Monthly Archives: December 2019

Dec 27

CMU: When the calendar matters and when it doesn’t

By Jani Ziedins | Free CMU

Cracked Market University: 

With 2020 only a few days away, I want to discuss the “calendar effect”. I alluded to this phenomenon in recent posts, but this is an important concept and worthy of the entire spotlight today.

In a lot of ways, the calendar doesn’t matter. For example, Year-to-Date gains/losses are a meaningless statistic, especially early in the yar. The same can be said for annual gains. 2019 will go down in history as the second-best performance of the last two decades and everyone is cheering these nearly 30% gains!

Unfortunately, 2019’s headline number isn’t so much about how good 2019 has been, but how bad 2018’s fourth quarter was. If we adjust the rolling 12-month period from October 1st, 2018 to October 1st, 2019, these impressive 12-months gains tumble all the way to a measly 0.5% annual return! That’s right, just half-of-a-percent in 12 whole months!  If our calendar went from October to October instead of January to January, the second-best year in two decades turns into a very forgettable performance. Ouch.

While we need to question these somewhat arbitrary rolling periods when making performance comparisons, there are times when the calendar actually matters to the market. It isn’t so much about the calendar itself or even the seasonality of the business cycle, but how institutional investors’ performance is measured and how their managers are paid.

Most institutional funds are judged by their annual performance and that means the managers running these funds live and die by where they stand at the end of every calendar year. There is nothing more important in their world. Next in importance comes the quarterly statements that get mailed to investors. If you want to keep people’s money, then you better show respectable gains at the end of every third month. And lastly, monthly gains, but they don’t matter as much because only the nerdiest of the nerds keep track of those.

Institutional money managers’ entire mindset revolves around March 31st, June 30th, September 30th, and December 31st. All of their decision are driven by how they will look on those four critical days. And since most market moves are propelled by institutional buying and selling, those four days matter to us too.

Currently, there is a lot of pressure on large money managers who are trailing this very impressive year. If they cannot match the market’s gains, at the very least they need to be able to tell their investors that they are in all the right stocks and that the results will come. This chasing of performance is what gives us strong moves in the final months of good quarters and years.

But here’s the important thing, once the calendar rolls over to the next quarter or year, these institutions are starting with a clean slate. Those that were compelled to buy in the final weeks of the year no longer need to chase prices higher because they have just been given three months of breathing room.

This herd buying and selling ahead of the end of quarters and years is what gives quarters and years consistent personalities. Quarters and years are most often up, down, or flat. But once those quarters/years end, we move into a new quarter/year, one that most likely will have a much different personality than the one that preceded it. 2019 was a good year for stocks. Chances are, 2020 will look a lot different. Be ready for it.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $STUDY

Dec 26

When it makes sense to buy AMZN

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

Two weeks ago I wrote a cautious post about AMZN. I explained how I was leery of this stock’s latest rebound because the prior dip lacked a compelling capitulation point. And while this remains the case, that didn’t deter traders from piling into the stock today. The company reported record holiday sales and that sent the stock surging nearly 5%.

Clearly I missed today’s move and I have no problem admitting that. That’s the way this goes sometimes. Successful trading does not come from being right about everything all the time, it is based on finding the best setups and profiting from those exemplary opportunities. This often means passing on something that ends up working simply because the odds of success were lower than what we typically look for. I wasn’t bearish on AMZN, I just didn’t see the latest dip as compelling enough to be worth buying.

While today’s performance was impressive, I wouldn’t chase AMZN at these levels. Today’s gains could easily fizzle over the next few weeks if this demand proves fleeting. It takes more than one day to reverse a downtrend and as impressive as today looked, it was just a single day.  I would like to see the stock hold this level for several weeks before concluding this rebound is the real deal.

There are a few reasons to be wary of today’s strength. First, it came during a holiday affected period. That means most institutional investors are on vacation and not participating in today’s buying. Second, if big money wasn’t buying, then demand was coming from retail investors and bears covering their shorts. This more impulsive based buying was evident in today’s one-way price action that started with smaller gains and rallied strongly all day long. That told us people were desperately chasing prices higher, not making intelligent and informed investment decisions.

Why this matters is because retail investors have shallow pockets and short-covering is a fleeting phenomenon. Until we see institutional investors support these prices by buying at these levels when they return in January, I would be leery of chasing today’s gains. That said, I could be wrong about AMZN again and prices could continue surging higher. But if I miss another move in AMZN, I don’t mind because trading opportunities with higher odds come along all the time.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AMZN

Dec 23

How to approach the market around the holidays

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

As expected, the S&P 500 continues drifting higher into year-end. All of the nasty headlines are behind us and for the most part, things turned out far less bad than feared. This return of optimism allowed stocks to rally to record highs. That said, this post is less about the market and more about what we should be doing this time of the year.

All too often it is easy to obsess over the market, and many times that distracts us from the things that really matter. Borrowing a well-used cliche, we should trade to live, not live to trade. If all you can think about is how well your positions are doing, or sometimes how poorly, you are missing out on all of the things going on around you.

As we approach the Christmas holiday, it often makes a lot of sense to unplug for a few days. For some people, that means liquidating everything and being fully present with their friends and family. For other people, this simply means lightening up on some of your biggest winners to the point you no longer feel the need to watch the market’s every move. For longer viewed investors, skip a few days of financial headlines and don’t open your stock app. Don’t worry, everything will still be there next week.

The above recommendations are doubly important if things are not going well. Sometimes we get stuck and have a hard time letting go of a losing trade. Forcing yourself to sell that bad trade for a few days might just be the thing you need to clear your head and come back with a fresh set of eyes. If you still like that trade next week, you can always get back in. But more often than not, we would rather avoid putting ourselves in that situation again. If that’s the case, chalk it up to “experience” and start looking for another opportunity.

No matter what happens over the next two weeks, don’t worry about it. There will be plenty of new trading opportunities next month, and the month after that, and the month after that…

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

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