When to ignore red flags

By Jani Ziedins | End of Day Analysis

Oct 02

Free After-Hours Update:

On Tuesday the S&P 500 continued hovering near all-time highs as it digests recent trade war and interest rate headlines. We’ve been trading near 2,900 for nearly six weeks as the market consolidates August’s breakout to all-time highs.

But this isn’t a surprise for regular readers of this blog. I wrote the following nearly a month ago, and the market has behaved exactly as expected since then:

 “I didn’t expect much out of this dip and that is exactly what it gave us. Since the market likes symmetry, we shouldn’t expect much out of this rebound either. The next move is most likely trading sideways near the psychologically significant 2,900 level. It will take time for those with cash to become comfortable buying these levels before we will start marching higher again.”

With the benefit of hindsight, it is obvious the market isn’t up to much. But that didn’t stop countless people from losing money by selling last month’s dip and chasing Monday’s rebound. Easy mistakes that could have been avoided if people were paying attention. Make sure you sign up for Free Email Alerts so you don’t miss profitable insights like these.

Over the weekend the United States and Canada struck a compromise on a revised NAFTA. That sent prices higher Monday morning, but the market has struggled to add to those gains.

Typically a market that fails to react to good news makes me nervous, and Monday’s fizzled breakout definitely raised a red flag. A lack of follow-on buying often tells us we are running out of buyers and a price collapse is imminent. But this is not a not a normal market and the same rules don’t always apply.

Without a doubt, yesterday’s fizzle got my attention. But at the same time, this muted reaction is consistent with this bull market’s personality. Volatility is extremely low and that works in both direction. Since market selloffs are quicker and larger than rallies, this market’s reluctance to sell off on bad news is far more impressive than this week’s inability to surge higher on good news. I’d love to see prices race higher, but I’m not overly worried about this modest move becaue it fits this market’s personality. As I’ve been saying for a while, this is a slow market, and we need to be patient and allow the profits to come to us.

I’m willing to forgive the market for not holding Monday’s early highs, but that does count as one strike. If I see more warning signs, it will force me to reevaluate my outlook. But until then, I’m still giving this resilient bull market the benefit of the doubt.

FB is still struggling to get its mojo back. Between last quarter’s earnings disappointment, looming privacy regulations, and last week’s hacking revelation, it’s been hard for this stock to turn sentiment around. This is still the hottest social media property and nothing else comes close. As long as technology continues to be the hottest sector, FB will continue to be a buy. But if FB cannot catch back up to its FAANG peers, that could be an early sign the other FAANG stocks are skating on thin ice. At this point, FB is far more likely to catch up to the other tech high fliers than it is to bring everyone else down to their level. Things still look good over near-term and into year-end, but the situation could look a lot different next year. Stocks and sectors often take turns leading the way higher and at some point technology will hand the baton to the next hot sector.

AMZN announced it is boosting starting pay to $15/hr for its warehouse and other front-line employees. The stock initially dipped on the news, but it has since recovered those losses. Paying employees well is far better than dealing with high turnover, disgruntled workers, and public relation campaigns against the company. Plus, this has always been a growth story, not one about profits. Attracting and retaining the best employees will help it extend its growth streak.

Despite the flurry of headlines over the last few days, TSLA is right back where it was last week. The bulls are as dug in and entrenched as the bears. Both sides are prepared to fight to the death, and that is resulting in this stalemate. At this point, I still give a slight edge to the bulls simply because we are still at the lower end of this summer’s trading range.

Bitcoin is still struggling to break $6.8k resistance. If buyers wanted to buy this dip, they would have jumped in already. The chronic lack of demand at these levels is a concern, and the path of least resistance remains lower.

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About the Author

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.