Fizzled Breakout

By Jani Ziedins | End of Day Analysis

Jan 31

End of Day Analysis:

After spending most of Tuesday in the red, a recovery in the final hour of trade pushed the S&P500 most of the way back to break even. Monday’s weakness killed last week’s breakout and pushed us back into December’s trading range, but Tuesday’s resilience tells us most owners are not abandoning their stocks yet. Volume was the highest of the year, no doubt boosted in large part by end-of-month adjustments.

The headline of the week has been Trump’s executive order to stop admitting immigrants from seven Middle East nations. As far as corporate earnings go, the financial impact is negligible but that that hasn’t stopped traders from selling the news. In large part they are not reacting to this story, but being reminded Trump’s unorthodox leadership style cuts both ways. Stocks enjoyed a strong close to 2016 on hopes of reduced regulation, tax cuts, and corporate tax reform. Largely forgotten in the cheer has been Trump’s less business friendly stances. Trump’s moves over the weekend reminded traders that his presidency won’t be all sugar and cream.

Demand near record highs has been an issue since early December and it is not a surprise to see stocks retreat from last week’s breakout. While confident owners continue holding for higher prices, few with cash are willing to chase the market to record levels. This standoff between bulls and bears has kept us rangebound for nearly two-months and at this point it doesn’t look like that is changing anytime soon. As long as we struggle to find new buyers at the upper end of the range and owners refuse to sell the lower end, we are not going anywhere fast.

At this point I’m more cautious than optimistic. The 200-point rebound from November’s lows priced in a lot of good news our leaders and the economy need to deliver. Hit these targets and the market will yawn because it already priced in most of those gains. But run into a snag and we tumble into all the clear air underneath us. Momentum is higher and all else being equal, we should expect the slow drift to continue. But the reward from owning a slow drift is small, especially when compared to the risk if something unexpected sends a chill through the market. Small gains and large risks create a poor risk/reward. That said, it is a tad too early to short this market because we will continue creeping higher until we have a reason to tumble. This is not a bad place to take profits, but wait for that worrying headline before attempting a short. Only options sellers and nimble day-traders make money in flat markets, the rest of us are not getting paid to own risk and are best served waiting for a better trade.

Jani

If you found this post useful, return the favor by Re-Tweeting it.
If you disagree, tell me why in the comments.

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.