Where’s the fear

By Jani Ziedins | Intraday Analysis

Nov 14
S&P500 daily at end of day

S&P500 daily at end of day

Stocks pushed ahead to new highs following Janet Yellen’s confirmation hearing.  We are just a few points from 1800, something that was unthinkable only a month ago.

It feels like there are only two opinions in the market, that stocks will keep going to the moon or we are in a bubble about to burst.  Where is the middle ground?  The people who say we need to take a breather and digest recent gains before marching higher?  Where are the nuanced opinions that say we need to pullback to the 50dma or traders should lock-in profits?  All I hear are these two polar extremes of buy, buy, buy and sell, sell, sell.  Maybe, just maybe, the truth lies between these two emotionally charged opinions.

I find it interesting how many people blindly attribute this market’s success to QE.  This year’s strength can’t possibly be because we shook off all the major risk factors people were worried about.  When is the last time you heard Contagion?  How about Cyprus?  Sequester?  Double-Dip?  More recently we put Shutdown and Default in the rear view mirror.  Who needs money printing when the market keeps removing all the uncertainty people were hiding from?

And here is why this is important.  If everyone believes QE is inflating this market and Yellen will continue the easy money policy, they will forecast higher prices for as far as the eye can see.  But what if it wasn’t easy money propping up this market, but overcoming fear and uncertainty?  My theory is this market rallied on overblown fears turning into non-events.  If that is what really drove us to all-time highs, we need fear, not QE to continue going up.  But this is the first time in at least a year and a half where the market is not obsessing over some impending catastrophe.  Without fear, this rally might be running out of gas regardless of what the Fed plans on doing.

Expected Outcome:
For the record, I am long-term bullish and think we are only a fraction of the way through a secular bull market.  When everyone says buy and hold is dead is the best time to buy and hold.  This is exactly what I am doing with my retirement account because I don’t need those funds for decades.  But in the near-term, I swing-trade extremes in sentiment with my trading account and it sure feels like the bearish views from earlier in the year are quickly being overtaken by boundless optimism.  The time to be excited about this market was in January, February, and March, not after a 25% runup.  Anyone just warming up to this market is a day late and a dollar short.  Buy when we are afraid, not when we feel safe.

Alternate Outcome:
These things go so much further than anyone expects.  That is what makes picking tops so perilous.  We might know exactly what will happen, but if we are early, in the market that is the same thing as wrong.  Everyone knows this rally will eventually stall, we are only debating the timing.

Trading Plan:
The market is most dangerous when it feels the safest.  Between endless QE and no material risks on the horizon, it sure feels like a safe time to hold stocks.  While I easily could be early, I feel the risks are growing with every leg higher.  If you don’t want to sell, at least use a trailing stop to protect recent profits.  Making money in the markets is easy, the hard part is keeping it.

TSLA daily at end of day

TSLA daily at end of day

TSLA cannot get out of its own way.  Markets are making all-time highs, yet the auto maker is stuck near five-month lows.  There is a crisis in confidence and that is never a good thing in a stock that ran up more than 400% in half a year.  It will eventually recover, but let it prove itself first by reclaiming $150 and the 50dma.  For current owners, hope is not a strategy and we always need an exit strategy.  If the broad market stumbles, that weakness will hit high-fliers especially hard.

FB recovered the 50dma, but volume was anemic and didn’t signal a valid buy-point.  Keep waiting for that strong volume bounce off the 50dma.  If we don’t see that, don’t jump in because we could slip back under this widely followed moving average, especially is the broad market stalls in coming weeks.

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.