce horrifically nightmarish consequences, beyond $4 a gallon and a 2% correction. Bin Laden became famous after we missed him with a cruise missle strike, instead killing kids and blowing up an aspirin factory we thought to be a weapons lab.

        Jani Ziedins August 29, 2013

        I agree, but heads of states have far more to lose than some radical, fundamentalist, stateless person like OBL. And even then OBL was still too cowardly to die for his cause and didn’t even fight back when the Seals raided his compound. Saddam made the mistake of testing the US and we called his bluff. Assad won’t make the same mistake. He knows if he attacks the west, his regime will be toppled in a matter of weeks and just like OBL, he is too smart to willingly die for his cause.

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