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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.
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday was another dramatic session for the S&P 500 as prices tumbled nearly 2%. The post-election relief is long forgotten as nervous selling pushed prices back near October’s lows. But as horrific as the headlines sound, we have only slipped back to where we started the year and are just 10% under all-time highs. If a person overreacts to flat years and pullbacks from all-time highs, then the stock market might not be a good fit for them. For the rest of us, this is business as usual.
While this week’s price action slammed us underneath 2,700 support, the thing we have to keep in mind is this is a holiday-affected week. Big money managers who make millions of dollars a year are on vacation this week with their family, not toiling away in the office. Why this is important is because without big money’s guiding hand, emotional retail investors are running the show. Big money’s absence during holidays often leads to increased volatility, and the market shedding nearly 100-points over two days definitely qualifies as volatility.
But the thing to remember about retail investors is they have small accounts. That means they don’t have the firepower to drive large moves. Only big money can propel directional moves and if they’re not behind today’s selling, then we should expect the weakness to stall and reverse once emotional retail investors run out of things to sell.
It is hard to ignore 100-point moves, but if big money is not involved, then it means the price action is not relevant to what comes next. Big money always has, and always will, drive the big moves. Emotional retail investors do little more than provide noise along the way. And unfortunately today, that noise was deafening.
As I started with, if a person cannot stomach a 10% pullback from all-time highs, they shouldn’t be the market. But for those of us that have been around a while, we are thankful these fearful people are willing to abandon stocks at steep discounts. Their loss is our gain.
As for how much further this can go, that is anyone’s guess. Emotional selloffs are the hardest to predict because fearful selling begets fearful selling. While stocks are at attractive levels, that doesn’t mean they cannot get even more attraction. But if I’m buying the dip, I’m not overly worried if I’m buying a 10% discount or a 12% discount. I’ll take every little bit I can get, but I don’t need to be greedy and am more than happy to settle for good enough.
As for the bears, it’s been a good run, but now that prices are into correction territory, they need the economy to get worse for us to keep tumbling. Unfortunately, most of the time reality turns out a lot less bad than feared. Will this time turn out any different, no, probably not. But that won’t stop the cynics from shouting that we should abandon the stock market.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
On Thursday the S&P 500 gapped lower at the open, undercutting the widely followed 2,700 support level and triggering another wave of defensive selling. But in midmorning trade, supply dried up and by the end of the day, the market surged 50-points above those early lows.
Everyone knows the market moves in waves, but that doesn’t stop people from being surprised every time it moves in waves. Our bullish or bearish bias convince us each gyration higher or lower is the start of a much larger move. Last week bulls were convinced the market was racing back to the highs. This week bears claimed their long-awaited collapse was finally upon us. And you know what, both sides got it wrong. That’s because they forgot the market moves in waves.
In Tuesday’s free blog post, “Don’t fear the normal and routine”, I warned readers:
“Every dip feels real and by rule, it has to. If it didn’t, no one would sell and prices wouldn’t dip. Without a doubt, October’s correction felt real. This week’s collapse feels just as scary. But just because it feels real doesn’t make it real. In fact, all of the selling over the last few weeks makes it even harder for this dip to find new sellers. The longer this drags on, the more people sell, the fewer sellers we have left, and the more solid the market becomes.”
Guess what? Thursday’s early selloff failed because we ran out of sellers. Pundits love to tell us no one can predict the market, but it really isn’t that hard once we realize that the same things keep happening over and over. Sign up for Free Email Alerts so you don’t miss profitable insights like these.
I wish the only thing we needed to know was what comes next. Then making money would be easy. Unfortunately, that’s not how this works. Not only do we need to know what is going to happen, but more importantly, we need to know when it is going to happen. Getting the timing right is where all the money is made.
While no one knows precisely when the market will make its next move, we do know when the odds are on our side. For example, this morning we knew the market was ripe for a bounce. Number one, we remember markets move in waves. Number two, all of the selling over the last few weeks chased off a big chunk of would-be sellers and supply would be tight. While there are no guarantees in the market, seeing the dip under 2,700 support stall because supply was drying up was a great signal this was time to jump in and buy the dip.
If both bulls and bears agree the market moves in waves, then both sides should have seen today’s rebound coming. The main point of contention is what comes next. Bulls say today’s higher-low is a healthy part of the recovery process. Bears claim this bounce only delays the inevitable collapse. But as long as both sides agree we will go higher over the next day or two, there is only one way to trade this.
That said, I definitely fall in the bull camp. As we witnessed in October, crashes are breathtakingly quick. Selling begets selling and cracks turn into gaping holes. But that’s not what is happening here. Wednesday’s dip under 2,700 bounced quickly. As did Thursday’s dip under this critical support level. If the market was fragile and vulnerable, that was the perfect way to launch a tidal wave of defensive selling that knocks us under October’s lows. Is that what happened? Nope. Supply dried up and we bounced. At this point, it is harder to find fearful sellers than confident dip-buyers, and that bodes well for the market’s continued recovery.
But just because the market bounced today and things look good, don’t forget markets move in waves. That means this rebound will inevitably stall and pullback. The longer these consolidations drag on, the more volatility shrinks and the smaller these swings become. We are getting further along in the healing process and that means we shouldn’t expect this rebound to be as sharp as last weeks, or for the next dip to be as dramatic.
Of course, all of this goes out the window if we tumble under 2,700 support Friday and launch a tidal wave of defensive selling. But barring that worst case scenario, things look good and the path of least resistance over the near-, medium-, and long-term is higher.
If you found this post useful, Follow Me on Twitter so you don’t miss future updates: Follow @crackedmarket
Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
Tuesday was a back-and-forth session for the S&P 500 as early gains fizzled and we closed modestly in the red. The early strength ran into resistance near the 200dma as last week’s relief turned into this week’s second-guessing.
As I warned readers last week, the sharp rebound from October’s lows was unsustainable and a pullback was coming:
This rebound recovered nearly two-thirds of the October selloff and that is about as far as these things go before they start running out of steam….this is definitely a better place to be taking profits than adding new money. At the very least, expect prices to consolidate for a while as investors warm back up to this market. But more likely, volatility will persist and that means a dip back to 2,700 support would be a normal and healthy part of this recovery.
Three trading sessions after I wrote that, we find ourselves testing 2,700 support. Sign up for Free Email Alerts so you don’t miss profitable insights like these.
People claim no one can predict the market, but it really isn’t that hard once we realize the same things keep happening. A decisive rebound following October’s sharp correction was never in doubt. The same goes for the subsequent rebound stalling and taking a step back. The question isn’t if, but when. The hard part is getting the timing right and that is where all the money is made.
Now that last week’s relief is long gone, we find ourselves questioning this market again. Monday’s collapse under the 200dma was as ominous as it gets and that triggered a wave of defensive selling. Traders who were paralyzed by fear during October’s correction and didn’t bailout were not going to make the same mistake this time.
But the thing to remember is most people can only sell once. Once they’re out, their opinion no longer matters. And in fact, the only thing they can do is buy back in. So while a huge number of people sold over the last several weeks, their pessimism no longer matters. And in fact, their pessimism is actually bullish because they will eventually turn into the buyers that fuel the recovery. Buying high and selling low is a poor trading strategy, but the crowd cannot help itself.
Every dip feels real and by rule, it has to. If it didn’t, no one would sell and prices wouldn’t dip. Without a doubt, October’s correction felt real. This week’s collapse feels just as scary. But just because it feels real doesn’t make it real. In fact, all of the selling over the last few weeks makes it even harder for this dip to find new sellers. The longer this drags on, the more people sell, the fewer sellers we have left, and the more solid the market becomes.
Tuesday’s price action was awful and the longer we hold near 2,700 support, the more likely it is we will violate it. But what matters most is what happens next. Does that violation launch another wave of defensive selling? Or does supply dry up and prices rebound?
I think the worst is already behind us, but there are no guarantees in the market. Traders nerves are frayed and anything could happen if panic sets in. But as long as that doesn’t happen, a dip under 2,700 that stalls and recovers is a great entry point for anyone that wants to get back in. Remember, by the time it feels safe, it will be too late to buy the discounts. But if we drop under 2,700 and trigger another avalanche of contagious selling, expect things to get a lot worse.
If you found this post useful, Follow Me on Twitter so you don’t miss future updates: Follow @crackedmarket
Jani
What’s a good trade worth?
How about avoiding a loss?
For less than $1/day, have analysis like this delivered to your inbox every day during market hours.
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