Monthly Archives: February 2022

Feb 28

What if Putin does the unthinkable and how to protect ourselves from it

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

S&P 500 futures fell as much as 2.5% during Monday’s overnight session as Russia’s war with Ukraine continued over the weekend and the West tightened the sanction screws on Russia.

But those overnight losses moderated by the open of regular trade to minus 1.5% and even better, the index finished the day down a very modest 0.2%.

While volatility remains off the chart, the index is trading amazingly well given the start of the largest European invasion since WWII. But as I told readers two weeks ago, this paradoxical behavior was expected:

This phenomenon of uncertainty being worse for stocks than bad news is what allows stocks to actually rally once bullets start flying.

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Well, that’s exactly what happened. While this crisis in Ukraine has turned into the worst-case scenario as Russia launched a full-scale invasion, US stocks have actually rallied nearly 7% from Thursday’s open. That’s not what a rational person would expect, but the stock market rarely does what it is supposed to do, so this mindbending move is par for the course.

While it feels a little strange to be profiting off of this conflict in Ukraine and my heart goes out to all of the people affected by this dreadful situation, I’m a trader by nature and when I see a great trade, I cannot help myself.

And given the market’s resilience Monday in the face of escalating economic sanctions, the stock market feels pretty comfortable economically with the way the situation is progressing on the other side of the world. While a massive human tragedy, the impact on US corporate earnings will be limited and is already largely priced into stocks.

As well as the index is acting, there isn’t much to do here except lift our stops to the 4,300 region and see if there is more upside left in this huge bounce.

That said, there is one risk that hasn’t been accounted for in US financial markets and that is Putin getting desperate and using tactical nuclear weapons to beat Ukraine into submission. Flatten one Ukrainian city with tactical nukes and the US stock market will open down 25% or more.

While this scenario seems highly unlikely, that’s the way many people felt about a full invasion early last week. That makes this a good setup for a bifurcated trade. Continue following the indexes higher with a conventional trade but buy a little insurance against the unthinkable by picking up some out of the money puts.

I typically don’t mess with options, but this is one of those cases where they make a lot of sense. The other alternative is staying in cash, but it is hard to resist these profits, so I will continue taking what the market gives me while using stock options to protect my backside against the unthinkable.

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Feb 25

Why the stock market’s rally following the Russian invasion makes perfect sense

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Russia invades Ukraine and US stocks rally?!?!

This has to be some kind of gigantic mistake, right?

Luckily for readers, I published a post last week titled “Why stocks could actually rally if Russia invades Ukraine“:

The thing to keep in mind regarding events in Ukraine is markets deal with bad news a lot better than uncertainty. That’s because traders can put a price on bad news and factor it into the market. Unknow outcomes are impossible to quantify and traders tend to let their imagination get the worst of them.

This phenomenon of uncertainty being worse for stocks than bad news is what allows stocks to actually rally once bullets start flying. While no one wants to see that happen, a hot war means we stop debating what could happen and instead focus on the actual impact of the conflict. And in most instances, reality turns out less bad than feared.

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The above analysis spelled out the market’s reaction to a tee when bullets started flying Wednesday night and hopefully readers were prepared because this was a fantastic trading opportunity.

(Note: The scale of this human tragedy in Ukraine cannot be overstated and my heart pours out to all the innocent people caught in the crossfire. But this is a stock market blog and the market has a cold, cruel heart when it comes to these things.)

Not surprising, the S&P 500 reflexively gapped 2.5% lower Thursday morning after the invasion started. But that’s when opportunity presented itself and only a handful of hours later, the index closed nearly 7% above those intraday lows. Blink and you missed an outstanding trade, especially if you use 3x ETFs like I do.

Now, this isn’t to say this was an easy trade. I’ve been looking for the bounce for a couple of weeks and made some premature buys along the way. But by being disciplined and following my trading plan, I made those “mistakes” with partial positions and by getting in and out early, those “failed” trades were mostly breakeven and some even returned a few bucks of profit.

While no one is getting rich trading these mini bounces, that was never the intent. I was big game hunting and I wasn’t going to let a few miscues detur me. Especially when those miscues were so inexpensive.

While some criticized these premature buys, I didn’t give up and my trading account is a lot fatter today because of it.

I cannot predict the future and I don’t know which bounce will be the real bounce. To deal with that, I simply buy all of the bounces because that means I will never miss one. And bounces that don’t work, no big deal, I get out at my nearby stop and try again next time

Rarely is making money this easy or fast. Hopefully, you didn’t miss this trading opportunity.

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As for what comes next, there isn’t much to do except lift our stops and see where this goes. If the emotional selling resumes, no big deal, I take my profits and wait for the next big bounce. I’m happy to keep riding these waves as long as the market is willing.

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Feb 23

Is smart money getting out before things get worse?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Wednesday was yet another bad session for the S&P 500 as it shed a further 1.8%, leaving the index 12% under January’s highs.

Nothing new happened Wednesday to drive this latest round of selling and instead, this continues to be “sell before things get worse” sentiment convincing people to abandon stocks at 8-month lows.

But to be perfectly honest, if I were going to sell, I would have done it weeks ago at the highs, not after stocks tumbled to multi-month lows. Which coincidentally enough, is exactly what I did back on January 5th:

Does [January 5th’s] dip stand any better chance of succeeding than all of the other aborted selloffs the market shrugged off last year? Probably not. But as nimble traders, why do we need to pick sides? As easy as it is to jump out and get back in, why would anyone want to ride through a near-term dip if they didn’t have to?

Well, as is turned out, the market’s “near-term dip” crashed another 500 points from that day’s close. Boy am I glad I switched to defense back when everyone else was too “fat, dumb, and happy” to be bothered.

These are the savvy moves we make when we follow the market’s lead and ignore what everyone else thinks “should” happen.

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While I cleared out of the market on January 5th, I bought a few of these bounces on our way lower. That’s because emotional markets bounce hard and fast. If we get in early enough, within hours we build a nice profit cushion protecting our backside.

While most of these bounces turn out to be false bottoms and stocks ultimately continue lower, buying the bounces early allows us to move our stops up to our entry points and sometimes even a little higher. (Imagine that, being wrong on a trade and still making money. It doesn’t get any better than that!)

While no one is getting rich profiting off these failed bounces, the most important thing is we stay in the game. While the first, second, or third bounce might fail, one of them is going to work and it will heap huge profit on those that get it right.

My approach to profiting from this volatility is simple, jump aboard these bounces early, often moving my stops up to my entry point, and then waiting for the real bounce. If this turns out to be another false alarm, no big deal, I get out and try again next time.

Traders dream of low-risk, high-reward setups. Well, this is one if we have the courage to trade it. Buy the next bounce; start small, get in early, keep a nearby stop, and only add to a position that is working. If the next bounce doesn’t work, no big deal, get out and try again the next day, the day after that, or the next week.

This emotional market is well on its way to getting oversold and that means the next bounce will be hard and fast. Don’t be left standing on the sidelines when it happens.

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Feb 22

It is time to sell before things get worse? Or is this a golden opportunity?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Monday was another painful session for the S&P 500 with the index falling to the lowest closing level since early October.

Putin moved Russian troops into eastern Ukraine and the West responded with a small list of economic sanctions. In fact, the sanctions were so modest that stocks actually rallied on the news. (Investors cheered that Russian energy exports were excluded.)

Okay, so stocks are at the lowest levels in several months and a big chunk of the bad news is already out there. Does that make this a good time to be selling stocks “before things get worse”? Or is this a better time to be looking at these discounts as the next golden opportunity?

While it never feels this way in the heat of battle, risk is simply a function of height, meaning the lower we go, the lower the risks have actually become.

Go back a month and a half when stocks were setting record highs and everyone was “fat, dumb, and happy”. With hindsight as our guide, how risky were stocks at that point? Yeah…

Fast forward a few emotional selloffs later and how risky are stocks now that they’re down 10%? Hmmm…

At the very least, we can say stocks are 10% less risky simply because they can only fall another 90% before hitting zero.

But we know the index cannot fall to zero, so current risks are actually a lot lower than that. (If the index falls to zero, civilization has ended and money is worthless, so our portfolios don’t really matter anymore.)

If this selloff falls 15% before bottoming, that means nearly 70% of the risk has been removed from the market. Does that sound scary? No, not really.

And more than just figuring out the rapidly diminishing downside risk, are people actually worried about what’s going on in Ukraine? Are they selling stocks because they think this crisis on the other side of the world will wipe out the American economy? No, of course not. No one thinks that. Instead, they are selling for no other reason than they think other people are going to sell.

I’ve been doing this a long time and doing something simply because you think someone else is going to do something is a really bad trading strategy.

Savvy traders buy and sell based on what the market is doing, not what they think other people are going to do. And down 10% on news that really doesn’t affect US markets is a far better time to be eyeing these discounts than rushing for the exits.

I’m looking for the next bounce and you should be too. Stocks closed pretty well Monday afternoon and there is a good chance this strength will continue Tuesday. Hesitate and these buying opportunities will be gone before you know it.

Start small, get in early, keep a nearby stop, and only add to a trade that is working.

Follow those simple rules and buying bounces is a low-risk/high-reward trading strategy.

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Feb 16

Why we can safely ignore rate hike headlines

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Wednesday was another choppy session for the S&P 500 with the index spending most of the day in the red before a late surge of buying pushed it above breakeven.

Stocks picked themselves up off of the intraday lows after the Fed’s meeting minutes revealed they still planned on a March rate hike. While this was consistent with previous Fed statements, some investors were relieved the minutes did not contain even more hawkish undertones.

While that explanation sounds plausible, the real truth is everyone who fears interest rate hikes has been abandoning ship since early January. And after six weeks of selling, we are running out of fearful owners that still have stocks left to sell.

At some point, everyone who wants to sell a headline will have gotten out. And all of those fearful sellers were replaced by buyers demonstrating an indifference to those same headlines when they bought despite them. And that is the magic point when those headlines stop mattering.

Six weeks is a long time and stocks have long since stopped falling on these same recycled “rate hike” headlines. That means it is safe to assume those headlines are priced-in and we no longer need to worry about more of the same. When the market doesn’t care, we don’t care.

No doubt headlines can get worse and the Fed can blindside the market with a more aggressive rate-hike schedule. But as long as the Fed sticks to their original plan, the worst of the selling is already behind us.

As for Wednesday’s price action, this was a bullish reversal. An opening gap lower failed to attract follow-on selling and prices closed the gap and finished just above breakeven. Bears had the perfect opportunity to break this rebound and they blew it.

If this market was truly overbought and vulnerable, prices would have fallen by now. A market that refuses to go down will eventually go up. That means January’s bounce is alive and well. Plan your trades accordingly.

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