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By Jani Ziedins | End of Day Analysis
End of Day Update
The S&P500 experienced its first one percent loss since October. This came as quite the shock for those that assumed the Trump trade would take us to the moon. But it was little surprise for those of us that have been doing this for a while. Many people will claim they saw this was coming, but the following is what I wrote the day S&P500 exploded to record highs following Trump’s first address to Congress and when Trump mania reached a fever pitch:
While owners feel good and comfortable with their positions, we really should be asking ourselves if this is a better place to be adding new positions or taking profits. Risk is a function of height and by that measure this is the riskiest the market has been in quite some time. Momentum is clearly higher and will likely continue, but I feel much safer buying discounts than paying a premium. It is simply a matter of risk versus reward. This breakout carried us to record highs and has already moved us 15% above the November lows. While we can keep drifting higher, what are the odds we rally another five, ten, or fifteen percent? With history as our guide, a near-term dip is more likely than a continuation. As we started with, markets move in waves. You know it, I know it, everyone knows it. Unfortunately many in the crowd have temporarily forgotten it.
And given today’s meltdown, we now we find ourselves in the midst of this expected pullback. The more pressing question is if this the start of a major correction, or just a routine two-steps forward, one-step back?
The excuse for today’s selloff was the failure of a Republican controlled Congress to quickly reach a deal on repealing Obamacare. The thinking goes that if they cannot get their ducks in a row on Obamacare, then the much more important tax reform is also in jeopardy. But the thing to remember is this is how politics works. As the saying goes, there are two things you don’t want to know how they are made, sausages and laws. This is an ugly and drawn out process. Just because Representatives claim they won’t support this bill doesn’t mean they won’t support a bill. This is how negotiations work in politics. Grind the process to a halt, get concessions for your constituents, and then let everything proceed. If our politicians were not doing this, they wouldn’t be doing their job.
So if this is the way politics always works, should we really be worried that the repeal of Obamacare and Tax Reform are dead? No of course not, that is just as ridiculous as assuming the Trump trade was taking us to the moon. Today’s pullback is normal, routine, and most importantly buyable. But the thing to remember about buyable dips is they wouldn’t happen unless they felt real. If everyone knew it was a buyable dip, no one would sell and we wouldn’t dip in the first place. Of course this feels real and of course it is scary. Every buyable dip feels this way.
The challenge isn’t knowing if we will bounce, but when. Most owners have been confidently holding for higher prices despite concerning headlines and price-action. Are today’s headlines likely to change their mind after they stood their ground through far more bearish headlines? No probably not. That means we should expect this selloff to run out of supply soon and rebound back into the heart of the trading range. What happens after that is an entirely different debate, but at the moment this is a better place to be buying equities than selling them.
The one exception is if we stumble across truly unsettling news that shifts the market back into a half-empty outlook. That said, today’s headlines are definitely not that. Repealing Obamacare is not dead. Tax cuts are not dead. Reducing regulation is not dead. This is simply a process and that takes longer than the stock market was hoping for. The great thing for us is these discounts create profit opportunities for those that are willing to take them.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Analysis
The S&P500 continues hovering above 2,360 while oil fell under $50 for the first time this year. The last few weeks of enthusiasm is crumbling and giving way to second thoughts. This shift is clearly evident in popular sentiment measures. The StockTwits’ $SPY stream plunged from 60% bullishness last week to 40% today. AAII’s weekly sentiment survey saw bearishness spike nearly 11% and is at the highest level since the election. Given how dramatically sentiment changed, surely it must have been a painful week for stocks. While we slipped almost every day since last Wednesday’s record high, the losses have been relatively trivial and we are down little more than 1% from last week’s all-time high. Clearly something is askew and as traders it is our job to figure out who is right, the resilient market, or the increasingly pessimistic crowd.
When all else is equal, we always give the benefit of doubt to the market. While it is not always right, it is far larger than we are and will run over us if we get in its way. One of the most useful techniques I found for analyzing the market is focusing on what it is not doing. This is typically far more insightful than trying to guess at what it is doing and why it is doing it.
This week’s dramatic swing in sentiment tells us the crowd thinks stocks went too-far and are vulnerable to a pullback. I can relate because that is exactly what I was expecting last week too. But here’s the rub, we haven’t pulled back very far after a week of selling. As I often write, breakdowns from unsustainable levels are breathtakingly fast. The market rarely gives us this much warning before crushing us. Jumping back to the “what is the market not doing?” view of the market, the obvious answer is it is not crashing. When the market isn’t doing what the crowd expects, that means it is setting up to do the opposite. While I’m not ready to predict another strong move higher, at this point that is far more likely than the widely feared imminent collapse. That means we should be looking for dips to buy, not selling stocks and adding shorts.
Jani
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