AM: Syria Relief

By Jani Ziedins | Intraday Analysis

Sep 03

AM Update

Stocks popped following the Labor Day break, flirting with 1650.  Obama is seeking Congressional approval before taking action in Syria and is the most cited reason for today’s relief rally.   This pushed us above last week’s stalled rebound, but we are still well under the 50dma.  The silver lining is the market violated support multiple times, yet selling never accelerated and we remain relatively stable despite of all the anxiety.

Summer is finally coming to a close.  Kids are back in school and rich money managers are returning from their countryside estates.  While active traders make up a bulk of the daily activity, they are a very small group and can only take the market so far before running out of money.  The lack of meaningful participation by big investors is largely responsible for the sideways trade we’ve seen since May.  Only guys with deeper pockets (mutual funds, pension funds, etc) can drive the markets sustainably and as they jump back in over the next few weeks, hopefully that will be the catalyst to get us out of this sideways summer chop.

The bigger question is if these guys will liquidate ahead of expected weakness, or continue buying the slow, but steadily improving economy.  Europe survived contagion.  China is still chugging along.  Japan has not imploded.  All in all, things are far better than worst case and that relief is a large part of this year’s strength.  While many still fear the end of easy money, all the people selling the bond market need to put that money to work somewhere and that certainly could be bullish for equities.  Valuations, fundamentals, and technicals don’t matter when people keep throwing money at equity fund managers and they have no choice but to buy stocks.

Expected Outcome:
If all you did was listen to the chatter, you’d think the market took a pretty good wallop this summer.  StockTwits SPY sentiment is 76% bearish, the most skewed I’ve seen it.  Headlines focus on Taper, Syria, and the weak economy.  But the funny thing is the market is higher since the end of April and just a few percent from all-time highs.  Calls of the sky falling are clearly premature.

People trade their outlook.  When is the last time any of us heard someone say “this market is going crash so I bought more stock this morning”?  Of course not, they say “I sold everything last week and am 100% in cash because this market is going lower.”  So what happens when everyone is bearish?  That means everyone already sold.  Clearly the term “everyone” hyperbole, but when short-term traders bailout, they sell at a discount to more confident long-term holders who are not afraid of near-term volatility.  These new buyers’ calm nerves suck up supply and the selloff stalls as we run out of sellers.

Alternate Outcome:
Every bear market starts with that first point lower and so will the next one.  The heated debate people is if we are already in the early days of a bear or this is just another routine dip on the way higher. While short-term traders are nervous and most are already out, complacency is creeping into the longer-viewed investors as every dip since the 2009 bottom has been a great buying opportunity.  Markets go up and markets go down, that’s what they do.  It’s been a good year, but we need to watch for signs the aging bull is running out of gas.  While the economy and Taper are already priced in, Syria is the new wildcard and the longer the political grandstanding drags on, the more uncertainty it injects into the market.

Trading Plan:
While we should expect more near-term volatility surrounding Syria, look for the market to break out of this trading range in coming weeks.  Maybe we have another horrible September as big money dumps shares at heavy discounts.  Or maybe they buy the discounts short-term traders are hand out.  I expect an upside resolution, but I will wait for the confirmation either way.  In the meantime we let the impulsive traders get chewed up by this volatility.

Plan your trade; trade your plan


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.