Welcome to Cracked.Market’s Monthly Scorecard:
This post includes a summary of last month’s market developments, links to several key blog posts, and critical analysis of the accuracy of each post.
September is historically the second worst month for stocks, just barely beating October’s abysmal performance. Unfortunately anyone who used that historical track record as an excuse to skip September missed an impressive surge to all-time highs. Who would have guessed using the rearview mirror to figure out where the market is headed is a bad idea?
All too often traders fall for these statistical anomalies, a bad habit often perpetuated by the financial medial that loves repeating these nearly useless facts. “Sell in May and go away”, “October is the worst month for stocks”, “This is the longest we’ve gone without a 3% pullback since 1928”, etcetera, etcetera, etcetera. These facts are little more than trivia and just as useless as knowing how many movies one actor was in with another actor. You can impress your friends with these facts, but they are of little practical value when it comes to timing trades.
No doubt there are quirks to the calendar that makes some of these statistical anomalies pop up, such as options expiration, end of quarters, and calendar years. But the thing to remember about these patterns is they are far weaker than current events and price-action.
This September’s price-action was dominated by a decisive rebound from August’s North Korean pullback. This relief rally was far more powerful than September’s traditional seasonal weakness. What happened yesterday, last week, and last month is always far more significant than what happened last year, last decade, and last century.
Looking ahead to October, the recent dip and churn in ownership created a strong foundation to build on. Volume returned in September as big money came back from vacation. Rather than lock-in profits, big money is more inclined to buy these highs. If this market was fragile and vulnerable, we would have plummeted weeks ago. This is a strong market and I expect it to only get stronger as underweight money managers give up waiting for a dip and start chasing prices higher into year-end.
In the next section I analyze all eight of my free blog posts from September.
How do you think I did? Tell me in the comments.
Click the title to read the full post.
[Is] the rebound really dead? Three things tell us not to be so hasty.
First the late-day rebound put us back above key support. The 50 day moving average was a ceiling for most of the last few weeks. But overhead resistance often turns into support after we break through. Today’s late recovery suggests that is the case here. Rather than spiral out of control, supply dried up when we tested this key support level.
Second, volume was one of the highest days we’ve seen in recent weeks. All the other sharp down-days also included elevated volume. But rather than portend of worse things to come, these high-volume days were capitulation and we rebounded within a day or two.
Third, all of these headlines are recycled. There is nothing new here. If one of these stories was going to take us down, it would have happened already. Selloffs are breathtakingly fast. Hesitate for a moment and it is too late. Sell first and ask questions later is the first rule of surviving a crash. But this North Korea selloff is going into its fourth week. The market never gives us this much time to think rationally and act calmly before a punishing selloff.
Score 10/10: September 5th’s weakness was the lowest point in all of September and we rebounded decisively for the remainder of the month. The 5th’s dip was nothing more than one last head fake before humiliating every reactive seller during its surge to record highs.
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For nearly a month this market has withstood one bearish headline after another. We slipped under the 50dma for a brief period. All of this selling cleared out most owners who could be convinced to sell. Now all that is left is people who don’t care about these headlines. No matter what people think “should” happen, when there is no one left to sell a headline, it stops mattering.
This is an important thing for bears and most especially shorts to understand. You have been given a golden gift in this relentless barrage of negative headlines. There has been more than enough to cripple a vulnerable market. But the thing to keep in mind is selloffs are breathtakingly quick. Sell first and ask questions later is the only way to survive a market crash. Yet here we stand nearly a month into this “selloff”. If we were going to crash, it would have happened by now. If this relentless barrage of headlines couldn’t scare owners into selling, I don’t know what it will take.
Anyone who is still short this market is probably only a little in the red. Rather than hope and pray for the selloff that isn’t happening, a smart trader admits defeat and takes his losses while they are small. This bearish trade has been given every opportunity to work, but this simply isn’t the right environment to be short. Be proactive and close a trade that isn’t working when the losses are small, rather than wait until the pain of losing money gets so strong it forces you out.
Score 10/10: What else is there to say? I told bears to close their shorts for a small loss before things got worse. I doubt many listened, but they had every opportunity to save themselves a big chunk of money. The key to surviving the market over the long haul is recognizing when you are wrong long before the pain of loss forces you out. Once you get good at this, some of my bad trades were actually closed for a profit because I recognized my mistake before prices turned against me.
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There is no magic to this. Basic market psychology and supply and demand told us the path of least resistance was still higher. In early August we tumbled when Trump and North Korea fell into a war of words that quickly escalated into North Korean missile and nuclear bomb tests. Then the Trump administration endured a rash of turnover in its senior ranks and at the same time exchanged barbs with senior Republican leaders. And finally two hurricanes did their best to pummel the Gulf Coast. Any one of those things would have crushed a vulnerable market. Put them all together and it creates a storm only the strongest market could endure. Yet that is exactly what we did.
Score 10/10: A market that refuses to go down will eventually go up. The writing was on the wall all month long. I hope you saw it.
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But just as things were starting to look good, North Korea launched another missile over Japan after Thursday’s close. Fortunately the stock market is reacting less and less to each successive provocation. In after-hours trade the S&P500 only dipped 0.2%. That’s because stock owners who fear this story sold weeks ago. These nervous owners were replaced by confident dip-buyers who demonstrated a willingness to hold these headlines. If there is no one left to sell the news, it stops mattering.
Once we traverse this latest North Korean speed bump, expect the slow drift higher to continue. Confident owners don’t want to sell no matter what the headlines say and their conviction is keeping supply tight. Conventional wisdom warns us about complacent markets, but what it often forgets to mention is these periods of complacency last far longer than anyone expects.
Few things calm nerves like a rising market. Expect these steady gains to shift the focus from fear of a crash to being afraid of being left behind. Recent sellers and underweight money managers will start realizing the dip they predicted isn’t going to happen and they will be forced to start chasing prices higher. Last week’s seller will be next week’s buyer. And that’s how the slow grind higher will continue.
Score 10/10: Hopefully you are starting to see a trend develop here. Hindsight is 20/20 and this analysis seems obvious now. Luckily for those who were paying attention and knew what to look for, it was painfully obvious as it was happening too.
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As we saw today, the North Korean rhetoric no longer matters to the market and we can safely ignore it. Next item coming up is the Fed’s policy statement on Wednesday. Consensus is the Fed will start winding down its balance sheet. This is an anti-stimulus move, but the market is largely ready for it. Yellen and the Fed have done a great job telegraphing their moves to minimize disrupting financial markets. While we should expect a brief bout of volatility, it’s been years since a Fed decision affected the market in a significant and lasting way. I don’t expect tomorrow to be any different.
Score 10/10: North Korea and the Fed couldn’t dent this rally, but readers of this blog already knew that.
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On Thursday the S&P500 experienced the largest drop in over two-weeks. As dramatic as that sounds, we only lost 0.3% in a relatively benign pullback to support. This was the lowest volume day this month and the first time trade has been below average since August.
As far as pullbacks go, this one was as mild as they get. There are two ways to interpret this. Either this dip was the best bears could manage in such a resilient and strong bull market. Or these are the first cracks in what is about to become a larger selloff.
If a person thinks a bull market needs to go up every single day, they should be worried about this price-action. For the rest of us, we know markets moves in waves and down days are a normal and healthy part of moving higher. Prior to today the S&P500 was up seven out of the last eight days and a routine down day was long overdue.
Score 10/10: A little dip after a long string of up-days was nothing more than catching our breath on our way higher.
Tuesday September 26th: Why smart traders ignore today’s price-action
In a directional market, a late fizzle like this would be a big red flag. It warns us there is no follow through and support is crumbling. But this isn’t a directional market and traditional trading signals don’t apply.
We have been stuck in a predominantly sideways market most of this year and every breakout and breakdown has been a false alarm. Anyone who failed to realize this has been making the exact wrong trade at the exact wrong moment. Buying the breakout just before it fizzles and selling the breakdown just before it rebounds.
…ignore today’s late fizzle because it is meaningless. Just like last week’s breakout didn’t mean anything, and the fizzle before that. We are stuck in a market that refuses to go down nearly as much as it refuses to go up. Don’t fall for these tricks by reading too much into this meaningless price-action.
While we are in a mostly sideways market, the path of least resistance is definitely higher. Headlines have been resoundingly bearish over the last several weeks and the market has flatly refused to breakdown. If this market was fragile and vulnerable to a crash, it would have happened weeks ago. The fact we withstood wave after wave of bearish headlines means this market is far more resilient than most people realize. A market that refuses to go down will eventually go up.
Score 10/10: September’s bearish looking fizzle turned out to be nothing, exactly as I expected. One of the most important things about trading is knowing what rules to use when, and when to ignore those rules.
Earlier in the week we dipped under support, but rather than sell this technical violation, many traders rushed in to buy the dip. Ignore what the bears are saying, this market is healthy and poised to continue higher. August’s basing pattern refreshed the market by chasing off weak owners and replacing them with confident dip buyers. Given how long we have been holding near the highs tells us few owners are taking profits and most are confidently waiting for higher prices. As long as confident owners keep supply tight, expect the drift higher to continue.
August’s 2% pullback was quick and shallow. The market likes symmetry and as a result the subsequent rebound has also been equally unspectacular. There is nothing wrong with that, but it also isn’t a surprise or a concern how slow the breakout has been. Recent sellers are still nervous and it will take a little longer before they conceded selling last month was a mistake and buy back in. But few things calm nerves like rising prices and soon the fear of losses will be replaced by fear of being left behind.
Score 10/10: The next day we surged to record highs and September ended on a strong note. If big money was going to take profits, we would have seen that selling show up in the price-action. Expect October to be another good month for stocks and keep buying the dips.
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Have a great weekend and I hope to see you again next week.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.