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

MARKET BEHAVIOR
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.

MARKET SENTIMENT
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.

TRADING OPPORTUNITIES
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

INDIVIDUAL STOCKS
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

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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.

LT November 14, 2013

Jani

I like your assessment but something is amiss. What all of a sudden why this market is close to back or even better than prior 2008. Did all of a sudden jobs are plenty abound and everyone is happy. This feels like a Zimbabwa market. It has no substance but again, you cant fight the FED. There is no direct link to QE and the market but yet every time the talk of TAPER the market pullsback. Coincidental or something else is at play. With less and less players this high up it is very easy for a group of individual to manipulate the market or for the government in a direct way push the market up. Why it makes government look good, makes the President look good. Its a win win for government and win win for those who bought low. If sucks for the 401k people except for those drawing on 401k now. Who is to say this market will keep going up in 20 years or another 10 years. No one knows the future but does hurt to make money now and pay off debt. My word of advice to everyone, pay your debt. Have no debt. Regardless of market crash or not, if it does you have no debt to worry about other than living expense. I’m a physician and love studying the market. Its fun and quite addicting. I don’t know as much as Jani but I’m learning. One thing I know, I will work until my last day on this earth. Many of my colleagues feel those days of living of pension are gone and far. Gotta have a skill that can last a lifetime and thank goodness I have that skill. But I’m hoping to create a good nest egg from daytrading and long term investment. This market is too high. It will go down. Like the hey days of the real estate market it finally popped. This market too will pop and have a huge funds on the side when the market finally pop.
Thanks for continuing this blog Jani.

xpatnola November 14, 2013

It seems to me the last fear to overcome this year is the fear of missing out. We’ve heard many times how the hedge fund and money managers have to jump in here before they close their books on the year. You’ve said before that the small investor is just a fraction of this market, and it’s the big boys pushing it around. If that’s true, and since there are deflationary pressures elsewhere, it may be that US equities are the place to be for the very near term. And I agree—being nimble is key here. I’m willing to ride this to year end, and then we’ll see.

    Jani Ziedins November 15, 2013

    I cannot dispute that. Picking tops is nearly impossible because it is hard to quantify chasing. But from a risk/reward POV, we’ve come a long way and fear is evaporating. I know I cannot pick the top, so I take good enough and wait for the next trade.

John November 15, 2013

The only thing keeping this market up is qe infinity with the promise of even more. I like your articles but without the feds acknowledged free money and all the “extra” off the books money this market would be in the crappers. No fundamentals or technicals here

    Jani Ziedins November 15, 2013

    If we were money printing for money printing’s sake, we would see out of control inflation. We don’t have any inflation because the Fed’s money is simply replacing the hole left in our economy left by the tightened lending standards and reduced willingness of individuals and businesses to borrow. The multiplier effect of lending is a huge part of a modern economy and the Fed’s injection is simply maintaining liquidity. That is why we have not seen adverse consequences of QE after four years despite what all the “experts” have said would happen. QE is filling a hole, not building a bubble.

john November 15, 2013

i would disagree with that comment.. But thats my opinion.. The market is in a huge bubble currently at at some point will bust. who knows when that will be, as the fed can print money into infinity. the market is up and continues up, the fed is the result in my opinion and most pro traders opinions.

of course bernancke and yellen disagree and see no bubble. i believe i have that one before all the other crashes too.. but it could go up to infinity again.. i dont argue that fact

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