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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 reclaimed nearly all of yesterday afternoon’s tumble after traders realized Trump’s threats to suspend stimulus negotiations were more bark than bite. Within hours, Trump backpedaled and promised to sign any bill that put money into voter’s taxpayer’s pockets.
This reversal alleviated investors’ fears and prices quickly returned to recent highs. And we should have seen this coming. Yesterday evening I wrote, “the dip might even turn out so modest and fleeting it could be hard to take advantage of.” Well, there you go. Blink and you missed it.
Tonight we have the vice presidential debate. If there is anything more inconsequential than the vice presidential debate, I can’t think of it. So yeah, expect investors to forget about this nearly as quickly as bored voters flip the channel.
The market continues trading well and has been above 3,300 support for nearly two weeks. If stocks were fragile and vulnerable, we would have crashed by now. Instead, September’s pullback is just that, a pullback. Nothing unusual or alarming about a step-back and cooling off following a 6 month, nearly non-stop run from the March lows. Two-steps forward, one-step back.
Expect the sideways chop to continue until the election. But as long as we get more up than down, things are going well. If the index crashes back under 3,300, we will have to reevaluate, but until then, there is nothing to stress about. (This is our last-line-of-defense stop-loss. That said, a savvy and nimble trader will recognize looming weakness and get out long before the market reaches our last-line-of-defense.)
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
Tuesday started out well enough. Early sideways trade transitioned into a decent afternoon rally. That is until Trump threw cold water on the market and surprised everyone by announcing all stimulus negotiations are suspended until after the election. That proclamation sent stocks crashing more than 2% from those afternoon highs in a matter of minutes.
If there is a silver lining to this afternoon’s tumble, stocks quickly found support between Monday’s open and Friday’s close and held in this region through the final hour of the day. The index slumped a little further in after-hours trade but not dramatically so. At least to this point, this looks more like concern than panic.
We will learn a lot more about the market’s mood Wednesday. Dramatic corrections like early September and huge crashes like last February get started and they don’t stop going for several days. If prices hold up reasonably well Wednesday afternoon, this latest development is not turning into the next crash.
For a fundamental analysis of the market’s disappointment, this is a delay and not a termination. A stimulus deal will eventually get done, it just won’t happen as quickly as investors were hoping. Delayed gratification leads to dips, not crashes. As long as the market remains above 3,300, stocks are in pretty good shape. And who knows, the dip might even turn out so modest and fleeting it could be hard to take advantage of.
As for how to trade this, the market has been acting well since September’s bottom and smart money was riding this wave higher. This afternoon’s sharp tumble threw a wrench into those plans. Even though stocks didn’t undercut recent lows near 3,320, it still made sense to take some risk off the table and lock-in a portion of our recent profits.
As I often remind readers, it is much better to be out of the market wishing you were in than in the market wishing you were out. There is nothing wrong with taking some risk off the table when we get blindsided by something we don’t fully understand. Our clearest thoughts and analysis comes when the pressure is off and sometimes it only takes selling a small fraction of our position to gain that clarity.
As for Wednesday, wait to see what happens tonight and tomorrow morning. If the market finds its footing, get back in. If we get hit by another round of reflexive selling, get out of the way and wait for the next bounce. My hard stop is near 3,320 and if we fall under that, I’m out no matter what*. (The lone exception is if we gap under that level at the open. I will give the market 15 minutes to find a bottom and bounce before selling.)
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Zoom (ZM) is one of this year’s biggest Covid winners, up over 600% since January 1st. You have to be living under a rock if you haven’t heard of this company either because of their ubiquitous video conferencing app or its meteoric stock.
While ZM has been on a jaw-dropping run this year, more recently, prices have stalled under $500. Is this the end of the line for ZM? Or just another pause on our way higher?
A few weeks ago I told subscribers to be careful as the stock gapped up near $500 following blow-out earnings. While it’s great to own a stock on days like that, gaps are dangerous things because they have a tendency of retreating and filling. And that’s exactly what happened over the next several days.
One of the most obvious things about stocks is before they make a big move, they start with a small move. The most obvious signal ZM was in trouble was undercutting the gap’s intraday lows the next day. That was as clear of a signal to get out as they come.
And the thing to remember is just because we sell a stock doesn’t mean we are giving up on it. When the risk/reward moves against us, it makes sense to lock-in some of those heady profits.
A few days later the stock bottomed after filling in most of the gap during September’s larger equity pullback. But this stock was too hot to stay down long and prices quickly pushed back to $500. If a person still liked the stock, there was plenty of time to buy back in at lower prices and ride this one back to $500.
But as soon as the stock broke through $500 and retreated back under the psychological level, that told us it wasn’t quite ready for the next leg higher and it needed to consolidate recent gains. Take profits again at $500 and wait for the next breakout.
I don’t think this stock’s run is over, but I would be hesitant about buying it under $500. I’d rather wait for it to break above $500 first. As I often tell subscribers, it is better to be a little late than a lot early.
Jumping in at a clearly defined level allows me to set a nearby stop and limit my risk. If the entire market continues slumping, this stock could easily retest $400 support before climbing up to $600. There is no need to ride this down and be tempted into a poorly timed sale near the lows. I perfectly happily give up a few dollars if it allows me to get in at a better-defined level where I can manage my risk.
As I said, I still like this stock but I want to see it break $500 first. Start small, get in early, keep a nearby stop, and only add to what is working.
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By Jani Ziedins | Weekly Analysis
Free Weekly Analysis:
Global markets were rattled Friday morning after Trump revealed he contracted Covid-19 and the S&P 500 crashed 1.5% at the open. That said, stocks quickly found their footing and spent the rest of the day trading above those early lows, closing down a “less bad” 1%. Most significant for traders is the index continued respecting 3,320 support.
While this wasn’t a great way to end the week, the index still added 1.5% over the last five days in its first positive performance since late August. It is about time!
So far, Trump is only exhibiting minor symptoms and even in his age group, severe complications are highly unlikely (only 1 out of 20). But even if he develops a bad case, this is a human development, not an economic event and it will not affect the equities markets in a lasting way. There is a very clear chain of succession and strict protocols will prevent any significant uncertainty or disruption. Without a doubt, this would affect the country’s psyche and be another historic/tragic event for 2020, but it will not affect the economy in a meaningful and lasting way.
That said, the market’s initial reactions isn’t always based on logic and reason, especially in times of extreme uncertainty. This has been a volatile several weeks for stocks and it doesn’t look like that will change anytime soon. But as long as stocks remain above last week’s lows, the market is trading well enough to earn the benefit of doubt. Until we crash under the lows, approach every dip as if it is on the verge of bouncing. (Only after we crash under recent lows should we consider shorting.)
As I wrote Thursday:
Any breakout must cross 3,400 and any retreat will fall under 3,320. Those are our tripwires. Buy the breakout and short the breakdown. Start small, get in early, keep a nearby stop, and only add to what is working. If we stick to that plan, it doesn’t matter which way this goes next. Be prepared for a head-fake or two along the way but as long as we get in early and get out early, the risks are pretty low.
Despite Friday’s dramatic headlines, nothing changed. Short the breakdown and buy the rebound. Start small, get in early, keep a nearby stop, and only add to what is working. If the first trade doesn’t work, pull the plug and try again. When it works, take profits and do it again next time.
Expect this extreme volatility to stick around until after the election and that means every bit of up will be followed by a bit of down. Get in early and take profits quickly. As long as we trade confidently and proactively, this is a target-rich environment.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Thursday modestly higher and remained above 3,300 for the fourth consecutive session.
It’s been a good seven days for the index as it reclaimed 180-points from last Thursday’s lows. But these gains leave us near overhead resistance and the rate of buying has slowed down. That’s not a surprise. This remains a volatile period for stocks and every bit of up is typically followed by a bit of down.
Given the headline environment and downward price pressure, trading sideways is actually constructive. It’s only been a few days, but the longer we hold recent gains without retreating, the less likely another major fall becomes.
That said, a big chunk of recent buying came from short-squeezes forcing bears to buy against their will. While short-squeezes trigger some of the most impressive surges, they are not sustainable by themselves because A) most investors don’t short and B) these people are not buying because they want to buy. To keep going higher, we need to recruit an entirely new class of buyers, i.e. those with cash that have been avoiding this market to this point. That is a much harder sell.
If we hold these levels for a few more days, previously nervous owners regain their confidence and those with cash start having more faith in these levels. With the temporary short-squeeze and dip-buying already behind us, we need voluntary buyers to take over and keep pushing prices higher.
As for how to trade this, it’s pretty straight forward. Any breakout must cross 3,400 and any retreat will fall under 3,320. Those are our tripwires. Buy the breakout and short the breakdown. Start small, get in early, keep a nearby stop, and only add to what is working. If we stick to that plan, it doesn’t matter which way this goes next. Be prepared for a head-fake or two along the way but as long as we get in early and get out early, the risks are pretty low.
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