1,900: Now What?

By Jani Ziedins | Intraday Analysis

Feb 16
S&P500 Daily

S&P500 Daily

End of Day Update:

Tuesday the S&P500 continued its rebound from last Thursday’s lows and is now just shy of 1,900 resistance. Not a bad turn of events given how awful things looked last week. This strength came on the coattails of a bounce in oil prices due to a rumored OPEC meeting and prospective supply cuts. The meeting happened, but they only agreed to cap production levels, not cut supply as hoped. Failing to live up to expectations sent oil prices tumbling Tuesday, but amazingly enough, the S&P500 closed at the day’s highs despite oil’s reversal. This is highly noteworthy because it was one of the few days this year where oil finished at the lows but stocks managed to close at the highs. Are stocks finally breaking this unhealthy correlation to oil prices? One datapoint doesn’t create a trend, but it is certainly a good start.

In last Thursday’s free blog post I caught flack from hecklers for suggesting that was the wrong time to sell defensively. Luckily for me hecklers are the most bold just before a reversal. While I am in no way suggesting we are out of the woods, a person who resisted the urge to bail out last week was rewarded with a nearly 100-point rebound from the lows. If a person wanted to sell defensively, today was a far better opportunity to do it than at any point last week. Everyone knows markets move in waves, unfortunately most forget that in the heat of the moment.

While I wrote about a rebound to 1,900 last week, I sure didn’t expect it to happen over two-days. But that is the way the market works. Either it takes so long to make a move that it convinces us we are wrong before proving us right. Or it does it so quickly we barely have time to register what happened. Clearly this bounce off of Thursday’s lows falls into the latter camp.

It is nice to talk about what happened, but what everyone wants to know is what comes next. For those that cannot handle this volatility, selling proactively near 1,900 makes a lot more sense than reactively selling near 1,800 and isn’t a bad decision for anyone needing a timeout from this chaos. A few weeks ago I wrote about us falling into an 1,800 to 1,940 trading range and I haven’t seen anything yet to suggest this has changed. Even though we might continue higher in the near-term, this rebound will likely fizzle and almost without a doubt there will be another opportunity to get in near 1,900 in the future. Sideways markets are the worst for longer-term owners because they hold the risk of a larger decline but are not getting paid for it with an appreciating stock price. This isn’t a problem for the resolute buy-and-hold owner, but those with less conviction are at a greater risk of reacting poorly to the choppiness inside a trading range.

Those of us that have a little larger appetite for risk, Tuesday’s price action was encouraging. As I already mentioned, it was a significant development when oil finished at the day’s lows and equities at the highs. Historically oil prices and the broad equity market have a very weak correlation and at some point this unhealthy relationship will end. Could this be the start of that? While OPEC didn’t give us what many were hoping for, production caps are a good start. Much of the fear fueling this plunge in oil prices was producers ramping up volumes to offset their declining incomes. A break from this runaway ramp in supply is a good start. If oil stabilizes around $30, while not a healthy number, at least equities can price it in and move on. As I shared in a previous post, we have fallen far enough that we shouldn’t plan for a v-bottom and instead expect this sideways choppiness to persist through at least the end of the quarter. But for the nimble swing-trader this presents a trading opportunity. Buy weakness and sell strength until something new comes along.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
Start your free trial today!

Follow

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.

George George February 17, 2016

I have more a question than a comment. Any insight/guidance you can provide will greatly be appreciated.
Question: Do you think investing in Europe at this juncture – with low interest rates in the U.S. and the ECB strongly suggesting more stimulus would be a good move?

P.S. Have read your last two posts. Your crystal ball was spot on!

Regards,

Gx2

    Jani Ziedins February 17, 2016

    I’m a US centric investor and only pay attention to Europe as it pertains to our markets. That said, I think the US economy is in a better position than Europe and Europe is more vulnerable to global economic slowing. They are getting support from the ECB because their economy needs it. But European stocks are down more than US stocks to reflect this. The other aspect that complicates things for me as a US investor is trading European stocks also involves exchange rate risk. Europe is interesting given the discounts, but I think US strength and a bottoming in Asia are more likely to turn their stock market around than ECB stimulus. If the US continues to outperform Europe, there is a good chance a lot of that ECB stimulus will find its way into our markets.

Comments are closed