Monthly Archives: October 2016

Oct 26

What’s Next?

By Jani Ziedins | End of Day Analysis

screen-shot-2016-10-26-at-6-48-45-pmEnd of Day Update:

Stocks dropped 10-points at the open due to what the financial media claimed was weak earnings. But rather than rattle nerves, a sharp reversal erased those losses before lunchtime. While we continued to bounce around in the afternoon session, we finished the day well off those morning lows.

Once upon a time price-action like this was insightful. Running out of sellers so quickly after an unsettling open is often a strong buy-signal. But in our current market, we have to assume this is just more random noise and cannot base a trade off it. If anything, I’m more inclined to trade against this signal than with it given how quickly this market reverses.

We remain inside the recent trading range and until the market shows us something new, we have to assume we are still playing by the same rules that have governed us since mid-summer. That means expecting directional moves to fizzle and reverse.

The thing to remember about stock market “rules” is they are only rules half the time. Sometimes we buy the breakout, other times we sell overhead resistance. A bearish lower-low looks just like a bullish double-bottom. Knowing what rule to apply when is the art of trading.

The first job of the trader is paying attention to the mood of the market. Are we in a buying mood? A selling mood? An indifferent mood? With this critical piece of information, we know which set of rules to apply. Currently we’re in an indifferent mood and that means ignoring traditional buy and sell signals.

It usually takes something significant to trigger a change in mood. Many times it is a dramatic and unsettling headline. Other times it is as simple as a change in the calendar as we transition from one quarter to the next.

I hoped going from the summer doldrums to the higher-volume fall trade would liven up our market and give us something to trade. Unfortunately that didn’t happen and now we need to look ahead for the next big thing to wake traders up. We are already a good chunk into the 4th quarter and 3rd quarters have not moved the needle. The election is the next big thing on the horizon and less than two-weeks away. Following that is the Fed’s largely expected rate-hike in November or December and institutional money managers repositioning for year-end. Hopefully one of these wild cards will pull us out of the trading range doldrums.

I will be shocked if the market trades lifelessly for the rest of the year, but the market has a nasty habit of giving us the thing we least expect. All we can do is wait and see.


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Oct 12

How to trade this weakness

By Jani Ziedins | End of Day Analysis

screen-shot-2016-10-12-at-8-16-53-pmEnd of Day Analysis:

The S&P500 steadied itself Wednesday following Tuesday’s crash through 2,40 support. While this price stability ended Tuesday’s emotional wave of selling, the muted rebound was hardly confidence inspiring. The calm didn’t last long because as I write this, overnight futures are down more than half-a-percent. Is this a sign of worse things to come? Or is it simply another routine bounce off the lower end of the trading range?

There wasn’t a clear headline driving Tuesday’s selloff. The best the media could come up with was disappointing earnings. We fear selloffs without a reason if it means the market knows something we don’t. But we ignore ones when the market is simply humiliating nervous and impulsive owners by convincing them to dump their stocks right before the next rebound. Which is this? That’s what we have to figure out.

New and unexpected headlines drive large directional moves. That’s because new information causes traders to change their outlook, and as a result, adjust their portfolios. This wave of buying or selling fuels the big moves. On the other hand, recycled headlines produce fleeting gyrations and quickly reverse because everyone already knows about these problems and they are factored into their outlook. If traders expect something, they don’t adjust their portfolio when those headline pop up again. The million dollar question is if the driving force behind Tuesday’s selloff is truly new and unexpected, or if it is simply recycled headlines we have been talking about for months.

Wednesday’s Fed meeting minutes gave us the strongest hints a rate-hike is just around the corner. Rather than extend Tuesday’s selloff, stocks hardly budged. That’s the clearest indication we have that the next quarter-percent increase is already priced in. We can cross that one off our list.

The next big bogie is third-quarter earnings. Expectations are relatively muted and it is hard to find anyone excited about our economic growth. Many even claim we are in an earnings recession. Given that less than enthused outlook, earnings have a very low bar to clear. While things could certainly could come in worse that this, they have to be be worse than the widely expected sluggish. Since front-line managers continue to see more demand than their current staffing levels can handle, we shouldn’t expect a large falloff in earnings. It will be another lackluster quarter, but the sky is not falling.

Assuming the overnight futures hold these losses into tomorrow morning, expect another wave of reactive selling to hit the market as nervous owners bailout before “things get worse”. But without any real meat to this selloff, this is definitely a better place to be buying than selling. Remember, risk is a function of height. By that measure, this is the least risky place to own stocks since June. Unless earnings over the next few days come in far worse than expected, a bounce off 2,100 support makes for an attractive entry point. When yet another selloff fizzles and bounces, expect underweight money managers to start feeling pressure to chase this market into year-end.


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