Stocks traded modestly higher, holding yesterday’s gains. The market remains a few points under the still upsloping 50dma and is the next major hurdle for a days old rebound. 1670 is another notable technical milestone representing the middle high of a potentially bullish double bottom. Volume is inching higher this week as traders return from summer vacation and start positioning their portfolios for the last few months of the year.
Weekly jobless claims are at their lowest levels in years, but tomorrow’s monthly jobs report is far more influential for both the Fed and market. Years ago the monthly employment numbers moved markets, but it’s been over a year since they generated anything more than intraday volatility and as long as they are not shockingly good or bad, expect much of the same tomorrow. Earlier in the year bad was good when traders worried about the sustainability of QE, but that ship already sailed and everyone is expecting Tapering in coming months at the latest. Since Tapering is already priced in, good is good again and a strong employment number is bullish for the economy and markets.
Some of the Syrian hype and fear is dying off as traders are coming to terms with military action. Bad news isn’t all that bad when it is quantified, it is the uncertainty that kills markets. As the political debate rages on in DC, it appears like this will be a very limited action and the market is gradually becoming less concerned over it.
Between the impending Taper and the shock over Syria, the market had every excuse to selloff, but bears just couldn’t get it done. In fact it looks more like selling stalled on the heels of these fearsome headlines. Scared markets plunge dramatically and three weeks into this selloff, it would be hard to call 3% off all-time highs a plunge. There is nothing wrong with distrusting this market, even going so far as shorting recent weakness, but we have to pay attention to how the market behaves to determine if our trade is working. We use stops as a last resort to get us out of bad trades, but most of the time we should exit trades that are not working long before our stops force us out.
The selloff seems stalled and is looking more like a buyable dip than shorting opportunity. We are still under the 50dma and the middle peak of a potential double bottom. Use either of these as a valid entry. A bolder trader could buy under these technical levels and use recent lows as a stop, but for most of us it is better to be a little late than a lot early. If we regain and hold the 50dma, new all-time highs are all but a done deal.
Bears can shoot against this market using the 50dma or 1670 as stops. We’ve come a long way and historically September has seen some brutal selloffs as big money managers dump shares into the end of the year. While the political debate around Syria is creating more
clarity, escalation by either side could catch the market by surprise. When calculating risk/reward, it is more than just probabilities but also magnitude of the potential windfall. Even if a rebound to all-time highs is more probable, betting against this market could be the better trade if the size of the payout is significantly larger. This is the highly profitable black-swan trade. While the world appears stable, the profit potential of everything unraveling can be attractive. Since these lottery style trades don’t work very often, the best way to trade them is through options that limit the losses of the more probable outcome.
Watch this market, waiting for the eventual breakout/breakdown. The ambitious can buy/short with tight stops.
Plan your trade; trade your plan
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.