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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 slipped 1.1% Tuesday after it failed to hold Monday’s nice gains.
While it would have been more fun to watch stocks rally for a second day in a row, testing and bouncing off of recent lows isn’t a bad consolidation prize.
The first bounce in any attempted rebound rarely succeeds and Monday’s fizzled bounce fits that description. But encouragingly, even though the index undercut Monday’s lows on Tuesday, the selling stalled almost immediately. That tells us there isn’t a lot of extra supply sitting underneath the market. Instead, most owners seem content holding through a minor violation of recent lows. And when owners don’t reflexively sell, supply dries up and prices bounce, which is what we saw Tuesday afternoon.
Even though the index finished more than 1% in the negative, Tuesday was actually fairly constructive. As anyone that’s been doing this for a while can tell you, the first thing a downtrend needs to get turned around is to stop going down. And at least for the last couple of sessions, this market stopped going down.
No one knows for sure what the market will do Wednesday after the Fed announces the next rate hike and lays out its expectations for the next few months, but seeing prices 550 points under recent highs means a big portion of the near-term downside has already been realized.
As scary as buying feels right now, the market has been acting decently the last two sessions and these reduced prices mean the risks of buying here are equally reduced.
Now, I’ll be honest, I’m not excited to be buying this near-term stability, but that’s the way all of my best trades feel in the beginning. (It’s the easy trades that typically cause the biggest problems.)
As much as I think stocks will rally after the Fed’s statement turns out “less bad than feared”, if the waves of selling return, I’m more than happy to admit I’m wrong, pull the plug, and even go short again if the selling accelerates.
Long but standing next to the exits is the way I’m approaching Wednesday.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 bounced Monday, adding a respectable 0.7% and ending a two-day losing streak. That said, Monday’s gains still leave the index near multi-month lows and August’s relief rally is ancient history.
All eyes are squarely on the Fed and Wednesday’s interest rate decision. But more important than what they do this week, investors are mostly interested in hearing the Fed’s plans for future hikes. Will it be a return of the dovish commentary that kicked off the summer rally? Or will Powell stick with his assertive tone that triggered this fall swoon?
My money is on Powell standing his ground. But there is a big difference when he says these things at 4,300 and when he says the same thing at 3,900. One price incorporated a lot of optimism and left us vulnerable to disappointment. The other is bracing for a stern talking too and it won’t catch many people off guard.
If prices were still at 4,300, I would be concerned about what the Fed says on Wednesday. But 400 points lower, there is already a lot of disappointment reflected in these levels and we could actually see stocks rebound on “less bad than feared” if Powell sticks to what he said in Jackson Hole last month.
Markets are always swinging between “too low” and “too high”. The August rally obviously got a little too carried away. But now that we are closer to the summer lows than the highs, there is a lot less risk in buying these levels.
I never buy dips, but I will be the first in line when prices bounce. And Monday’s bounce off of the opening lows was a great opportunity to get in because it allowed us to manage our risks by placing a very sensible stop nearby. If the bounce keeps going Tuesday, great, we add more and move up our stops. If the selling returns, no big deal, we pull the plug on our partial position at Monday’s intraday lows and start looking for the next bounce.
While it feels foolish to buy ahead of the Fed’s next rate hike, the best trades always start this way. By the time it feels good, it will be too late.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Thursday was another rough session for S&P 500 as the index shed an additional 1.3%.
So much for the post-Labor Day rebound. But this wasn’t a surprise for readers of this free blog. As I wrote Wednesday evening:
Bouncing 0.3% on the heels of -4.3% bloodbath is downright pathetic. Stocks rebound from oversold levels hard and fast. And since Wednesday’s bounce was neither hard nor fast, that tells us the market is not oversold yet…at this point, the wind is blowing in the other direction and momentum is clearly lower. Don’t relax because it is about to get worse.
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And as expected, the S&P 500 tested and violated 3,900 support Thursday. Unfortunately, dropping a handful of points under support doesn’t count as capitulation, meaning things need to get even worse before they can get better.
Now don’t get me wrong, I’m an optimist at heart and I’m looking for the next bounce, but we need a little more near-term pain before we break through to the other side. Maybe stocks fall hard Friday morning and that signals capitulation. Or maybe the selling doesn’t exhaust itself until Monday or later next week. But at this point, we still need to drive real fear through stock owners’ hearts before this will bottom and bounce. Until then, look out below.
Tuesday’s crash was shortable. We could continue holding the short through Wednesday’s pathetic bounce. And Thursday’s minor violation of 3,900 was only the warmup act, telling us to stick with the short trade into Friday.
What’s coming on Friday? More pain.
But the important thing to remember about short trades is they always end in a hard and fast bounce, so don’t get greedy. Just when this trade looks like it is unstoppable is when we need to pull the ripcord and lock in those short profits because holding a few hours too long will wipe out a big portion of our profits.
And when we bounce, be ready to grab that next wave higher because those first few hours will be very profitable. Maybe the bounce arrives Friday. Maybe it comes Monday or later next week. But it will be here very soon and we need to be ready to jump aboard as soon as the selling climaxes in a spectacular and obvious way.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 bounced 0.34% Wednesday. While this would count as a respectable performance under most circumstances, unfortunately, these are not normal times.
Bouncing 0.3% on the heels of -4.3% bloodbath is downright pathetic. Stocks rebound from oversold levels hard and fast. And since Wednesday’s bounce was neither hard nor fast, that tells us the market is not oversold yet.
The optimist sees prices holding above 3,900 support. And without a doubt, Wednesday’s lack of follow-on selling brought some much-needed relief to warry stock owners. But Tuesday’s selling was emotionally charged and if there is one thing we know about emotional selloffs, they don’t bounce neatly off of support. Instead, they crash through support, send everyone scrambling for cover, and then bounce only after the crowd has given up hope.
Have we gotten to the point where all hope is lost? It definitely doesn’t feel like it.
Now, don’t get me wrong, I love buying the biggest down day of the entire decline because that often signals capitulation. The difference between those buyable crashes and Tuesday’s selloff is the latest tumble wasn’t plunging to fresh lows. Instead, we simply slipped back to levels from last week.
While a 4% bloodbath will get anyone’s attention, it doesn’t count as capitulatory selling until we are falling to levels no one thought was possible only a few days before. And since we were at these levels a few days ago, this doesn’t count.
No doubt Wednesday’s bounce could carry a little further on Thursday, but at this point, the wind is blowing in the other direction and momentum is clearly lower. Don’t relax because it is about to get worse. How much worse is anyone’s guess, but a terrifying violation of 3,900 support is clearly in the cards.
How much further we go under 3,900 is still up in the air and we will learn a lot more about the market’s mood when we get there. If supply dries up after violating widely followed support, then the bounce is near. If the panic selling resumes, hold on to your hats.
Of course, after this crashes through support and everyone else is panicking, that’s when we start looking for the next buyable bounce.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 crashed more than 4% Tuesday after the monthly inflation report came in higher than expected.
The panic selling wasn’t triggered because inflation continues accelerating. In fact, August’s 8.3% reading was under June’s 9.1%. The problem is the July and August stock market rebound was largely based on hopes inflation was moderating even quicker than this. And August’s stubbornly high inflation report dashed those hopes, sending stocks tumbling.
Now, before we throw the baby out with the bath water, Tuesday’s selling only pushed the index back to levels it was at several days ago. But this is one of those half-full, half-empty things. The half-full person sees an index still holding above 3,900 support. The half-empty person sees all the air underneath us if 3,900 support fails.
Will 3,900 support hold? That’s hard to say. But the thing we know for sure is emotion, and thus volatility, is off the chart. No matter what happens next, the move will be oversized. Either a hard and fast rebound from oversold levels or a spectacular crash through near-term support.
Lucky for us, we are nimble traders, so we don’t have to guess ahead of time. Instead, we wait for the market to make its next move and then we jump aboard.
While there is no way to predict a 4% crash, that doesn’t mean we can’t navigate these gyrations successfully. I am fully willing to admit I came into Tuesday’s session long. Last week’s rebound was acting well and there is no reason to abandon a trade that’s working. But lucky for me, my trading plan kept me safe. I buy bounces early and that extra margin made all the difference on Tuesday.
Tuesday’s open gap jumped my trailing stops and when the early bounce failed to stick, I had no choice but to pull the plug. And since I bought my positions last week, that still meant collecting some profits. Definitely not the profits I had in mind Monday afternoon, but on a day when everyone else is running around with their hair on fire, pulling smaller than expected profits isn’t a bad problem to have.
And it’s a good thing my trading plan pulled the plug early Tuesday because the index fell another 100 points before the session was over. This won’t rank anywhere near this year’s most profitable trades for me, but it will probably be one of my better trades because trading well doesn’t always show up in the P&L. Avoiding a loss is just as important as making money.
(I made some quick money shorting the afternoon swoon, but that was an opportunistic trade and not a strategic move.)
Now it’s time to wait and prepare for the next bounce…
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Monday nicely higher.
A midday step-back tried to unwind some of these gains, but rather than join in the selling, most owners shrugged and prices quickly bounced back near the intraday highs.
If last week’s rebound was built on a pile of sand, the lunchtime swoon was more than enough to trigger a larger wave of follow-on selling. But so far most owners are comfortable holding for higher prices, meaning there is some substance to these prices.
We’ve been waiting a while for the back half of September and now that it’s finally here, we can start taking the market’s price action more seriously. That’s because institutional money managers are back at work and getting ready for the final months of 2022.
While we shouldn’t expect a dramatic change in the market’s behavior overnight, we can put more faith in any of the signals it gives us. And so far, it seems like big money is fairly comfortable with prices at these levels since they haven’t hit the sell button yet.
Maybe this changes tomorrow or next week, but so far, things look pretty good.
Hold the bounce, lift stops, and see what happens. There isn’t much else to do here.
Hold with stops spread across the mid-4k’s. Momentum is still at our back and so far most owners are resisting the urge to sell.
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