Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, 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 young children.
The S&P 500 finished Tuesday almost exactly where it started. And not only that, this was the third close in pretty much the same spot. Regardless of what is going on around us, the market is very content at this level and reluctant to leave it.
How a person interprets this lack of movement largely depends on how they view the market. Bulls call it resting. While bears claim it is stalling. Which is it? That’s what we are going to figure out.
“If this market was overbought, fragile, and vulnerable to collapse, [last] Tuesday’s headlines and dip were more than enough to kick off an avalanche of selling. The fact prices held up tells us the ground under our feet is solid and there is a lot of support at these prices. This continues to be a strong market and the path of least resistance remains higher.
That said, we burned through a lot of demand since the start of the year and it is no surprise the rate of gains is slowing. We are quickly transitioning to more sideways than up as we approach the old highs. That means we need to be patient and expect a little more back-and-forth.”
And so far this is exactly what happened. Prices resisted the temptation to tumble while at the same time struggling to find the energy to continue higher.
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This week’s lethargic price action doesn’t change anything. In fact, it confirms and reinforces what I thought previously.
It is far easier for a market to tumble than it is to go up. Given how quickly prices fall, simply holding steady is an encouraging and constructive sign. If this market was going to breakdown, it would have happened by now on any number of bearish headlines and negative price action we’ve seen over the last few days, weeks, and months. The defiant act of resisting the temptation to fall proves this market is far more resilient than the critics and cynics want you to believe.
And having survived so many attacks from trade war, rate hikes, and slowing growth headlines, that tells us most of these headlines have already been priced in. If the first, second, and third retelling of these headlines didn’t break this market, why should we fear the fourth, fifth, or sixth? The simple answer is we shouldn’t. And so far that’s proven to be the right call. The longer a headline sticks around and the more people talk about it, the less it matters. If the market doesn’t care about these things, then neither should we.
Prices have been rallying on a reality that is turning out far less bad than feared late last year. Given how dire predictions of doom and gloom were last fall, it didn’t take much to beat those expectations. And even in the face of slowing global growth, the market is still enjoying relief that things could have been so much worse.
That said, “less bad than feared” was good enough to get us back to the highs. But to keep going, we need to transition to “good” headlines. At this point, we’re not there yet and is why the rally has stagnated. We can rest easier because we are not standing on the edge of a precipice, but we shouldn’t expect an explosive move higher either.
This continues to be a buy-and-hold market. Those with the patience to stick with their favorite long-term investments have been rewarded as the profits came to them. Unfortunately, the environment has been less good for swing-traders since the dips and bounces have been so fleeting. Sometimes the best trade is to not trade. And that has been the case here. Profiting from these small gyrations takes impeccable timing and is all too easy to get wrong.
Continue sitting on your favorite long-term investments. But keep a little cash handy for when the next opportunity pops up. We cannot take advantage of the next dip if all our money is tied up in stocks. Even though things are pretty boring right now, without a doubt, they will get a lot more exciting when we least expect it. Be ready.
What’s a good trade worth to you?
How about avoiding a loss?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM