Why bears keep getting it wrong

By Jani Ziedins | End of Day Analysis

Feb 01

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Wednesday was Fed day, and as expected, it took the S&P 500 on a wild ride.

The initial knee-jerk reaction was lower, but as I warned readers, this first move is often misleading and we don’t want to jump aboard anything too quickly. Here’s what I wrote Tuesday evening:

Don’t jump on the first knee-jerk reaction Wednesday afternoon because it often goes in the wrong direction, but it won’t be long before the market can no longer hide its true intentions and it starts the next multi-day move. If it’s up, buy it. If it’s down, get out of the way…

Once Powell got a few minutes into his press conference, a wave of relief spilled over the market and prices went from -1% to +1% as fear of the worst went flying out the window. Which, also wasn’t a surprise, again quoting what I wrote Tuesday evening:

As for what comes next, recent gains leave the market vulnerable to a slip if the Fed doesn’t say all of the right things. But once we work our way through that volatility over the next few sessions, I expect the “less bad than feared” rebound from the October lows to continue. The only question is if it continues from 4,100, 4k, 3,900, or 3,800. And while I consider myself bullish, the trader in me would love to see this fall to the lower end of that range before bouncing.

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Well, unfortunately for us, Powell said all the right things Wednesday afternoon and I didn’t get lucky enough to buy big discounts from impulsive and panicked sellers at much lower levels, but such is the market. Sometimes it gives us great trading opportunities, other times we have to settle for good. This happens to be one of those good times.

While it is easy to parse the Fed’s statement to justify why the market rallied on the news, there are just as many reasons stocks could have fallen on the very same statement. As has been the case for a while, this continues to be a half-full market and it keeps focusing on the positives. If it wanted to go down, there are more than enough excuses for prices to fall. But by this point, all of the naysayers have sold and once they are out, their opinion no longer matters.

If this market was fragile and vulnerable, Wednesday’s knee-jerk selling would have accelerated lower. Instead, supply dried up and prices bounced on less-bad-than-feared. Something that refuses to go down will eventually go up. Expect Wednesday’s highs to get even higher over the next few days and weeks.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.