Stocks are bouncing around today as they digest overseas headlines. We are one percent from recent highs and nearly 50-points above the 50dma. Prior resistance near 1,925 is acting as support and we are holding this technical level for a 3rd day. Volume has been below average every day for nearly a month, but this is typical of light summer vacation trade.
Without big money’s steady hand, summer can be volatile as smaller traders have more influence. This is especially true when the market is trying to digest worrisome headlines coming out of Iraq and a potential flare up of political discord in DC. While we are only a few points from all-time highs, the market is anything but relaxed.
Ignore the headlines and buy the dip has been the rally call of last couple years and many are sticking to that game plan here. Buyers showed up to defend 1,925 and so far are preventing any further selling. Their cause is aided by confident owners unwilling to sell fearful headlines, keeping supply tight. Last year the market jumped at the sight of its own shadow as we had temporary selloffs on headlines of sequester, fiscal cliffs, Arab spring, and taper to name a few. This year prospects of war in Ukraine and Iraq are met with cautious optimism.
While it is encouraging to see the market hold up in the face of these headlines, the best profit opportunities come from irrational market moves. While participants are nervous over these geopolitical headlines, no one is fearful enough to sell their stock at a discount. After nearly two years of watching every dip bounce back to new highs has trained owners to hold no matter what. With so few sellers, the future of this market rests on the buy side. As long as buyers keep soaking up what little selling we have, the market will continue higher. But every rally reaches a point where everyone who wants stock already has all they can hold and the market stalls on a lack of new money.
The longer we hold up in the face of these headlines, the less likely they will take us down. Markets tend to roll over quickly and avoiding a precipitous drop as these headlines break means they are well on their way to being priced in.
Owners are demonstrating comfort with the risk/reward at these levels. With such a little discount being offered to hold this risk, the market is telling us it doesn’t expect these events to deteriorate in any appreciable way. That leaves buyers vulnerable to a worse than expected outcome that is clearly not priced in.
The best profit opportunities arise from emotional and irrational moves in the market. Since no one is offering us a discount to hold this risk, there is little reason for us to own these headlines. The same goes for shorting the market. We had the scary headlines and the market didn’t flinch, meaning it will take something larger to crack this market. At this point it seems we are in no-man’s land and where the market goes from here is a coin-flip. If I were forced to pick sides, holding these levels suggests we will continue higher, but any degradation of the situation in Iraq could set of a mad rush for the exits. With such a poor risk/reward, the best trade is to wait and see what comes next.
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.