Monthly Archives: April 2020

Apr 21

Is it finally time to short this market? (and how to do it safely)

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 shed 3% Tuesday, adding to Monday’s nearly 2% decline. As well as the market has been trading lately, these two sessions closed nearly the daily lows and their price action stands out like a sore thumb.

Stocks have been defying gravity every since they launched off of the March lows. This has been one of the biggest and fastest rebounds in history and most seasoned observers were skeptical this strength could last given the frighteningly dreadful economic headlines surrounding us. But the same thing could have been said last week and the week before that. And unfortunately, a lot of anxious bears got themselves run over shorting this meat-grinder rebound a little too early.

As I often say, knowing what the market will do is easy, the hard part is getting the timing right and that’s where all the money is made. Without a doubt, this market was going to pull back, the hard part is knowing when. Are we finally at that point? Great question but if we are approaching this the right way, it shouldn’t matter.

Far and away the greatest strength we have as independent traders is the nimbleness of our size. We can go from full long to full short with just a few mouse clicks. We don’t have big money’s army of analysts, supercomputers, or inside connections, but those things are not necessary if we know how to exploit our size. We don’t need to know what the market will do ahead of time because we are fast enough to react to events as they happen. Rather than short the pullback before it rolls over, we can (and should) wait for it to happen before we jump aboard that move lower.

The keys are knowing what signals to look for and then being able to recognize quickly when we get it wrong. Get in, get out, and try again. That’s the formula for our success as independent traders. With that approach, we don’t need to predict the future. We simply react to it as it happens in realtime.

Yesterday’s weak close, this morning’s early dip and finishing again near the daily lows gave us the first interesting overnight shorting opportunity in a while. For several weeks I’ve been day-trading this market because opening gaps have been large and unpredictable. But this is the first time in a while I felt like there was something worth holding.

That said, this trade needs to be done carefully. Shorting today’s weak open gave us a profit cushion going into the close. And more than that, locking-in a portion of profits this afternoon both guaranteed some profits and reduced our exposure by leaving us with a smaller position.

If the short trade doesn’t work tomorrow, it won’t hurt much between the reduced position size, existing profit cushion, and the portion of profits already locked-in. If that’s the case, we get out and try again next time. But if it works, add more at the open and see where it goes. Close weak for the third day and we follow the same formula tomorrow afternoon.

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

Apr 20

How to trade a market that lost its mind

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

As unprecedented and historic as this global shutdown has been, it keeps throwing curveballs at us that only a few weeks ago seemed too absurd to even be worth hypothesizing over.

The lastest unprecedented development was the most spectacular collapse in the history of commodity trading. $22 oil was shocking enough. Then we got barrels trading at $8 on the spot market a few days ago. But that was only warming us up for the main event.

People’s jaws were on the floor this afternoon when oil contracts for May delivery fell under one dollar. Fifty cents for 55 gallons of oil? Surely it couldn’t get any worse than that. And moments later, it did exactly that.

Traders were so desperate to avoid taking delivery of physical oil they became willing to pay people to take their oil. That’s just how bad the current situation is. And not just a dollar or two. The day closed with oil trading at minus $37 dollars! That’s right, traders were so desperate to get out of their positions they would pay you $37 for every barrel of oil you take off their hands!

How did one of the most important commodities in the world go from a coveted resource to something akin to raw sewage that requires payment to be disposed of?

But just as shocking as the collapse of May’s oil contract was the stock market’s indifference to it. The neighbor’s house was burning to the ground and the S&P 500 was too busy organizing its sock drawer to even look out the window.

Two months ago, if you told me oil would fall $55 dollars in a single day, I would have expected all financial instruments to be imploding. But not today. Today, it was just another headline the S&P 500 is ignoring.

At this point, we have three options. Argue with the stock market, fall in line, or get out of the way. No one wins an argument with the market, so please don’t do that. For our longer-term investments, buying at these levels still represents a decent discount if we plan on holding for a couple of years. For anything else, get out of the way!

There is a saying in the market, missing the bus is better than getting hit by the bus. If we don’t feel comfortable buying this strength for a long-term investment, there is nothing wrong with sitting this one out and waiting for a better opportunity. Remember, often the best trade is to not trade. Until the risk/reward lines up in our favor, wait patiently on the sidelines. That means waiting until this rebound is breaking down before shorting it. Or for the less aggressive, buying the next dip. But whatever you do, don’t allow yourself to argue with this strength.

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

Apr 17

Free Weekly Analysis and Lookahead

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis and Lookahead

The S&P 500 finished the week 3% higher and was the third up-week out of the last four. Equally impressive is Friday closed at the highest levels in six weeks. And not to be overlooked, this week’s spread between the lows and highs was the smallest in two months. As dire as the economic headlines have been, the stock market definitely seems to be coming to terms with our new reality.

Is a relatively modest 15% decline from all-time highs enough to account for the largest economic shock since the Great Depression? At this point, the stock market seems to think so. My Thursday post touched on some of the reasons the market finds itself at current levels, namely most investors believe the economy will bounce back relatively quickly. While this is part of the answer, there are also other supply and demand factors at play.

One of the bigger contributors to this limited selloff is the fact many investors have already lived through stock market crashes. Most of us were around to witness the 2008 Financial Crisis that cut stock prices in half. And the more recent example of 2018’s Christmas massacre that saw stocks tumble nearly 20% between Thanksgiving and Christmas.

What was the biggest takeaway from both of these crashes? Stocks bounce back even higher. Reactive sellers were left behind when the indexes pushed to new highs without them. Regret is a powerful motivator and these investors were not going to make the same mistake twice. Fool me once, shame you. Fool me twice, shame on me.

At least for the time being, many would-be sellers learned to hold through volatile episodes and not succumb to the panicked feeling in their gut. Rather than impulsively sell stocks again, these investors are still hanging on. And so far discipline has been rewarded with prices dramatically above the March lows.

No matter what we think should happen, when confident owners don’t sell, prices don’t fall.  While we could see prices slip over the next week or two in a normal and healthy exhale, as long as the selling remains restrained and orderly, any dip is a buying opportunity, not an excuse to abandon ship. Short-term traders can exploit this weakness, but long-term investors should stick to their buy-and-hold plan.

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

Apr 16

What’s going on with TSLA and AMZN?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

After weeks of dramatic moves, the S&P 500 finally seems to be getting comfortable at current levels. While we are still experiencing elevated volatility with 1% and 2% daily moves, they have largely been offsetting each other from day-to-day around 2,800.

While the market has been finding its footing, there are a few stocks that have definitely been taking advantage of this calm to reassert their dominance. NFLX and AMZN are inherently well-positioned to do well during these lockdown times because they cater to customers at home.

As expected, these two companies navigated last month’s stock crash relatively well, losing less than the indexes. No surprise there. But then something curious happened Monday. Investors started piling into these stocks with reckless abandon. There wasn’t a definitive headline driving this strength. Instead, retail investors were hungry for something to throw their money at and these two stocks happened to be the beneficiary.

Fundamentally, nothing changed between last week and this week for NLFX and AMZN. Neither one found the cure to the Coronavirus or unlocked the secretes to sustained fusion. These were some of the best run and best-positioned companies last week when no one was paying much attention to them and they are the exact same well-run companies this week. The only thing that changed is they are now popping up every Tom, Dick, and Harry’s stock screen. Nothing attracts a crowd like a crowd and these two mega-caps are the hottest thing going right now.

Of course, this should look familiar to anyone who’s been following the market over the last few months. In late January, we saw the same thing happen with TSLA. A company that was doing well and going about its business when all of a sudden it became the hottest trade in the market, for seemingly no explicable reason. There wasn’t a headline breakthrough. TSLA reported earnings a couple of weeks before and showed a small profit but not much happened after earnings. And then all of a sudden, one day out of nowhere, the stock started racing higher, much like NFLX and AMZN are doing today.

Like TSLA before it, NFLX and AMZN are nothing more than momentum trades. People want to get in because they’re afraid of being left out. They’re not buying AMZN and NFLX because they love the companies. They’re buying them because everyone else is buying them. And unfortunately, these things rarely end well. I warned people to lock-in TSLA profits when the stock slipped under $800 and I definitely hope a lot of readers heeded that advice. As similar as NFLX and TSLA’s stock charts look here, only a fool would expect this to end any differently.

Unsustainable moves are unsustainable. They’re great while they last, but always recognize it for what it is. Stick with what is working and ride this higher, but never let it go to your head. Make sure you stay disciplined and use a trailing stop to protect your profits. No doubt this will pop like all of the other unsustainable surges higher that came before it. Some people will make money and other people will lose money. Make sure you are one of the people who end up on the right side of this trade.

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

Apr 15

Is this market too hot, too cold, or just right?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 gapped lower at the open, making this the fourth consecutive day of large opening moves in opposite directions. One day the bulls are in charge, the next day belongs to the bears. As much passion as there is in the market, both sides have been equally wrong about this one.

Over the last few weeks, I’ve been discussing strategies to trade this rebound. Today I’m shifting gears and will get into why the market is doing what it is doing.

While it isn’t hard to point out a few historical examples of the market getting things wrong, the thing we need to remember is the market is right far more often than it is wrong. These cherry-picked instances ignore all of the other times the market got things right. This also means when the market is not doing what we think it should be doing, the very first thing we should question is ourselves. And even more important than who’s right or wrong, the market determines our profits and losses and by that measure, it is always right. Rather than fall into the argument of why the stock market should be dramatically higher or lower than it is right now, let’s figure out why it is where it is.

Tumbling 20% from the highs of only a few weeks ago is a dramatic move. But these are dramatic time and this kind of reaction is logical and expected. The world looks nothing like it did at the start of the year and that means the stock market should obviously reflect this new reality. Where we run into disagreements is if -20% is too hot, too cold, or just right.

At this point, most investors are encouraged by the moderating infection rates and they are hopeful people can start going back to work in a few weeks. This will require obvious adjustments to our old routines to include social-distancing and protective measures, but it will be a good start that gets most people back to doing what they need to be doing. There will be some outliers like concert venues and movie theaters that will continue suffering from bans on large groups, but the rest of the economy should start thawing soon. Or at least that is the market’s current expectation.

While the upcoming earnings reports will be some of the worst in history, the thing to remember is the market doesn’t care as much about what happened last month or what will happen next month, it is looking six months ahead and wants to know where we will be this fall. As bad as things look now, if the market expects economic activity to be picking back up this fall, that is how it will price stocks today. Everyone knows our economic numbers will be shockingly bad. But that also means we can assume this is already priced in. Just like the market, our attention needs to be focused on is where the economy will be six months from now.

As for this -20%, the bears think we haven’t fallen far enough and bulls believe prices are already too low. Split the difference between these two extremes and we end up right where we should be. That said, it is impossible for the market to stay at one level so we should expect these volatile gyrations to continue for the foreseeable future. But no matter how high or low we go, unless something dramatic happens (i.e. a vaccine is released or a flare-up races out of control), expect these big swings to cancel each other out and for the prices to move mostly sideways around these more moderate levels. That means buying the bigger dips and selling the bigger rebounds for the next six months.

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

Apr 14

CMU: The Art of the Trade

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 bounced back from yesterday’s modest dip and the March rebound continues reclaiming lost ground. There wasn’t a definitive headline driving this strength, instead, this relief primarily comes from a moderation of the viral infection rates. We are still a long, long way from resolving this crisis, but at least for the moment, it appears like it is no longer spiraling out of control.

Last week I shared a day-trading strategy that has been working well in this market. It doesn’t matter if the market gaps higher or lower, what we are paying attention to is the market’s first move following the open. If the market rallies, we buy. If it dips, we short. Now, when I say first move, I don’t mean five seconds after the open, but in the first five or ten minutes. Identify that move, jump aboard, leave a stop near the open and see what happens. If the first move fizzles and hits your stop, get out. If you are aggressive, consider flipping directions and going the other way. Take profits in the afternoon and be ready to do it again the next day.

Easy enough, right? Well, today gave us one of the more challenging cases. To this point, the market’s been really good about going in one direction or the other. The handful of times it switched directions midday, that reversal kept on going, making a flipped trade work well. But today’s price-action caught us in the middle. The early rally dipped back to the open and then bounced higher. How this affected a person’s trade depends on the levels they got in at, the stop they picked, and if they switched directions or not.

If a person gave their stop little extra room under the open, they were probably okay and rode the afternoon rebound higher. But if they were more conservative, this midday swoon undercut their stops and knocked them out for a small loss. If they used that trigger as a signal to enter a short trade, they got washed out a few minutes later when that midday false-alarm bounced higher.

If I person got zinged twice today, there is nothing wrong with calling it quits and trying again tomorrow. These losses are measured in cents and not a big deal relative to the profits we’ve been collecting over the last few weeks. We cannot win them all and this is just part of the game. Come back tomorrow and by then today’s trade will be long forgotten.

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

Apr 13

Don’t count this rebound out just yet

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 stumbled at the open following the long holiday weekend. Coronavirus headlines were actually fairly encouraging with infection rates moderating in a lot of areas. Unfortunately, much that optimism was already priced in during last week’s 12% surge. Now that we are at the upper end of the recent range, the market requires even better news to keep pushing higher and today’s headlines didn’t cut it.

That said, after the morning’s selling ran its course, the market held up surprisingly well. I’ve been one of the countless cynics that are suspicious of this market’s nearly 30% rebound from last month’s lows. But despite the widespread criticism, this market keeps hanging in there. And today’s price action was no different. Rather than devolve into a mass of panicked sellers, supply dried up in late-morning trade and we spent the rest of the day climbing out of that hole. While prices still finished in the red, I actually count this as a win for the bulls. When owners were given the invitation to sell, they shrugged and bought the dip instead. How much longer this lasts is anyone’s guess, but for the time being, the market is still acting well and it still demands our respect.

While odds are high the market will stumble and test support at some point, it doesn’t seem like we are at that point yet. Maybe it finally happens tomorrow, the day after, or even next week. But either way, we need to be careful shorting a resilient market. Lately, I’ve been day-trading this market because I’d rather not be caught on the wrong side of a 3%, 4% or even 5% opening gap. There is still plenty of money to be made trading during regular hours and most importantly, this allows us to exercise prudent risk management by preventing prices from leaping over our stop-losses in the middle of the night. While I might miss some profits when the market gaps in my direction, inevitably, I am also missing those days when it would have run over me instead.

I don’t need to make all of the money, just the easier, lower risk stuff. I’ll leave everything else to the gamblers. If you want to read how I’m trading this market, check out last week’s free posts.

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

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