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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Thursday was a boring session for the S&P 500 as it did a lot of nothing and finished exactly flat. But boring is good. Bear markets are filled with emotion and volatility. They move so fast people don’t have time to think or make rational trading decisions. Contrast that with this market where we barely moved 10 points in a week.
The most dramatic move occurred Tuesday after Trump revived trade war fears when he threatened Europe with new tariffs. But that 0.6% loss failed to build momentum and the next two days finished green.
But this isn’t a surprise. I wrote the following Tuesday evening:
“Despite [Tuesday’s] weakness, I still like this market. It has been challenged by countless bearish headlines and weak price-action. Yet, every time these dips fail to build momentum. We fear what we don’t know, not what everyone has been talking about for months. If these headlines were going to break this market, it would have happened a long time ago. If the market doesn’t care, then neither should we.”
Two days later and Tuesday’s bearish headlines and market dip are long forgotten.
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If this market was overbought, fragile, and vulnerable to collapse, Tuesday’s headlines and dip were more than enough to kick off an avalanche of selling. The fact prices held up tells us the ground under our feet is solid and there is a lot of support at these prices. This continues to be a strong market and the path of least resistance remains higher.
That said, we burned through a lot of demand since the start of the year and it is no surprise the rate of gains is slowing. We are quickly transitioning to more sideways than up as we approach the old highs. That means we need to be patient and expect a little more back-and-forth.
Down days like Tuesday are a normal and healthy part of every move higher. Resist the urge to assume every day’s gyration means something. Most of the time the market’s moves are meaningless noise. Yet that doesn’t stop people from predicting every up-day is the start of the next surge higher and any dip lower is the beginning of the next collapse.
As I said, if this market was going to collapse, it would have happened by now. But at the same time, the rate of gains definitely slowing. Combine these two ideas and we have a market that is doing a lot of nothing. It is okay to keep holding our favorite buy-and-hold investments, but for a trade, there isn’t much to do.
We want to trade when the odds and risk/reward are stacked in our favor. We want to trade when the market is handing out money. But a lot of the time, the smartest trade is to not trade. Holding risk of the unexpected for a 10-point profit over a week is simply not worth it. We only want to own stocks when we are getting paid and right now the market is being stingy. Better trading opportunities are coming, we just have to be patient. Until then, don’t let these meaningless gyrations fool you into making poorly timed trades.
Note: The above only applies to short-term trades. This market is acting well and there is nothing to do with our favorite buy-and-hold investments expect sit on them and patiently wait for the profits come to us.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 stumbled Tuesday, breaking an eight-session win streak. Investors were unnerved after Trump announced a fresh round of EU tariffs, reigniting trade war fears. And right on cue, the EU said it was ready to implement retaliatory tariffs against the US.
So much for the trade situation getting better. But even though trade war headlines flared up again, the index shedding 0.6% is a fairly benign response. It certainly doesn’t measure up to the fear that gripped equity markets last year.
Today’s muted reaction is not a surprise for those of us that have been paying attention. We know most owners who fear Trump’s trade wars bailed out a long time ago. And not only did these fearful sellers already abandon the market, they sold to confident dip buyers who demonstrated a clear willingness to jump in front of these headlines.
If these confident dip buyers weren’t scared then, there is no reason to think they will get scared now. No matter what the cliches say about confidence, confident owners don’t sell, and when they refuse to sell, supply remains tight.
While tight supply is preventing any of this year’s modest dips from growing into something bigger, supply is only half the equation. The problem we is as prices approach last year’s highs, a huge chunk of demand has already been satiated during this amazing run. While most of this year’s rebound was fueled by “less bad than feared”, as we approach the old highs, “less bad” is no longer good enough and we need headlines to shift to “good” to continue marching higher.
I said as much last week when I predicted more back and forth was ahead of us:
“while the path of least resistance remains higher, the rate of gains is clearly slowing. The easy money has already been made. Now things get a lot more choppy. And choppy means challenging. Breakouts fizzle and breakdowns bounce.
Chasing these daily gyrations will most likely end in losses as people buy the strength and sell the ensuing weakness. Repeat that a few too many times and the losses will start to add up. This market needs to be traded proactively, not reactively. Don’t fall for its tricks.”
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Even though most of us understand the markets move sideways more often than they go up or down, almost everyone comes to the markets with a preexisting bias. Either people are bullish or bearish about current levels and they believe any move in their direction is the real deal. If they are bulls, they buy the breakout. If they are bearish, they short the breakdown. But not long after they react to the market’s move, it fizzles and reverses. Once prices start moving against these reactive traders, they lose their nerve and pull the plug. Buy high, sell low is a horrible way to trade. Unfortunately, most people fall for the market’s tricks and end up losing money.
Despite Tuesday’s weakness, I still like this market. This it has been challenged by countless bearish headlines and weak price-action. Yet, every time these dips fail to build momentum. We fear what we don’t know, not what everyone has been talking about for months. If these headlines were going to break this market, it would have happened a long time ago. If the market doesn’t care, then neither should we. The
This market is transitioning to more sideways than up. That means we need to be more careful with our purchases and stop-losses. In fact, for most people, they would be better off not trading this chop. Either buy-and-hold your favorite positions and wait for the slow grind higher to continue, or stay out and wait for the risk/reward to skew more in our favor.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
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