Should we fear this complacency?

By Jani Ziedins | End of Day Analysis

May 09

End of Day Analysis

The S&P500 poked its head above 2,400 resistance in early trade for a second consecutive morning, but just like Monday, we were unable to hold those highs on Tuesday. But before we get too pessimistic, both the gains and losses were small and mostly insignificant, measuring only a handful of points in either direction. While 2,400 has been a ceiling for the last few weeks, few traders were enthusiastically buying this breakout and that lack of demand is keeping a lid on prices.

On April 27th I wrote in my free blog:

Currently we are at the upper end of the trading range, meaning this is a better place to be taking profits than adding new positions. The longer we hold near these highs, the more likely it is we will break through 2,400 resistance, but without a substantive headline driving the breakout, expect the buying to fizzle and prices to tumble back into the heart of the trading range.

And so far this is exactly how things have played out. Stubbornly confident owners are keeping supply tight and propping up prices, but new money isn’t willing to chase prices higher and the breakout fizzled. But that was then, and this is now. What people really want to know is what comes next.

The post-election rally has been built on the back of expected tax cuts. We came a long way in anticipation of these cuts, but now we are getting to the point where traders need to see our politicians start delivering on their campaign promises before they will push prices any higher. Confident owners are keeping supply tight, but new money is no longer willing to push us any higher.

It is tempting to point to the record low VIX and claim this market is complacent. And I don’t disagree, this market is incredibly complacent. But the thing about complacency is it can persist for long periods of time. If confident owners haven’t sold any of the bearish headlines and price-action over the last several months, why are they going to start selling now? The simple answer is they won’t. Not until they have a good reason to change their mind. This bull market will die like every other one before it, but it needs something more than complacency to take it down and right now we don’t have that.

Markets like symmetry. We find ourselves in a very unemotional period, meaning traders on both sides are not very engaged in this market. We go up a few points, we go down a few points. No one is getting too excited in either direction. Even though the market is stalling at 2,400 resistance, we shouldn’t expect prices to tumble from here. Instead look for a pullback that matches the intensity with which we broke out. A few points higher and a few points lower.

Unfortunately for us traders, it is hard to profit from these small moves. But that is the way this goes. Sometimes we have great opportunities, other times not so much. It turns out this is one of those not so much times. But don’t despair, good trades are never far away. I don’t know what and when the next market moving event will be, but I do know it is coming. The challenge is for us to resist the temptation to over-trade this sideways chop and give back our hard-earned profits. Long-term success in the market doesn’t come from our winners, but minimizing our losers. It is easy to make money, the hard part is keeping it.

Jani

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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.

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