Monthly Archives: August 2015

Aug 11

Finally New News

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Tuesday was a tough day for the S&P500 as it gave back most of Monday’s gains. We fell back under the 50dma and 2,100 support, but managed to hold the 200dma. Volume was slightly above average, but relatively constrained given the size of the decline.

The Chinese government surprised everyone with an unprecedented yuan devaluation. This sent investors the world over scrambling for cover. While there is a direct impact from a weaker yuan and stronger dollar, that pales in comparison to the inflamed fears of a slowing Chinese economy.

The market can quantify and digest currency moves in a day or two. This is a negative for export dependent economies like Germany, but a weaker yuan actually helps net importers like the United States since it lower input costs for many of our companies. That’s why stocks like WMT were higher when everything else was down.

Reacting to the currency move alone, the response in US markets seemed overblown. But it wasn’t the currency move that spooked traders. They feared the reasons the Chinese government felt compelled to act so brashly. Between slowing Chinese growth, a crashing Chinese stock market, and now this, traders are starting to fear worse than expected weakness in the world’s second largest economy.

This situation leaves the market in a precarious position. Prices defied countless bearish headlines this year from Grexit to rate hikes, but those were largely recycled stories that we’ve lived with for years. China weakness on the other hand is something new and unexpected. Investors that weren’t bothered by a Grexit or 0.25% rate hike are rightfully concerned by these Chinese headlines. While there is a good chance this is just another blip on our way higher, this is the most serious situation we faced all year.

Things are too uncertain at the moment to predict which direction the market will go next, but I’m confident whatever happens, it will be dramatic. Maybe this is what finally breaks the camel’s back and triggers the long-awaited correction. However, if a crumbling Chinese economy cannot bring down this market, then nothing will and all we can do is hang on and enjoy the ride. The next couple of days will give us good insight into the market’s psyche. Either selling intensifies and we plunge to levels not seen in years. Or the emotional selling exhausts itself and we rebound to new highs like we have so many other times.

Jani

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Aug 06

The Sky is Falling

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The S&P500 sliced through 2,100 support and fell all the way to the 200dma before mounting a feeble bounce into the close. Traders clearly took notice as volume surged to the highest level in over a month.

Today’s selloff clearly rattled nerves and has many fearing worse things to come. Money managers, gurus, and journalists all smell blood in the water. And they’re not the only ones. The Stocktwits $SPY sentiment gauge swelled to 63% bearish. Bullishness on AAII’s sentiment survey is hovering near five-year lows. The CBOE Put/Call ratio spiked today to levels only seen a few times in the last five-years. And Investor Intelligence reports 58% of investment advisors are bearish. It seems everyone lost confidence in this market.

Given how bearish these indicators are, you’d think we are in the middle of a long and deep correction. The funny thing is we are only 2.4% from all-time highs. The most plausible explanation is a highly insightful crowd and savvy pundits see the storm clouds brewing and are getting out ahead of the long-awaited correction. That is of course if you think pundits and the crowd are good at identifying important turning points.

As a devout contrarian, if the crowd get this right, I’ll eat my hat. I really don’t want to eat my hat because I really like it, but I don’t have anything to worry about. It’s not because the crowd and gurus are stupid. Intelligence has nothing to do with it. Supply and demand drives market pricing and by rule the majority’s opinion is already priced in. Common sense tells us that anyone anticipating a correction would sell their stocks ahead of time. From this we can infer the large majority of people with bearish outlooks are at the very least underweight stocks. If that’s the case, then most of the selling is already behind us and this is the safest time to buy and hold stocks in quite some time. No one said being a contrarian was easy, but to make money we have to make the hard trades.

The headline event everyone is looking forward to is the monthly jobs report due before Friday’s open. While the media hypes this up every month, it’s been years since this report made a lasting impact on prices. This Friday will be no different. Expect early volatility, but the numbers will be forgotten by the close.

Jani

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Aug 04

What to Expect from Rate Hikes.

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 failed to reclaim 2,100 support after falling under this widely followed level Monday morning. Volume was light again as few traders chose to adjust their portfolios based on anything they saw or heard Tuesday.

Greece and China are ancient history as Puerto Rico, AAPL, July employment, and rate hikes dominate headlines. While the stories have changed, the results are the same; bearish headlines and resilient prices. The market is down eight of the last eleven trading sessions, but we remain within two-percent of all-time highs. Bears have plenty of reasons to criticize this market, but owners don’t care. When they don’t sell, supply is tight and prices strong.

Even though the broad market is holding up, AAPL sliced through its 200dma Monday and continued plunging Tuesday to the lowest level the stock’s been since January. This drop leaves many AAPL bulls perplexed because there isn’t a fundamental driver worthy of a 15% selloff, but that is how markets work. Prices go up and they go down, even when there isn’t an obvious reason. But there is always a reason, even when we don’t see it. Lately everyone’s been on the AAPL bandwagon as iPhone 6 sales knocked the ball out of the park, but recent developments in China lead many to question if the China growth will still be there. That was enough to weaken prices and from there the selling snowballed. Today’s look looks like capitulation and there is a good chance the stock will rebound to the 200dma. How it responds to this level will let us know if this is a false bottom on our way lower, or just another great buying opportunity on our way higher.

The other major story traders are worried about is the Fed’s first rate hike, but paradoxically raising interest rates will actually be a bullish catalyst. We saw this phenomena last year with the start of the dreaded Taper. Everyone expected the end of quantitative easing would depress prices because it meant the end of easy money used to bid up stocks. In reality we saw the opposite. The start of Taper spawned a great year for stocks because a reasonable and predictable Taper replaced the uncertainty that preceded it. Expect this market to follow a similar pattern once the Fed’s rate hike plan is formally announced.

While it is always nice to watch my account swell in value, I’d actually be more concerned about the sustainability of these levels if prices were wedging higher. That is when the last of the buyers are coming to market and we are on the verge of exhausting of demand. Selling like we’ve seen in recent days chases off the weak owners and clears the way for a sustainable move higher. The harder part is figuring out the exact timing of the breakout. It could happen tomorrow. Or we could slip a little further and retest the 200dma before launching the next move higher. While I cannot predict the exact timing of the next move, I’m confident it will be higher. When market is given every excuse to breakdown, but it stubbornly holds near the highs, that tells us the path of least resistance is higher, not lower.

Jani

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Aug 03

Testing Support

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 tested the resilience of 2,100 support for a fourth day. We sliced through this key level early in the day, but recovered most of those losses before the close. Volume was average for these typically slow summer months, but well short of the elevated levels seen in recent weeks.

Summer markets are often choppy when institutional investors are on vacation. Without big money’s steady hand, smaller and more emotional traders drive these erratic price swings. But these smaller traders don’t have the account size required to push sustainable moves and is why prices jump around, but ultimately don’t go anywhere. This phenomena perfectly describes the trade we’ve seen in recent weeks; dramatic, but unproductive.

Much to their detriment, these smaller traders pile in and out of the market following every gyrations. They reactively buy when prices go up, and reflexively sell when they go down. While everyone knows it is foolish to buy high and sell low, that is exactly what most of these small traders do. There are times to buy breakouts and sell breakdowns, but sideways markets is definitely not one of them.

While it is tough to be brave when prices fall and cautious when they go up, that is exactly what we need to do. There is no reason to be afraid of today’s weakness and break of support. We didn’t collapse when headlines were shouting Greek Contagion and Chinese Bubbles, so why should we all of a sudden be afraid they are going to fall on us now? Markets have been given every opportunity to implode this year. If that is what they really wanted to do, it would have happened already.

Jani

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