Monthly Archives: June 2017

Jun 27

Is it Time to Worry?

By Jani Ziedins | End of Day Analysis

End of Day Analysis: 

The S&P500 collapsed Tuesday in one of the worst selloffs in over a month. Of course “collapse” is a relative terms since today’s weakness didn’t even knock a full percentage point off of the S&P500. But given how benign the stock market has been recently, 0.8% is shocking enough to grab everyone’s attention. The tech heavy NASDAQ took a bigger hit, shedding 1.6%, but to put things in perspective, both indexes are still within a few points of all times highs.

The headline that turned early weakness into a waterfall selloff was the GOP abandoning the planned health care vote because they didn’t have to votes to pass it. Health care is not that important to the market, but that the lack of unity on this issue puts the entire Republican agenda in jeopardy. The post-election stock market rally was built on expectations of tax cuts and today’s legislative logjam is not the narrative the market was hoping for.

The question traders have to answer is if today’s weakness is the first hints of a much larger selloff. Or if this is simply another dip on our way higher. On the surface these headlines don’t seem any worse than the ones the market brushed off previously. Brexit? So what. Rate hike? Who cares. Special investigator looking into the president’s administration? No big deal. If the market didn’t care about those things, why should it care about this health care vote? In fact this isn’t even the first time a health care bill failed to pass. The House stumbled several times before they finally passed their version of Trumpcare. There is no reason to think the Senate won’t be able to do the same.

Most likely today’s weakness will turn out to be a false alarm. Traders have been burned countless times every time they defensively sold weakness, only to see the market rebound even higher not long after they bailed out. It’s gotten to the point where so few people are selling headlines that dips barely last more than a few hours and go further than a handful of points. Right or wrong, headlines no longer matter if people stop selling them. Without supply, it is hard for any dip to build momentum. And that has been the story of this half-full market. No matter what the headlines have been, traders assumed everything will turn out fine and to this point that has been the right call.

As a trader I love a little uncertainty and volatility. These create great trading opportunities because someone else’s fear becomes my payday. Unfortunately this has been a painfully boring market and I don’t think today’s headlines changes that. I fully believe this market is skating on thin ice, but this isn’t the headline that is going to take us under. The market will continue to give our politicians the benefit of doubt and Tuesday’s botched vote will be forgotten by Thursday. If we find support Wednesday, the selloff is done and we can go back to our summer naps. I wouldn’t be concerned until this market crashes through 2,400 support and keeps going. But even then I still think it is simply creating a larger buyable dip. Trends continue countless times, but they only reverse once. Fight this bull at your own risk.

Jani

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Jun 13

Why nothing matters to this market

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 rebounded from Friday’s early selloff and finds itself right back near all-time highs. Anyone who sold Friday’s dip is kicking themselves for overreacting to that weakness. If they were paying attention to the way this market has been behaving, they would have known better and not made that mistake.

Last Thursday I wrote:

“While this market makes me nervous, the path of least resistance is clearly higher. If we were vulnerable to a crash, it would have happened by now. There have been plenty of excuses for traders to sell defensively. But when no one sells the headlines, they stop mattering. These things rarely end well, but they also last longer and go higher than anyone expects. I don’t trust this market, but it will most likely continue creeping higher for the foreseeable future.”

A few hours the market “crashed” in one of the biggest dips in nearly a month, but that was clearly a place to be buying the dip, not selling the weakness. To be honest, I cannot even remember what traders were so spooked over Friday morning it was that trivial. If interest rate hikes, a presidential scandal, and the U.K. government in disarray didn’t bother the market, why should some nominal headline Friday morning make a difference? And a few hours later, it turned out those headlines didn’t matter and we find ourselves right back near the highs.

Risk is a function of height, meaning this is the riskiest the market been in quite some time. But just like skating on thin ice, it’s only dangerous if you fall through. Right now the market continue skating on thin ice without a care in the world. The path of least resistance remains higher…….until it doesn’t.

While I’m skeptical of this market and don’t trust it, it will keep going higher until is has a good reason not to. So far it has refused every reason we’ve thrown at it. That’s because this market is built on high hopes for generous tax cuts. At this point it is clear nothing else matters. The market doesn’t care that a special counsel has been appointed to investigate our preside. That doesn’t have anything to do with tax cuts, so it doesn’t matter…..right?

But if this market is built on a foundation of tax cuts, that is also the thing we are most vulnerable to. If the Republican coalition in Congress devolves into party infighting, or this looming Russia/Trump scandal erodes all of the president’s political capital, expect this market to give back a big chunk of the post-election gains. At this point that is the only thing that will kill this rally. But until this happens, enjoy the slow glide higher and ignore all the other noise along the way.

Clearly this is a buy-and-hold market. Anyone trying to trade this crap is getting their ass kicked. Traditional breakout and breakdown signals mislead us when they fail hours later. The only trade to make is either sticking stocks, or staying in cash. Anyone trying to outsmart this market by jumping in and out is doing nothing but accumulating losses. There are trading markets and there are buy-and-hold markets. This is definitely a buy-and-hold. But don’t despair. This won’t last long and great trading opportunities will come to those who are patient enough to wait for them.

Jani

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Jun 08

Is anyone paying attention?

By Jani Ziedins | End of Day Analysis

End of Day Update:

It was an exciting day for politics on both sides of the pond. We started the day with a General Election in the U.K. and capped it off with Comey’s testimony before a Senate committee. These two events were widely anticipated by pundits and news junkies for weeks. But it seems someone forgot to send the memo to the stock market. Given the market’s tepid, almost boring price-action, it looked like any other boring summer trading session.

Luckily for us boring is a good thing. It means traders are calm and not overreacting to headlines. Rather than sell nervously ahead of uncertain events, most traders are confidently assuming everything will blow over and this isn’t worth worrying about.

It’s easy to see why the market shifted to this half-full outlook. Every defensive sell over the last few years was a painful mistake. After getting burned three, four, and five times by prematurely selling a dip, traders learned their lesson and now confidently hold any and every dip because it will bounce like all the others before it. And so far that strategy has worked brilliantly. In fact the lack of defensive selling has gotten to the point that dips are measured in hours and tenths of a percent. Blink and you’ll miss them.

I miss the old volatility. I made a lot of money buying steep discounts from traders overreacting to headlines. People would dump their stocks “before things got worse”, but typically that was as bad as it got and we rebounded when things turned out less-bad than feared. But these days it is hard to find bargains when traders are demanding premium prices for uncertain times.

It was easy and safe to buy a dip when the market overreacted. Risk is a function of height and the lower we went, the less room there was left to fall. Buying at $80 is always less risky than buying at $100. But the opposite is true here. Long gone are the days of buying at $80, or even $100. Instead sellers are demanding $120 for an imperfect product. Good for them if they can sell at $120, but the thing is most are greedily holding for even higher prices. Their confidence is keeping supply tight and propping up prices, but these premium prices mean there is far less margin for error. We’ve gotten to the point where need to hit the ball out of the part just to keep this rally alive.

While this market makes me nervous, the path of least resistance is clearly higher. If we were vulnerable to a crash, it would have happened by now. There have been plenty of excuses for traders to sell defensively. But when no one sells the headlines, they stop mattering. These things rarely end well, but they also last longer and go higher than anyone expects. I don’t trust this market, but it will most likely continue creeping higher for the foreseeable future.

This post-election rally was built on expectations of tax cuts. Nothing else matters. Corporate tax cuts, repatriation of overseas profits, more money in consumers’ pockets. That is what propelled us from the November lows. But expectations are high. Maybe a little too high. What happens if Trump and Republicans fail to deliver on their generous promises? It won’t be pretty. Right now the stock market is giving the benefit of doubt to Trump and the Republicans. But there is a good chance the tax cuts won’t be as impressive as hoped for and we will stumble into a sell-the-news dip. Tax cuts are what got us to these heights and they are also one of the few things that can knock us off this perch. Keep riding these waves higher over the near-term, but bailout as soon doubt about the size of the tax cuts starts to creep in.

Jani

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