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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
End of Day Update:
On Tuesday the S&P500 extended Monday’s breakout to record highs. While the gains were modest, traders were more inclined to buy these highs than take profits. But this is no surprise to regular readers of this blog. Last week I warned bulls to close their shorts proactively and take losses while they were small.
Quoting Thursday’s free blog post:
Anyone who is still short this market is probably only a little in the red. Rather than hope and pray for the selloff that isn’t happening, a smart trader admits defeat and takes his losses while they are small. This bearish trade has been given every opportunity to work, but this simply isn’t the right environment to be short. Be proactive and close a trade that isn’t working when the losses are small, rather than wait until the pain of losing money gets so strong it forces you out.
There is no magic to this. Basic market psychology and supply and demand told us the path of least resistance was still higher. In early August we tumbled when Trump and North Korea fell into a war of words that quickly escalated into North Korean missile and nuclear bomb tests. Then the Trump administration endured a rash of turnover in its senior ranks and at the same time exchanged barbs with senior Republican leaders. And finally two hurricanes did their best to pummel the Gulf Coast. Any one of those things would have crushed a vulnerable market. Put them all together and it creates a storm only the strongest market could endure. Yet that is exactly what we did.
The thing to remember is market crashes are breathtakingly fast and the only way to survive them is to sell first and ask questions later. But this latest selloff occurred in slow motion. In nearly a month of selling we only managed to dip 2% from all-time highs. That was after an endless string of negative headlines. Bears had their perfect storm, yet the market was still standing. That was the clearest warning possible that bears were on the wrong side.
As I’ve been writing for months, confident owners are keeping supply tight. While conventional wisdom tells us complacent markets are prone to collapse, what it forgets to mention is these periods of complacency last far longer than anyone expects. That’s because confident owners keep supply tight when they refuse to sell every headline and dip. If owners don’t sell the news, it stops mattering. That is exactly what was happened over the last month.
Since early August, nervous owners were bailing out of the market and selling to far more confident dip buyers. These new owners showed a willingness to own this uncertainty. In a bit of a self-fulfilling prophecy, those that confidently bought were willing to own the risk and uncertainty. Because they didn’t sell the fear, supply dried up and we bounced. News gets priced in once those that are afraid of it sell to new buyers who don’t fear it.
But that was then and this is now. What most readers want to know is what comes next. Plain and simple, expect more of the same. If we were going to breakdown, it would have happened by now. The path of least resistance is still higher. Nothing calms nerves like rising prices and this breakout to record highs is making the fears of the last several weeks fade from memory. Fear of the unknown is quickly being replaced by fear of being left behind. Big money managers are returning from summer vacation and they will start positioning their portfolios for year-end. Many of the underweight managers are coming to the realization that the dip they were waiting for isn’t going to happen. The pressure of being left behind will force them to chase prices higher into year-end.
This is a slow-moving market and I don’t expect us to launch higher, but expect the slow rate of gains to continue. A market that refuses to go down will eventually go up and that is what is happening here. Recent sellers will realize their mistake and fuel the next round of buying. I expect volatility to pick up this fall, but every dip is a buying opportunity. Stick with your buy-and-hold positions and keep adding when prices slip. This bull market will eventually break like every one that came before it, but we are not at that point yet. If you are out of the market don’t chase prices higher, but if you want to get in, be ready to jump on any dip.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
The S&P500 finished Thursday mostly unchanged. Even though we find ourselves inside a holiday shortened week, volume picked up and has been above average the last three days, something that hasn’t happened in over a month.
Summer is winding down and big money managers are finally returning to work. For most of the summer we’ve been stuck in neutral because smaller traders don’t have the firepower to drive a sustainable move. nstead every directional move fizzled and reversed because big money wasn’t there to join the buying and selling. Now that they are finally back at work, we should finally see some life come back into this market.
The big question is if institutional managers will keep throwing money at these record highs, or if they will chicken out and start taking profits ahead of the widely forecast tumble.
As a contrarian I get suspicious every time I hear something from too many different sources. And this includes current predictions of doom and gloom. It’s been a really rough few months. Healthcare reform failed in a spectacular way. There’s been a revolving door at the Trump administration. Trump’s frequent criticisms of Republican leaders is not helping either. Then there is this North Korea thing that just won’t go away and keeps getting worse. And finally two hurricanes to cap it all off.
Any one of these items is more than enough to takedown a fragile market. Combined they are as formidable as a hurricane. Yet here we stand, less than 1% from all-time highs. Surely something isn’t right.
One of the most effective ways to study the market focusing on what it is NOT doing. What should the market be doing, but it isn’t? Given this flow of overwhelmingly bearish headlines, clearly this market should be in freefall. But it isn’t. What gives?
There is a lot of headline uncertainty surrounding this market, but it doesn’t care. The thing to remember about headlines is they get priced in over time. That’s because anyone who is afraid of those headlines sells to dip buyers who are not concerned. This turnover in ownership replaces weak with strong, creating a robust foundation.
For nearly a month this market has withstood one bearish headline after another. We slipped under the 50dma for a brief period. All of this selling cleared out most owners who could be convinced to sell. Now all that is left is people who don’t care about these headlines. No matter what people think “should” happen, when there is no one left to sell a headline, it stops mattering.
This is an important thing for bears and most especially shorts to understand. You have been given a golden gift in this relentless barrage of negative headlines. There has been more than enough to cripple a vulnerable market. But the thing to keep in mind is selloffs are breathtakingly quick. Sell first and ask questions later is the only way to survive a market crash. Yet here we stand nearly a month into this “selloff”. If we were going to crash, it would have happened by now. If this relentless barrage of headlines couldn’t scare owners into selling, I don’t know what it will take.
Anyone who is still short this market is probably only a little in the red. Rather than hope and pray for the selloff that isn’t happening, a smart trader admits defeat and takes his losses while they are small. This bearish trade has been given every opportunity to work, but this simply isn’t the right environment to be short. Be proactive and close a trade that isn’t working when the losses are small, rather than wait until the pain of losing money gets so strong it forces you out.
Keep doing what has been working and that is sticking with your favorite stocks and adding on weakness. Bears need to admit their short trade isn’t working while the losses are small because the biggest risk remains to the upside. If we were going to crash, it would have happened by now.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
On Tuesday the S&P500 tumbled for the third time in as many weeks. Midday selling pushed us under the 50 day moving average, but fortunately we bottomed not long after and closed well off the lows. Volume was the highest in nearly a month and this was one of first above average volume days in quite some time.
North Korea was the primary culprit yet again as they tested a nuclear bomb over our extended holiday weekend. That was enough to send shudders through global markets. But the thing to remember is this was their fifth nuclear detonation over the last decade. If the first four didn’t trigger a massive selloff, then there is a good chance this one won’t either.
Last week we rallied when the flow of negative headlines abated for a few days, but Tuesday abruptly ended that reprieve. In addition to North Korea, Trump added political uncertainty when he distracted Congress from budgets and the debt ceilings when terminated Obama’s Dreamer program for underage illegal immigrants. Then attention turned to Hurricane Irma, a category 5 storm headed for Florida. Taken together, these three headlines were more than enough to ruin last week’s jovial recovery.
But is the rebound really dead? Three things tell us not to be so hasty.
First the late-day rebound put us back above key support. The 50 day moving average was a ceiling for most of the last few weeks. But overhead resistance often turns into support after we break through. Today’s late recovery suggests that is the case here. Rather than spiral out of control, supply dried up when we tested this key support level.
Second, volume was one of the highest days we’ve seen in recent weeks. All the other sharp down-days also included elevated volume. But rather than portend of worse things to come, these high-volume days were capitulation and we rebounded within a day or two.
Third, all of these headlines are recycled. There is nothing new here. If one of these stories was going to take us down, it would have happened already. Selloffs are breathtakingly fast. Hesitate for a moment and it is too late. Sell first and ask questions later is the first rule of surviving a crash. But this North Korea selloff is going into its fourth week. The market never gives us this much time to think rationally and act calmly before a punishing selloff.
Simple supply and demand is behind this market’s strength. Those that are afraid of Trump and North Korea have long since bailed out of the market and been replaced with confident dip buyers. That is why today’s dip ran out of sellers so quickly. If the current crop of owners didn’t sell the first or second North Korea scare, why are they going to sell this one? Today’s limited selloff tells us they held their ground.
Markets don’t give us this long to sell the top and this one is no different. If we were going to crash, there have been more than enough reasons for us to plummet. The fact we are still standing strong near the highs tells us this market is more solid than most people give it credit for. Keep doing what has been working. Stick with your buy-and-hold positions and keep adding on any dips.
As I’ve been saying all month, a market that refuses to go down will eventually go up. Don’t lose your nerve now.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
On Thursday the S&P500 extended Wednesday’s breakout above the 50dma. Despite escalating tension with North Korea and a category four hurricane, stocks continue trading near all-time highs. As I’ve been saying all month, a market that refuses to go down will eventually go up. That is exactly what is happening here.
Even though the news flow has been overwhelmingly bearish this month, stocks have barely budged from record highs. At our deepest and darkest period in August, we were down a whole 2% from all-time highs. Bears were giddy with excitement and kept telling us to wait for it. But the crash never happened. That shouldn’t come as a surprise to anyone who reads this blog. Market crashes are breathtakingly fast, not drawn out affairs. If the initial headlines couldn’t knock us down, the follow-up headlines were even less likely to do so.
It all comes down to simply supply and demand. The first North Korea headlines scared off the traders who fear such a thing. The next time those same headlines popped up, there were fewer people left to sell the recurrence. Instead, these fearful sellers were replaced by confident dip buyers who demonstrated a willingness to hold the risk. This churn in ownership is how news gets priced in and why it stops mattering.
Tuesday North Korea launched a missile over Japan, but paradoxically that was our buy signal. Everyone who feared those headlines had already sold and the market was setting up to bounce on tight supply. We capitulated early Tuesday and have been racing up ever since.
Nervous and fearful traders were wary of what they claimed was weak market. But they got it exactly wrong. Withstanding the relentless barrage of negative headlines confirmed how strong this market was. If we were vulnerable to a collapse, any one of those headlines would have sent us tumbling. The fact we stood up so well tells us this is a strong market, not a weak one.
In all my years of trading, one of the most reliable trading signals comes from identifying what the market is NOT doing. Despite all the headline uncertainty, this market was not tumbling. That told me there was good support behind these prices and the path of least resistance remained higher. That told us the latest drop in price was still a dip buying opportunity.
The last few weeks of selling purged many weak owners from the market and replaced them with confident dip buyers. This firmed up support and this bull is even stronger than it was last month. This base building process is setting the stage for the market’s next move to all-time highs. The path of least resistance remains higher and 2,500 is easily within reach. From there we need big money to start buying to keep the rally alive.
The market is up around 10% for the year. While this has been slow this summer, I don’t expect that to last. Volatility is already picking up and that will continue through the fall. While many bears warn about downside volatility, I actually think bigger risk is upside volatility. Many cynical money managers are underweight this market and they have been patiently waiting for a pullback. The latest 2% dip is about as good as it is going to get. When they realize this market is far more resilient than they thought, they will be forced to chase prices higher or else risk explaining to their investors why they lagged behind the indexes so badly this year. That desperate chase for performance is going to fuel a strong rally into year-end.
While that is the most likely outcome, there is a chance Trump and Republicans fumble tax reform and the market uses that as an excuse to take profits. This could lead to a wave of reactionary selling that drops us near breakeven for the year. That said, this is a low probability event because the fumbling, bumbling Republicans cannot get anything done and expectations for tax reform are already quite low. I doubt many people will be surprised if Trump and the GOP get nothing accomplished this year. That lack of surprise means we won’t see much of a selloff. If we were vulnerable to high expectations, we would have seen a much stronger reaction when the Senate failed to pass healthcare reform.
This is an incredibly strong market that is ignoring every excuse to sell off. Keep doing what is working. Stick with your buy-and-hold positions and buy every dip until further notice.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
Tuesday was a wild ride for the S&P500. We gapped lower at the open following North Korea’s provocative firing of a missile over Japan. But rather than devolve into another spiral of relentless selling, we bounced off the early lows and actually finished the day with small gains. It was a shocking reversal for everyone who automatically assumed the bottom falling out of this market.
I’ve been saying for weeks, the path of least resistance is higher and today’s resilience confirms that outlook. Headlines have been overwhelmingly negative in recent weeks. An escalating war of words between Trump and North Korea. A revolving door of senior advisors in the Trump administration. An exchange of sharp barbs between Trump and senior Republican leadership following the Charlottesville tragedy. The worst natural disaster to hit U.S. in over a decade. And now North Korea moving beyond words by launching a missile over Japan. If anyone knew the barrage of negative headlines that was coming, they would certainly expect the market to be dramatically lower. Yet here we stand, less than 2% from all-time highs. What gives?
Most traders focus on what the market is doing. But I find it far more insightful to see what the market is not doing. That is a far more predictive indicator of what the market’s next move because it exposes the crowd’s false assumptions. In this case, that we are vulnerable to a collapse. If we were going to crash, it would have happened weeks ago. It doesn’t take much to trigger an avalanche of selling when the market is fragile. Yet the last few weeks we withstood headline after headline. We slipped a bit and nervousness definitely spread through the crowd, but prices barely budged. For anyone that was paying attention, that resilience told us we were standing on solid ground. And each day of selling further firmed up support as nervous owners were replaced by confident dip buyers. Rather than get weaker, this market has been getting stronger. And today’s flaunting of the North Korean missile story confirms that analysis.
This reversal is as bullish as it gets. While I’d love to see us race ahead, sideways churn is just as constructive. The market isn’t following anyone’s timeline, but trust me, a market that refuses to go down will eventually go up. Trade against this strength at your peril.
Jani
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Free blog posts are published Tuesday and Thursday evenings.
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By Jani Ziedins | End of Day Analysis
End of Day Update:
On Thursday the S&P500 lost ground for the fourth-time out of the last six-trading sessions. Fear over an armed conflict with North Korea morphed into fretting over debt ceilings and bond defaults. These latest issues were brought to the forefront two-nights ago when Trump threatened to shut down the government if Congress doesn’t fund his wall.
These relentless waves of bearish headlines over the last few weeks has weighed on market sentiment. AAII’s latest investor survey shows a 6-point loss in bullishness and a mirror image increase in bearishness. The bull-bear spread is nearly 20-points under its historical average as a large number of investors are preparing for the worst.
It is easy to see why pessimism jumped in recent weeks. Tension with North Korea, key members of the Trump administration forced out, barbs exchanged between Congressional leaders and the White House, and now swelling anxiety over a government shutdown and default on U.S. debt.
Without a doubt this market should be in freefall. Yet eight-days of losses over the last three-weeks only managed to knock us down 1.6% from all-time highs. That’s hardly the panic driven selling you would expect given the headlines. What gives?
Bears claim we are on the verge of imploding. They figure it is only a matter of time before this complacent market finally wakes up. But here’s the rub, everyone already knows about these issues because it is front page news. If a group of investors is blissfully unaware, then they have their head in the sand and are unlikely to figure it out any time soon. Not only that, the dramatic swing in investor sentiment tells us these headlines are definitely affecting people’s mood and outlook.
Is there any truth to the bear’s argument that the collapse is coming, even if it is a little delayed? In all my years I’ve never seen the market ponder headlines for several days before finally deciding to plunge. It would be great if the market gave us that much time to analyze the facts and make a thoughtful and deliberate sale before crashing. Unfortunately that’s not the way this works. Market crashes are frighteningly fast and if you stop to think about what is happening, you will get run over. Market crashes are most definitely sell first, ask questions later events.
The simple truth is if the market cared about this crop of headlines, we would have crashed by now. Without a doubt this market is complacent, but the thing conventional wisdom fails to tell us is complacent markets last far longer than anyone thinks possible. This bull market will die at some point because all bull markets eventually die. But this market’s limited reaction to these waves of bearish headlines tells us this is not that time.
If anything the recent bout of negativity and string of down days is firming up support. Every nervous seller is being replaced by a confident dip buyer. This churn in ownership is strengthening this market and setting the stage for the next move higher. I am definitely not a raging bull and have a lot of concerns about this market. But I have been doing this long enough to know a market that refuses to go down will eventually go up. Don’t fight what is working.
Jani
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