AM: Down but hanging in

By Jani Ziedins | Intraday Analysis

Sep 27
S&P500 daily at 12:36 EDT

S&P500 daily at 12:36 EDT

AM Update

MARKET BEHAVIOR
Stocks slipped as traders fretted over the impending Congressional votes and potential govt shutdown.  We dipped under 1690, but early weakness didn’t trigger a cascade of stop-loss selling.  The market is nervous, but not panicked and we are only 2.3% from recent highs.

MARKET SENTIMENT
The half-full view is holders are confidently sitting on their positions, knowing this is the wrong time to sell.  The half-empty view is such a small pullback means there is still tons of downside left.  The truth probably lies somewhere in between.

Only the extremist thinks the US Govt is on the verge of going out of business.  Most rational traders expect the debate will be heated and ugly, but in a few weeks it will be ancient history.  There is little doubt Congress will increase the debt limit because they have no choice, the fear is how long this drags out.

In reality, this is just a bump in the road that comes up every couple of years.  Sometimes it slips under the radar when it is rubber stamped.  Other times political parties use it to extract concessions for programs they disagree with.  Right now the GOP is threatening to go nuclear over Obamacare.  The question for the market is if this is just political posturing and a negotiating tactic, or if the GOP is actually suicidal and willing to drive the car off the cliff.  That is the main source of uncertainty here, but this is nothing close to the structural problems we had in 2008 with the Financial Crisis.  Our politicians will figure something out and the market will rally on the relief.  Then it is on to the next worry, likely a return of Taper headlines.

One of the things that keeps this pullback more constrained is many of the weak jumped out in August’s selloff.  Those that fear Debt Ceiling are likely afraid of the Taper too.  That means most of the potential Debt Ceiling sellers are already out of the market.  No matter what the headlines say, we need people selling stocks to push the market lower and so far few are selling these headlines.  Trade people and their portfolios, not the headlines.

TRADING OPPORTUNITIES
Expected Outcome:
The market is holding up relatively well given the headline risk.  Either owners are oblivious to the dangers, or the fearful have already bailed out.  The August dip cleared a lot of dead wood, meaning there is less to get rid of this time.  Likely this pullback is just a little cooling off following the sharp 100-point rebound.  The Debt Ceiling will be ancient history soon enough and these discounts are buying opportunities.

Alternate Outcome:
The Tea Party’s hatred for govt spending and Obamacare is the wildcard in the mix.  Do they have enough influence in the GOP to shutdown the govt to prove a point?  We will soon find out.  While the risks of driving off the cliff are great, the probabilities are slim.  This creates an interesting “black swan” trade.  Buying some cheap, out of the money puts is akin to playing the lottery.  The chances are winning are slim, but the rewards are great.

Trading Plan:
The market is holding 1680 as expected (50% retracement of recent gains) and is closer to a buy point than a shorting opportunity.  The longer we hold these levels, the safer it is to wade in despite of the headline risk.  Bears have the wind at their back, but still cannot get the job done, meaning they are far weaker than most realize.  Plan ahead of time where you will buy and sell and stick to that plan.

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.

fleischut September 28, 2013

you are funny, cracked market!

what I’m about to say is intended in a very respectful, an observation from one comrade to another.

when we’re at 1730 you say things are good but honor your stops at 1710. at 1710 you say, don’t short until we break 1700. at 1690 you say we’re close to the bottom, better to be long here than to be short. I don’t read all of your posts but I honestly don’t ever remember a single one that said, ‘you know, now is a very good time to take some risk off the table’. sometimes you do say, now is not the time to initiate new positions, but you never seem to say ‘sell’, and you almost always conclude that anyone who was going to sell has probably already sold. just my observation. but as always, thanks for taking the time to write down your observations and good luck!

    Jani Ziedins September 30, 2013

    No offense taken. I understand your POV, but I don’t want to tell people how to trade because they will never listen to me anyway. Typically the way I approach each day is sharing ideas with people who are long, in cash, and short. I felt like 1730 was a touch frothy and suggested people take money off the table, but if they wanted to continue holding, that was okay too. As we dipped lower, the decisions each group should make changes. For example, today’s dip to 1675 is the wrong time for a long to sell and they should keep holding. (Either trade short-term or trade long-term, don’t change horses midstream when emotions kick in.) This approach to analysis leads to some of the inconsistencies you pointed out, but each day is a new beginning and the analysis changes with the market.

    As for taking risk off the table, this is what I said on Sept 18 & 19, not bad suggestions if you ask me. 🙂

    Sept 18
    Trading Plan:
    Move trailing stops up to at least 1700 and possibly 1709. We are sitting on nice gains and don’t want to give those away. 100-points over a couple of weeks is a big move and not a bad place for the cautious to lock-in profits. This continues to be a bad place to short, wait for a violation of support before betting against this market.

    Sept 19
    Trading Plan:
    Proactive traders can sell the pop and wait for a pullback to 1700. Others can continue holding after moving up their trailing stop to just under recent resistance at 1700 or 1709. Being short here is nothing more than trying to pick a top and we should wait for a material violation of support before betting against this breakout.

fleischut September 28, 2013

….and, fwiw, I do think you’re right that we most likely bounce at 1680, and I don’t have much interest in being short (or long) here (but I was short until this morning).

LT September 28, 2013

I have a question, who owns all these stocks. A few years back we would have volatility up the ying yand but in the last two years since Obama got re elected we haven’t had much of a real correction. Majority of the retail guys are gone. All that is left are the big boys and institutions/hedge funds who are less likely to sell on a whim. Something is amiss here. I don’t know what it is but it smells funny. I’m gonna ride this baby up as long as I can. The fall will be EPIC.

    Jani Ziedins September 30, 2013

    I agree, those that bought and sold every blip in the market added to the volatility, but most of those guys went broke and returned to their day job.

fleischut September 28, 2013

LT: the fed owns all these stocks. just kidding.

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