A market that refuses to go down will eventually go up

End of Day Update:

As I’ve been saying for a while, a market that refuses to go down will eventually go up. That is exactly what happened this week and now the S&P 500 finds itself 1% from all-time highs. This is a long way from the fear and uncertainty that dominated the headlines for most of the year.

This “unexplainable” strength confuses skeptics and the only expiration they can come up with is the market is rigged. Personally I wish the market was rigged because that would make trading so much easier. All I would need to do is follow the people who are rigging it and I would be printing money! Unfortunately nothing is ever that easy and we actually have to work for our profits. But don’t fret, it isn’t that difficult if we know what to look for.

In this case it was recognizing the market’s strength. Remember, we trade the market, not the news. If the market doesn’t care about headlines (trade wars, rising interest rates, sex scandals, etc), then neither should we. This one idea could have saved a lot of people a lot of money this year.

If the market didn’t care about Trump’s trade war yesterday, last week, and last month, what are the chances it will start caring today? Almost none. It doesn’t get any simpler than this. Anyone still arguing with the market got run over and is much poorer for it. Don’t be that guy.

While it is easy to say these things after the market made it’s move and it is obvious to everyone, I’ve actually been saying these things for a while. I wrote the following last week as the market threatened to tumble under 2,800 support:

No matter what people think should happen, Trump’s trade war has largely been priced in. Anyone who fears these headlines bailed out months ago and was replaced by confident dip buyers. Right or wrong, this turnover in ownership means the remaining owners don’t care about these headlines. When no one sells the headlines, they stop mattering. That is how we find ourselves in a paradoxical market that rallies 100-points after Trump imposes billions of dollars of tariffs on the Chinese. These things don’t matter because no one is left to sell the news. This market is not “rigged”. It is not “irrational”. It is behaving exactly like it should. The people who don’t understand this strength are simply looking at the wrong things.

The market is actually fairly easy to figure out once we know what to look at. In this case it was ignoring all the noise surrounding us and seeing a strong market. That said, many of the easy gains are behind us. The path of least resistance is most definitely higher, but the gains will be slower and harder to come by. Anyone trying to profit going forward will need more conviction and patience to sit through the inevitable gyrations as we run into resistance near all-time highs. Stick with what has been working and keep believing in this market.

FB is got hammered following disappointing earnings. I didn’t expect anything this dramatic and obviously neither did the market. This crushing loss highlights the importance of diversification when trading individual stocks. One misstep can send a highflier tumbling in a terrifying way. I don’t mind holding large positions in the indexes because they are naturally diversified. But with individual stocks it never makes sense to hold more than 20-25% of your portfolio in any one company. If a person had equal weightings of the FAANG stocks in their account, today’s 20% plunge would have only put a 4% dent in their portfolio.

That said, these stocks don’t trade in isolation and one highflier’s stumble risks taking down the entire group. Luckily GOOGL and AMZN carried their weight and it looks like the tech trade is still alive. It will just take NFLX and FB a little while to overcome their latest stumble. If these stocks hold current levels into next week, this is simply another buyable dip.

Bitcoin is struggling to hang onto $8k support and we are left wondering if this latest rebound is simply another “dead cat” bounce. Every significant selloff is littered with sharp rebounds. The problem is each of these bounces is less high than the one before it. This year we witnessed strong bounces to $17k, $13k, $12k, $10k and now $8k. Will this one end any different than those? I’m skeptical. To prove me wrong BTC needs to end this cycle of lower-highs by breaking above the previous lower-high of $10k. Until then this rebound is guilty until proven innocent.

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Jani

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