Stick With It

By Jani Ziedins | End of Day Analysis

May 21

End of Day Update:

Opening weakness in the S&P500 quickly rebounded and turned into a decent gain for the index. Overnight worries about Chinese manufacturing and European weakness faded as soon as we opened. While it was nice to finish in the green, we struggled with 2,130 again as we find ourselves stuck in a very narrow range between 2,120 support and 2,130 resistance.

Headlines have given this market has every excuse to sell off, yet we keep making new highs. Too often the novice contrarian confuses price with sentiment. They assume high prices automatically equate to overly bullish sentiment and is why they want to bet against the trend. But the truth is price and sentiment are completely independent. Just as surprising, the contrarian trade is most often sticking with the trend while every else is convinced it’s gone too far and is about to correct. That is how we find ourself at record high prices while the AAII’s bullish sentiment remains 14% under historic averages and near five-year lows. It seems the crowd developed a fear of heights.

The most compelling signal the market can give us is not doing what everyone thinks it should. When we’re supposed to crash on Greece, weak GDP, rate hikes, and all the others, but we rally instead, that tells us to grab on and enjoy the ride. Don’t fear these headlines, instead fear the day when all the news is good and the market stops going higher

Jani

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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.

Tom May 23, 2015

Comment on your May 21 update:

The last line in the update says: “Don’t fear these headlines, instead fear the day when all the news is good and the market stops going higher”.

I agree, but not sure if you have observed, but that day is already here. On days when the news is all good, the market not only does not go up but most of the time goes down and I’m sure you know the reason for that (fear of fed tightening).
So according to your logic of being fearful of the time when the market does not go up on all good news, well that time is now.

    Jani Ziedins May 23, 2015

    Everything is up to our own interpretation, but IMO Yellen’s comments were slightly bearish when she said rate hikes will happen this year. Rather than degrade into a stampede for the exits, we closed down four-points. If the market was overly optimistic, it could have easily tumbled Friday, especially given the light, pre-holiday trade. That said, I am growing concerned about the market’s inability to extend the breakout. If we don’t continue past 2,135 early next week, then a near-term pullback to 2,100 seems likely. But either way, cooling sentiment is setting us up for the next big move to the upside, not downside.

      Tom May 26, 2015

      You could be right about the next big move to the upside (although I’m not sure how big an upside move that will be, could be to 2150, 2165 or 2180 max IMO), but according to me, the only reason the market is not selling off is due to the anticipation that buybacks will lift the markets to new highs in May/June. If this factor was not there, we would be at much lower levels currently. Feb was a big month up (due to buybacks) but only because Jan was a big month down (same pattern as last year). Last year May/June were 2% up months, so this year could be same or even less than 2% up months (because last year QE was still there and the risk of rate hikes was not hanging like a sword on the market’s neck). A 10-15% correction has to come sooner or later and will most likely begin when no one is expecting it, which means if everyone is expecting it to come between Sep-Oct, then it could happen earlier or later.
      BTW – everyone thinks the Fed is data dependant for rate rises. IMO, it is not. If Yellen had a choice, she would never raise rates. But they know that sooner or later, the economy will slow down and head downwards and before that happens they need to be at least at 2%, so they can go though the charade of cutting rates to support the economy. They are trapped. It is already too late for them, next year being an election year. Summer 2013 was their chance to start, failing that summer 2014. Assuming they start in Sep, max they will be able to do is 50 bps and then will have to stop (Q1 being the weakest quarter) due to the turmoil in the mkts/economy. By the time the next slowdown rolls around, we will have -ve rates and QE4 of 150B-200B a month, but will fail to do anything for the economy (as everyone will realize the futility of QE). Financial assets may either skyrocket or collapse, depending on how investors look at the overall situation. One thing is sure, it will be fun to watch.

        Jani Ziedins May 26, 2015

        We had a 10% pullback on an intraday basis in October, so I don’t know that we need another one less than a year later. We also had a 22% pullback, again on an intraday basis, in the fall of 2011. But for some reason people don’t count these when they claim this market hasn’t pulled back in 6 years.

        It is clearly anecdotal on my part, but it sure seems like I am hearing far more rationalizations not to buy this market than excuses to chase it. It is always scary to hold all-time highs at the far right edge of the cart. But obvious buy points are only obvious months later.

        I agree with you in that I don’t know how much upside there is in this move, but it sure feels like this market doesn’t want to selloff and the wrong trade is betting against it.

          Tom May 26, 2015

          Wow. Uncanny the way you predicted a move down to 2100. Kudos to you.

          Jani Ziedins May 26, 2015

          It only counts if we bounce. 🙂

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