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By Jani Ziedins | End of Day Analysis
End of Day Update:
The S&P500 sold off for a third day following Trump’s “Fire and Fury” threat to North Korea. The first two days of selling were relatively benign, but today’s defensive selling crashed through 2,460 support and the 50dma. This was the biggest single-day loss since mid-May and it puts us back to levels not seen in a month.
Thursday’s selloff felt especially dramatic since it came following a period of historically low volatility. Many traders assumed there was nothing to worry about and we would coast into the end of summer. Unfortunately for them today’s steep selloff reminds us there is no such thing as easy money in the market.
It is hard to talk about what is going on in the stock market without first dipping into geopolitics. This isn’t the first time we’ve gotten into a war of words with North Korea and it won’t be the last. But this situation is unique because no one knows how far Trump or Kim Jong Un will take it since both leaders are new to this high-stakes game of chicken. One miscalculation by either side could escalate this situation from words into something far more deadly.
Kim Jong Un’s primary “Trump” card continues to be the thousands of artillery cannons armed with chemical and biological weapons pointed at Seoul’s ten-million plus citizens. There is nothing North Korea can do to prevent us from bombing their nuclear program, but they can retaliate by attacking the civilians in Seoul.
Millions of hostages are what makes this situation so much different from the ones we face in the Middle East. Trump can talk a tough game, but unless he is willing to sacrifice millions of South Korean civilians, his hands are tied just like they were for all of his predecessors.
Most of the time these situations with North Korea diffuse themselves over a few weeks and things return to “normal”. There is a 99.9% probability this is what will happen here too, but that hasn’t stopped traders from reacting strongly to these headlines.
What started out as a little uneasiness earlier in the week turned into a mass exodus Thursday. This weakness was compounded by all the technical traders using stop-losses to automatically get them out of the market. While this strategy sounds good in theory, it can be tricky in practice because people often use similar support levels to trigger their stop-losses. That means any dip through a widely followed level will trigger another wave of autopilot selling.
2,460 has been support for several weeks and we violated that this morning. That lead to the first cascade of selling that pushed us down to the 50dma. Then Trump told the world his “Fire and Fury” threat wasn’t strong enough and that was enough to extend the selloff under the 50dma.
While this selloff feels scary, the thing to remember is risk is a function of height. Last week when we were trading at record highs and everyone was in a cheery mood was actually a far riskier place to own stocks than jumping in and buying this dip. While it definitely doesn’t feel like it, the discounts sellers are offering make this a safer place to buy stocks because a big chunk of the selloff has already been realized.
For months I’ve been saying this is a buy-and-hold market. Holding is an easy thing to do when the market is gently gliding higher, but holding through a dip hard to do when everyone around us is selling. Our natural instinct is to join the crowd and get out before things get worse, but then that is no longer buy-and-hold.
Every dip this year bounced and this time will be no different. If you don’t think the U.S. will start a war with North Korea, then this is a better place to be buying stocks than selling them. It takes courage to go against the herd, but take comfort in knowing it is a lot safer to buy this fear than last week’s complacency. Many of us have been praying for a buyable dip, here it is. Don’t lose your nerve now.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Analysis:
Tuesday was one of the most volatile sessions in months. A small opening loss rebounded into a breakout to record highs. But the good times didn’t last long before Trump announced to the world he was willing to go to war with North Korea. That threw a bucket of cold water on the bulls’ party and we finished well off the midday highs.
As dramatic as that description sounds, the actual price moves were not all that impressive. At our highest we were up 0.4%, and after the “big” selloff we end up closing down 0.24%. The only reason it felt so volatility is the market has been hovering lifelessly between 2,470 and 2,480 for the last three-weeks.
This war of words with North Korea is certainly something new and unexpected. For a while I’ve been saying that the summer’s slow drift higher will continue until something new and unexpected happened. Is this war of words between Trump and Kim Jong Un that thing? Probably not. While consequences could be quite dire, the odds of this grudge match escalating to a nuclear war are almost non-existent. Neither side can afford to let it go that far.
This will keep the talking heads on TV busy for weeks, but I doubt many stock owners will take this seriously and even fewer will sell the news. So while it is new and unexpected, it isn’t really material and unlikely to derail this bull rally. Any near-term weakness should be viewed as a buying opportunity. But given how modest today’s dip was, I wouldn’t expect this to go much further unless the threats from both sides escalate significantly.
Until further notice, expect the path of least resistance to remain higher. Stock owners are stubbornly reluctant to sell their stocks and that tight supply is propping up prices. Of course their stubbornness is only matched by the reluctance of those with cash to chase record highs. But keep in mind any gains will be slow coming, it took us three weeks to rally from 2,470 to 2,480. Don’t expect that rate to increase any time soon. This is a buy-and-hold market and keep doing what is working.
That said, things will get more interesting in a few weeks when big money managers return from vacation. They have the firepower to move us out of these summer doldrums and most likely their buying or selling will drive the market’s next move. Most likely we will see underperforming managers chase record prices into year-end as they desperately try to catch up. But there is a small chance air could come out of the Trump rally if Congress fails to deliver the promised tax reform.
The best part about being an independent investor is we can buy and sell full positions with the click of a mouse. That means we don’t need to decide ahead of time what will happen. Instead we can wait for the market to reveal its intentions and then we hop on the band wagon and enjoy the ride. Enjoy the slow climb higher over the next few weeks, but start looking for a bigger trade to come along in September or October.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
The S&P500 slipped for the fourth-time out of the last six-trading sessions and lost ground seven out of the last eleven-days. As bearish as that sounds, you cannot measure the percentage decline without using a decimal point. When looked at that way, this has actually been a bullish couple of weeks. All these days of selling can do little more than knock us down a fraction of a percent from all-time highs. A market that refuses to go down will eventually continue higher.
But many traders are not seeing what I’m seeing. Bearishness on AAII’s sentiment survey jumped nearly 8-points this week and sentiment on StockTwit’s $SPY stream is in free fall and near two-month lows. Who’s right? The market’s right. Not because it is smarter than we are, but quite literally because it sets the prices we buy and sell at.
But there are very real supply and demand reasons why it is better to stick with the market here. People trade their outlook. Most of the traders who have grown more bearish over the last few weeks have been the ones selling and causing this modest bout of weakness. But now that they are out of the market, who is left to sell? Given the trivial declines, not many owners have joined the selling. While conventional wisdom tells us to fear complacency, the thing it forgets to tell us is periods of complacency last far longer than anyone expects. This bull market will end like all the ones that came before it, but this price-action is telling us it isn’t ready to go yet.
One thing most of us can agree on is sharp selloffs are breathtakingly fast. But here we are, nearly two-weeks into a “selloff” and we have fallen little more than a handful of S&P500 points. If we were standing at the edge of a precipice, the last two-weeks of selling would have fed on itself and we would already be dramatically lower. If the bears couldn’t break this market by now, then they are not going to break it. This is not a set-it-and-forget-it market, but we need to do what is working and right now that is buy-and-hold.
When will that change? Good question. It will change when something new and unexpected happens. Traders who fear a Trump presidency or rate hikes have long since abandoned this market. The next time Trump makes an incoherent 2am Tweet, don’t expect the market to react because everyone who cares about that stuff already sold. Same goes for the next rate hike. Anyone who fears rising interest rates is long gone and they no longer have a vote in what the market does next. That is how bad news gets priced in and why it stops mattering. Ignore what everyone else is talking about because it is already priced in. Instead stay on the lookout for the obscure thing no one see coming.
Not long ago I thought this market would tumble when the GOP failed to cut taxes as aggressively as the stock market hoped, but given how little it reacted to Trumpcare’s appalling failure, the market is telling us it doesn’t care about politics. You’d have to be living under a rock at this point if you still had faith in Congress’s ability to get something done. If everyone expects the tax legislation to fail, then it won’t matter to the market when it does because it is already priced in. Maybe these things will start mattering at some point, but this is not that point.
That said, this is the most nervous I’ve been since the 2009 bottom. Something is coming. I don’t know what it is or when it will happen, but I know something will be worse than most people are prepared for. The market’s half-full outlook has given us this smooth ride higher and it is foolish to fight what is working, but we should be standing next to the doors so we can be one of the first to get out when things turn south. Stick with this bull market for the time being, but be on the lookout for the thing no one sees coming.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
The S&P500 added modest gains Tuesday. This strength largely puts last week’s “collapse” in the rear-view mirror. Sharp selloffs are breathtakingly quick and this is the fourth day we’ve held 2,460 support. If this market was vulnerable, we would have tumbled by now.
This resilience won’t surprise regular readers of this blog. Confident owners have ignored every other reason to sell stocks this year and nothing changed last week. In fact there really wasn’t any news driving Thursday’s dip. It was simply a case of reactive traders overreacting to each other. Once this brief bout of weakness passed, hours later dip buyers were back at it. If confident owners showed zero interest in selling rate-hikes and political dysfunction at home and abroad, why would they all of a sudden be spooked out of the market for no reason at all? Answer is they weren’t and that’s why Thursday’s selling reversed so quickly.
While conventional wisdom tell us to fear complacency, what it often leaves out is periods of complacency last far longer than anyone expects. Without a doubt this bull market will die like every other that came before it. But that doesn’t mean we cannot go higher in the meantime. These failed selloffs tell us the path of least resistance remains higher and smart traders keep doing what is working.
That said, this is the most nervous I’ve been since the 2009 lows. Last year’s paranoid, half-empty outlook has given way to this assume everything will work out, half-full outlook on the world. Markets are normally nervous and tend to fear the worst, but this market is anything but nervous. But this doesn’t come as a surprise. After years of regretting every defensive sale, traders have learned to ignore the outside noise. If sequesters, Greek collapses, Brexits, rate-hikes, Chinese bubbles, and all the other noise didn’t matter, then surely nothing going on right now is worse than that. Right now most owners are more afraid of being left behind than they are of losing money. While this cannot last forever, as long as confident owners don’t sell, supply stays tight, and prices remain firm.
Assuming everything will work out is typically the right decision and is why I’m a big fan of buying dips, but eventually we come across something that turns out worse than feared. I have no idea what will take us down, or when it will happen, but I know it is coming. I’m not ready to give up on this market because it is acting so well, but I am standing close to the door and ready to jump at the first signs of trouble. Normally a nervous market is priced at a discount and that compensates us for taking the risk of owning stocks. Unfortunately this market is priced for perfection and that leaves little margin for error. The path of least resistance remains higher, but this is the most dangerous the market’s been in nearly a decade.
The biggest advantage of being a small trader is we can close our positions in minutes. We don’t need to predict what will happen ahead of time because we have the luxury of being able to wait for the market to tell us what it wants to do. While it is tempting to argue with an overvalued, complacent market, resist that urge. Keep doing what is working, but stay vigilant and be ready to react when something changes.
Previously I thought Trump’s inability to enact meaningful tax reform would be the undoing of the Trump rally. But given how little the market reacted to the GOPs inability to agree on anything makes me think the market really doesn’t care about tax reform. If legislative progress was important, Trumpcare’s crash-and-burn would have taken some air out of this market. Instead we continue hanging out near the highs. Same goes for the expanding Trump/Russia investigation. Maybe these will matter at some point, but right now the market doesn’t care and neither should we.
Keep doing what is working. Stick with your buy-and-hold positions. These minor fluctuations are too small to swing-trade effectively, but it is wise to keep some cash ready for the next big trading opportunity. Even though this market is painfully boring, I expect things will liven up when big money managers return from summer vacation and start positioning for year-end.
We are up approximately 10% year-to-date, but I don’t expect us to finish here. Volatility will pick up this fall, I just don’t know whether that means underperforming money managers will be forced to chase price higher into year-end, or if the wheels will fall off the Trump rally and we come crashing back to earth. Most likely we will witness a chase into year-end, but remain wary of anything that doesn’t go according to plan. Complacency means most owners will be slow to react to changing conditions. That will give us plenty of time to get out before things get ugly.
Jani
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