AM: Yo-yo continues

By Jani Ziedins | Intraday Analysis

Sep 04
S&P500 daily at 1:18 EDT

S&P500 daily at 1:18 EDT

MARKET BEHAVIOR
The yo-yo continues as stocks returned to 1650 following yesterday’s weak close that gave back most of those early gains.

MARKET SENTIMENT
Syria induced volatility is chopping up anyone reacting to these wild swings.  Naturally everyone wants to buy low and sell high, but anxious traders are doing the exact opposite as we ricochet between failed breakouts and failed breakdowns.  Today’s trade is shaping up as a one-way short-squeeze as we push beyond recent highs and trigger a wide swath of short-sellers’ stop-losses.  Can this rebound continue or will it stall retest recent lows?

While we all know what is happening, we only make money by trading what will happen.  Taper is a distant memory as Syria dominates headlines.  Obama shocked everyone by seeking Congressional approval, leading to yesterday’s opening gap higher, but that surge faded as many on both sides of the isle came out in support of military intervention.  It is harder to pin down an exact news catalyst for today’s surge, but the market doesn’t need one.  We are going up because more people want to buy than sell, and so here we are.

Part of the reason we have so few sellers is most afraid of recent turmoil are already out.  They sold yesterday, last week, or last month.  No matter how bad the headlines, if no one is left to sell, the market will hold up fairly well.  Recent volatility and intimidating headlines chased off the weak who sold at a discount to far more confident investors willing to stomach the uncertainty.

Every other dip this year was buyable and we will soon know if this continues or breaks the trend.  With as much bearishness as there is in financial headlines and how little the market’s come down, it really feels like there is limited downside remaining in this move.  Often the market acts like a coiled spring and explode one direction or the other. Between Taper and “war”, there has been plenty to unleash a coiled spring, but 4% off all-time highs is more fizzle than bang.  The lack of an explosive move lower shows the market is not poised to collapse because it already ignored multiple invitations to do just that.  Weak hands already bailed out and the new owners are not interested in selling.  Low volume, high volume, it doesn’t matter; when owners don’t want to sell, we go up.

TRADING OPPORTUNITIES
Expected Outcome:
While I remain constructive on this market because of the muted downward moves, volatility will persist and anyone lacking conviction in their positions is best suited sitting this one out.  No doubt today’s explosive rebound will go the other way within days, even hours.  The safest and easiest play is waiting for this volatility to work its way through the system and buy as the market starts acting more decisively.  That doesn’t mean when the coast is clear and it finally feels safe to own because that is clearly too late.  Buy when uncertainty is coming out of the market, but it is still plenty scary.  In war situations, that often means when the bombs start falling because we are no longer wondering “if” or “when”.  Then it is simply a matter if the consequences are as bad as feared, which most often they are not.

Alternate Outcome:
The problem of trading with conviction is it often leads us right off a cliff.  As the saying goes, know when to hold’em, know when to fold’em.  The simplest way around this problem is waiting for better setups.  The goals isn’t to make all the money, just the easy stuff.  Trading sideways chop is the most frustratingly difficult ways to make money.  Take some time off and come back for the next directional move.

Trading Plan:
Without an iron gut, sit this one out, or at least dial back the size of your stake.  Anyone who wants to trade this, trade proactively, not reactively.  That means taking profits early and often because they will evaporate days later.  My bias is for an upside resolution, but we could see more weakness before then.

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.