All Posts by Jani Ziedins

Why Did This Happen?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 finally climbed through 2,100 resistance Tuesday on below average volume. The last time we found ourselves this high, the rebound stalled the next day and we tumbled back to the low 2,000s. Will this time be any different?

It was hard to identify a bullish catalyst that fueled these gains. The biggest headline was a disappointing manufacturing report showing the first contraction since 2012. If we put our “inverse-logic” hat on, maybe traders were hopeful this revelation would further delay the Fed’s impending rate-hike. But that wishfulness is a stretch since the Fed already recognized a stronger dollar and slowing global growth would pressure exports. If traders were buying this headline, they were grasping at straws.

The most likely explanation is the one I’ve been talking about for weeks. It is getting harder and harder to find owners willing to sell their stocks regardless of the headlines. If terrorism and a NATO nation doing a Russian jet won’t spook stock owners, are one or two points on a manufacturing report going to make a difference? Given today’s price-action, apparently not.

While we have countless reasons to sell-off, it is far more insightful to look at the market’s response to these bearish headlines. Rather than argue with the market and demand it go lower, we should acknowledge this uncanny strength in spite of the bad news. If we are open-minded enough to listen, the market is telling us it isn’t bothered by these widely known issues because they are already priced in. While a stubborn trader refuses to believe bad-news could be priced in near all-time highs, what he is failing to account for is where we would be without these economic and political headwinds. 2015 has largely been a bust because we are trading at the same levels the year started at. This is in comparison to the nearly 20% yearly gains we’ve averaged over the last six-years. If we continued to receive positive economic news throughout the year, there is every reason to expect we would trading near 2,500. That means slowing global growth, a strong dollar, slumping energy prices, and a sluggish US recovery have already taken 400-points out of our market.

It’s been a bumpy ride this Fall as we digested these headlines. Over the last four-months, nervous traders have been given plenty of excuses and opportunities to bail out. If the headlines didn’t scare them out, then no doubt the plunging prices did. But just as things looked their worst, we bounced. This recovery wasn’t driven by good news, it came from running out of sellers. Anyone who wanted to get out sold their stock at a steep discount to a far more courageous dip-buyer who demonstrated a clear willingness to hold these risks. Flushing out weak owners and replacing them with confident ones is what solid bases are built on. These new owners bought when the hysteria was at its worst, so it shouldn’t surprise us when they shrug off far more trivial headlines. As long as they remain confident, supply stays tight and prices continue defying “logic”. Don’t think about what the market should do, figure out what other traders are thinking and trade the resulting supply and demand. Strength in the face of bad news is extraordinarily bullish and only a fool would argue with this market.

Jani

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What Just Happened?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It was a dramatic day for the S&P500 in this holiday shortened week. A NATO nation intentionally shot down a Russian fighter jet and fears of a military escalation sent traders scrambling for cover. European markets plunged 2% on the news and the selling spilled over to US markets when we opened. But by midmorning the reactive selling stalled and we found support at 2,070. Not only did the market find a bottom, but by the close we recovered all the losses and finished in the green. Without a doubt this counterintuitive price-action left a lot of bears scratching their heads.

Russia is clearly upset about what happened and the world is anxious to see what happens next. Realistically Putin only has two options, retaliate or complain. While a military escalation between Russia and the West is terrifying to contemplate, Russia would suffer tremendously if he chose this route. Putin is most definitely a bully, but he is not a madman. He has little to gain from a direct confrontation with NATO and everything to lose. Inflammatory rhetoric is the only sensible tool for him to wield because he cannot afford to do any more. Maybe he could withhold oil and natural gas, but even that is cutting off his nose to spite his face because this would do far more damage to the Russian economy than Europe. Traders waking up to this realization is what allowed us to recover from those early, reactive losses.

Since this is a holiday week, most big-money, institutional investors are on vacation. Without their guiding hand, we often see increased volatility as smaller and more impulsive traders take over. Had these events occurred during a more typical week, most likely we would not have fallen as far since cool-headed money managers would have snapped up the irrationally discounted stocks. Without big money’s help this morning, the only thing that saved us was running out of sellers. The thing that kept these losses relatively modest was the fact that we’ve seen a tremendous amount of turnover through the last few months. August’s plunge purged most of the weak-kneed owners and replaced them with far more confident dip-buyers. Anyone who bought the fear and uncertainty over the last few months clearly has thick skin and they demonstrated that again today by not reacting to this mornings headlines. While most people are confused by the market’s reaction today, if you understand the underlying factors, this modest dip and decisive rebound make perfect sense.

As for how to trade this, it is hard to get more bullish than this type of response to bad news. If we won’t sell off on falling energy prices, slowing global growth, a surging dollar, disappointing earnings, rate-hikes, terrorism, and now military conflict with Russia, it is hard to imagine a scenario that will scare these confident owners into selling. Bearish headlines don’t matter if no one sells them. Given this environment, plan on another Santa Claus rally this December.

Jani

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Who Bought the Dip?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Wednesday produced the second 1.5% up-day this week as the S&P500 launched through 200dma resistance. The headline catalyst was Fed releasing their monthly meeting minutes. While the crowd assumed the market needs never ending easy money to keep this rally rolling, today we surged on the strongest hints yet of an imminent rate hike. Has the market lost its mind? Or is the crowd looking at this the wrong way?

Something that trips up a lot of traders is they assume there must be a reason behind every price move. Why did we drop last week? What made us go up today? The financial media lives off of this hunger for explanations. And just like everyone else in the market, rather than admit they don’t know the answer, journalists will gladly make something up. We expect them to give us reasons, not say “I don’t know”. They claim we rallied today because of the Fed meeting minutes. Had we sold off instead, no doubt they would have just as effortlessly spun the same data into a bearish tale. I’m not being critical of journalists because they are giving us what we ask of them. Filling our needs isn’t their fault. The problem lies with us and always needing a reason.

Armed with this “information”, traders further compound the problem by assuming every small move is the start of something larger. We like to draw long trend lines from small data sets. Last week’s 90-point pullback was the start of a 300-point plunge through 2015’s lows. At least that is what it felt like Friday. But that’s not what happened. Instead we find ourselves up nearly 70-points and the week is barely half over. What happened?

Everyone knows markets go up and down. They know we take a step-back for every two-steps forward. We all know it is better to buy stocks when they are cheap and sell them when they are expensive. Anyone can look at the middle of a chart and identify the obvious tops and buy-points. But once our eyes drift to the far right edge of the page, we forget everything we know. All of a sudden a very routine and buyable dip transforms into a terrifying cliff. Or a big runup feels like safe and comfortable place to buy instead of a what it really is, the last chance to take cover before the storm.

While I had no idea what the headlines would be, in my November 5th blog post I warned readers that we were setting up for a very normal and healthy pullback following a 200-point rebound from the October lows. Then in my November 12th blog post I said this was the pullback we were waiting for so instead of run scared, take advantage of the discounts. After the fact these seem like brilliant calls, but that is grossly overstating the amount of brain power it takes to see these moves for what they are, simple swings in supply and demand. We sell when the crowd is buying and buy when the crowd is selling. It doesn’t get much easier than that. Rather than get freaked out by the headlines and the far right edge of the chart, remember what you already know. It only takes a moment to find the obvious answer if we clear our mind of all the noise.

Jani

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One-Step Back

By Jani Ziedins | Intraday Analysis

S&P500 daily

End of Day Update:

The S&P500 sliced through the 200dma as it slumped 1.4% Wednesday. This move leaves us just above 2,040 support that comes from earlier in the year. Volume was barely average, telling us there wasn’t a lot of reactive and emotional selling today.

Nothing like a little selloff to revive bears’ hopes and dreams. Whether you were watching TV or reading online streams, plenty of people believe this is the “BIG ONE”. But here is the thing, dig back in your memory and recall a time when all the pundits successfully predicted a big selloff before it happened. If you are struggling, don’t worry, it’s not your memory that’s failing you, it’s the pundits. Now don’t get me wrong, most of these people are exceptionally intelligent and insightful. There is also a lot of truth to what their ideas. But what trips them up is the basic laws of supply and demand. When the crowd is convinced we are headed lower, how do you think they are positioned? Once a pessimist sells, they lose their vote and are merely cheerleaders. And right now it feels like we have a lot of people rooting for the market to go lower. The reason people are so quick to jump on the “this is it” bandwagon is because memories of September’s fear and regret are so fresh in their mind.

The biggest headline these days is December’s looming rate hike. In a WSJ survey, 92% of economists predicted the Fed will boost interest rates next month. For all practical purposes it appears like there is universal belief the Fed will finally act. Monetary tightening for the first time in nearly a decade has people predicting doom and gloom for our economy. Of course many of these same people also called for runaway inflation and $10k gold because of the Fed’s “reckless” money printing. If they got the first call wrong, there is little reason to believe they will get it right this time. Further, the conversation shifted to rate hikes as soon as Quantitative Easing wrapped up last Fall. If anything, Janet Yellen has been dragging this out, so it should not be a surprise or shock to the systems when it finally happens. People don’t get hit by the bus they see coming, so this rate hike will be a non-issue.

While people are scared by this selloff, this is just another buyable dip on our way higher. In my November 5th post, I warned people that we should be preparing for a very typical pullback following a large rebound. Sixty points later, that is exactly where we find ourselves. Two-steps forward, one-step back. Technicians frequently find Fibonacci patterns in directional moves. This would be a retracement of 24%, 38%, 50%, or 62%. Following a 225-point rebound, these are pullbacks of 55, 85, 112, or 140-points. We’ve already passed the 55-point mark and 85 isn’t very far away. While we don’t want to catch a falling knife, an interesting entry would follow the market slicing through support and recovering those losses on huge volume. This would be the capitulation day that chased of the last of the sellers. Traders who miss a big run always hope for a pullback that will let them get in, but all too often they lose their nerve when the market gives them what they were asking for. Embrace discounts, don’t fear them.

Jani

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Who is the Next Buyer?

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 slipped modestly Thursday, but this was mostly a placeholder day ahead of Friday’s monthly employment report. October’s breathtaking 200-point rally kicked into overdrive following September’s big employment miss. Will October’s employment launch a similarly impressive move?

I cannot begin to guess what the jobs number will be. Maybe we have another big miss. Or maybe economists lowered their expectations so much that it will be an easy beat. But the truth is even if I knew the number ahead of time, I’d still be clueless about how the market will react to it. We vacillate so frequently between ‘good is good’ and ‘good is bad’ that it is challenging to simply figure out which way is up. But rather than guess what the number will be or how the market will react to it, there is a better way.

Everything always comes back to supply and demand. It makes no difference why people are buying, only that they are buying. Same goes for selling. This means we no longer need to worry ourselves over whether ‘good’ is good or bad. The only thing we care about is if people are buying or selling the news. So the question of the day is, “Who is the next buyer?” Find that answer and we unlock the market’s next big move.

To figure out where we’re going, we start with where we came from. Two-hundred points over four-weeks tells us there was a lot of desperate buying in October. Buyers were forced to offer higher and higher prices in order to persuade reluctant owners to sell. Value buying, dip-buying, short-covering, breakout buying, and good old fashioned chasing, we saw it all in October. And that’s what launched us from the lowest levels of the year to near record highs almost overnight. As for what comes next, we need to identify that next enthusiastic buyer.

Near record highs, we can cross value buyers off the list. Same goes for dip-buyers. If there are any shorts left in the market following a 200-point beating, clearly they don’t feel pain and any further gains are just as unlikely to convince them to cover. We smashed through almost every resistance level and moving average on our way higher. The only meaningful level we haven’t crossed is all-time highs above 2,130. But again, if a breakout buyer didn’t buy the previous key levels, is 2,130 really going to get them off the couch?

The one plausible category left is the chaser and given all the selling we saw in September, there are plenty of regretful sellers afraid of being left behind. But while a retail trader might buy after a 200-point rebound, institutional investors are far more stubborn. They are experienced enough to know a pullback is just around the corner and will patiently wait for a hot market to cool off.

And so here we are. I have no idea what the employment number will be or how the market will react to it. But I know that no matter what the knee-jerk reaction is, it is going to be really hard to find new buyers to keep these sharp price gains going. Keep that in mind as you try to figure out how to trade Friday’s employment report.

Jani

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Fear of Heights

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Good is Good Again

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 continues to defy the skeptics as it surged to 2,090 by Wednesday’s close. October’s breathtaking rebound leaves us 2% from all-time highs, something unimaginable only a few weeks ago. I was a member of the buy-the-dip camp, but even this recovery caught me by surprise.

Wednesday’s headline event was the Fed’s policy statement that held interest rates at current levels, but left the door wide open for rate hike in December. The market initially sold off on the prospect of near-term tightening, but it quickly found its footing and rallied decisively into the close. Volume registered at the highest levels since the last Fed meeting.

It appears the market is slowing moving back to a more traditional mindset where good news is good and bad news is bad. For several years we went through a period where the market cheered bad news because that meant a continuation of easy money. But we’ve seen the opposite reaction in recent months. September’s selloff followed the Fed’s no-hike decision, while this afternoon’s rally came after strong hints of an imminent rate hike. This suggests stock prices are no longer dependent on the Fed’s generosity. Instead traders are responding more appropriately to September’s global growth concerns and this month’s relief that the situation turned out less bad than initially feared.

While it is nice to find ourselves in the green for the year, we must be cognizant of where we came from. Two-hundred points over a few week period is a stunning move, but everyone knows the market moves in waves. Without a doubt these two-giant leaps forward will be followed by a step-back at some point. Will we run out of buyers at 2,100? Are traders ready to chase the market above all-time highs? Lets not forget that the reasons for August’s plunge are still as real and present as they were two months ago. It won’t take much to stoke those fears again. While I am happy to see the market recover from an emotional and irrational selloff, it feels like this buying frenzy is just as questionable.

Like always, long-term holders can continue holding. Those with cash should resist the temptation to chase after such a huge move. While momentum is clearly higher and will likely challenge 2,100 resistance, we know a step-back is coming. The patient trader will wait for the inevitable vacuum of demand that follows every panicked buying frenzy.

Jani

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Levels to Watch

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 slipped under 2,020 support Wednesday, reversing from early gains. Volume was below average, telling us that not a lot of owners were worried by this 0.6% loss. That can be a good or bad thing depending on how you choose to read it. The bullish interpretation is confident owners create a solid foundation when their stubborn resolve keeps supply tight. However bears will remind us that capitulation reversals happens on high volume. The last couple of days of light volume means we haven’t shaken the tree very hard. A fair number of weak owners are still hanging on and could easily turn into nervous sellers if we slip any further.

This was only the fifth downday since late September. Over that breathtaking stretch, we surged nearly 150-points and recovered more than half of August’s selloff. Seeing a little red on Tuesday and Wednesday is not unexpected or a bad thing. Everyone knows healthy markets take periodic steps back and is most likely what this is. The only questions are when, how long, and how much.

Technicians often spot 38% and 62% retracements of the prior move (Fibonacci). Applied to our 150-point move, that would be a 57 or 93 point pullback. Currently we’re only 20-points from the recent highs, meaning there is plenty of additional room to fall. Unfortunately the 38% and 62% values are only valid from the top of the move and we won’t know until after the pullback where the actual top was. While this method cannot tell us when the market will peak, it gives us an idea of the magnitude of pullback we should expect. A 20-point dip doesn’t come close, so either we haven’t finished sliding, or 2,040 isn’t the top. In a few days we will have our answer when we keep slipping, or bounce and continue higher.

We are quickly moving into earnings season and that is taking the focus away from Asian and European markets. While there isn’t a lot to get excited about by our sluggish earnings, at least we are no longer being held hostage by overseas stock markets. The challenge with interpreting earnings is anticipating the market’s reaction. It was fairly comical when Wednesday morning’s headlines told us stocks were up on encouraging earnings, while later in the afternoon the same financial journalists blamed the selloff on disappointing earnings.

With so many companies reporting, traders can find plenty of evidence to prove whatever bias they harbor. If they are looking for an excuse to sell, they will find it. If they are looking for a reason to buy, there will be plenty of justifications. This means the mood of the market is far more important than the actual results. After such a strong run, it seems like those with cash are taking a half-full view of the situation. The last few days we’ve run into resistance every time the market pushed up against 2,040. This shouldn’t be a surprise since this provided support through most of 2015. What is support often turns into resistance that appears to be the case here. Real or self-fulfilling, those with cash don’t want to chase stocks higher than 2,040 and that lack of demand is keeping a lid on prices.

What does this all mean? If earnings come in as expected, then a pullback to the 50dma would be healthy and represent a good buying opportunity. On the other hand, if key earnings start missing badly, then the global selloff will flare up and we could easily undercut recent lows. Finally, if we blow past 2,040 resistance, there isn’t a reason to chase the breakout since we know a 60-point pullback coming. Let the market peak and then come back to you.

Jani

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Should We Believe in this Rebound?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 slipped modestly Tuesday, but there is nothing unusual about pausing and catching our breath after a two-day, 90-point rebound. Volume was near average, showing few were concerned about this sideways churn.

Friday morning U.S. stocks were punished when employment missed expectations, but moments after that weak open prices launched an explosive rally that pushed us back to the upper end of the trading range. At this point it is hard to say if traders bought the dip because bad news is still good, if the bad news was less bad than feared, or if people were following the herd and buying because everyone else was buying. The difference is critical because knowing who was buying and why they were buying tells us how sustainable this rebound is.

Chasing and short-squeezing are two of the least sustainable forms buying because these are a short-lived phenomena. These buyers don’t believe in what they are buying, they are simply reacting to what everyone else is doing. And as soon as the wind shifts, so will their trading. On the other hand, buyers who were excited about bad news delaying the Fed’s rate-hike are also misguided. We are deep into the region of diminishing returns where additional easy money will have little impact on prices. We need real economic gains to fuel the next rally leg. Delaying a 0.25% rate increase by a few weeks isn’t going to help corporate earnings or the economy. We already saw this realization when the Fed’s “no hike” decision lead to the most recent 100-point selloff.

The last possibility is less bad than feared. This 10% correction was driven by fear of a global slowdown taking us with it. The logic assumes a strong dollar and weak overseas demand would crush our export economy. But so far the data isn’t supporting this correlation.  Europe and Asia have been slowing for quite a while, but have yet to make a serious dent in our recovery. Without a doubt these are headwinds we have to fight against, but they haven’t been substantial enough to reverse our growth or hiring gains. The latest data points continue showing growth and hiring, meaning maybe things are not as bad as feared.

The first two reasons to buy this rebound are deeply flawed, but the last one is the real deal. While it is hard to get in traders’ heads, how the market acts in coming days will tell us who bought and why they bought. Chasing, short-squeezing, and buying bad news are all flawed trading decisions and if this bounce was built on that type of foundation, it will crumble within days. On the other hand, if traders are growing increasingly confident in our economy as they realize the fallout from a global slowing isn’t as bad as they initially feared, they will start buying with increasing conviction. That will show up in stable, supportive prices near 2,000.

The most constructive behavior we could see over the next couple of weeks is overseas selloffs that are met with a shrug when they reach our shores. No longer reacting to foreign weakness tells us this story is priced in and we can stop worrying about it. That will be our sign to jump in and ride the year-end rally back toward recent highs. But if we cannot hold recent gains, then we’re not ready yet and undercutting August’s lows is a very real possibility. But not to fret, this is just another opportunity to buy stocks at cheaper prices as we form a double-bottom.

Jani

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Employment on Deck

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Stocks closed modestly higher, but it was a respectable performance since we were down 20-points midday. Volume was average as most traders await Friday’s monthly employment report before making their next move.

The tail continues wagging the dog as our early stumble was driven by German weakness. While U.S. and German markets often trade in parallel, it’s because Germany’s export economy is heavily dependent on U.S. consumers. As goes the U.S., so goes Germany. But the opposite is not true. Germany consumes a nominal percent of U.S. output, so a slowdown in the German economy is barely a speed bump for us. That is why it is not appropriate for U.S. equities to be held hostage by German and Chinese markets. These countries need us, but we don’t need them. While a global slowdown is not helpful, it is not fatal to our economic recovery. Without a doubt our markets will break this nonsensical link when traders realize our fortunes are not as tightly tied to the rest of the world as they currently fear. The upcoming employment and earnings season will show just how marginal of a role the slowing global growth story impacts us.

The last few days has given both bulls and bears something to crow about. Today was the third day in a row we rebounded from midday selloffs and finished higher. If stocks were teetering on the edge, these early plunges were more than enough to push us into the abyss. The fact we resisted such an easy excuse to breakdown tells us the market is not as fragile as it feels. However, the daily chart looks horrible and we are clearly in the middle of near- and medium-term downturns. Guilty until proven innocent is the name of the game and until we see real buying push us above 2,000, every bounce should be met with suspicion.

The most interesting setup would be a sharp selloff that shoves us under August’s 1,860 lows on historic volume. But rather than devolve into another steep leg lower, supply dries up and we bounce. This would be the last hopeful holdouts capitulating and the formation of a solid double-bottom reversal pattern. While the market rarely gives us what we want, we can always hope for a great buying opportunity like this. Until we breakout, breakdown, or form a compelling double-bottom, expect prices to remain stuck in the 1,900ish / 2,000ish trading range.

Jani

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Tail Wagging the Dog

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 rebounded sharply, rocketing past 1,900 on the last day of the third quarter. Volume was above average, but suspiciously light given the size of today’s move and the traditional end of quarter repositioning.

It would be great if there was a solid reason behind these gains that we could build a sustainable rally on. Unfortunately this was another example of the U.S. markets taking their cues from overseas traders. Strong gains in Asia and Europe early Wednesday morning lead to our gap higher at the open. While there are plenty of reasons to believe in the U.S. economy, linking our stocks to overseas economies is not healthy. Few believe China and Germany are done falling into their respective holes and if we continue pricing US equities based on how foreign markets trade, today’s rebound will be undone in a matter of days.

The most important thing we need to see is our markets decouple from the rest of the world. Normalcy will return when we start trading on traditional metrics like earnings, revenues, employment, and GDP. There is a good chance this will happen over coming weeks as US employment and third quarter earnings season diverts our attention from how the DAX or Shanghai traded overnight. The first sign the correlation is breaking down will be the end of these wild one and two percent gap openings. Next will be more days where our trade bears little resemblance to the moves in Asia and Europe. No one payed much attention to foreign markets a couple of months ago and it is only time before traders stop looking at their terminals in the middle of the night before deciding to buy or sell US equities.

Without a doubt overseas weakness is a headwind, but a 10%+ correction has done a good job pricing it in. Europe and Asia have been slowing for a while and if they posed a serous threat to our economy, it would have shown up in our numbers already. Resilient third quarter earnings will prove that fears of overseas economies dragging us down are unfounded. When that happens, it will kick off our year-end rally as international traders move their money to the most attractive economy on an ugly block. In the meantime, expect elevated volatility as long as our markets remain linked to overseas trade.

Jani

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What to Look For

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 fell out of bed Thursday morning, dragged down by German markets that are still coming to terms with the Volkswagen emissions scandal. This is just another example of how our stock market is fixated on global-macro trends instead of the more traditional domestic and company specific data. But in an impressive midday reversal, the S&P500 found its footing near 1,910 support and erased most of the early losses. This intraday change in direction looks similar, but in the opposite direction as last Thursday’s “no hike” fizzle that kicked off this week-long, 100-point selloff. Could this price-action signal a dramatic change in direction just like it did last week?

The first thing to cross off the list of stuff to worry about is this Volkswagen emission scandal. While this will destroy a historic level of auto industry shareholder wealth through recalls and government fines, this is a very company specific story. This didn’t expose a weaker than expected economy or consumer, so it won’t have a lasting impact on future earnings for the broader market. The relevant stocks will take a beating to reflect the staggering loss of shareholder wealth, but then everyone moves on.

Last week we stalled above 2,000 because few buyers were willing to chase prices higher. But 100-points lower, the value proposition is dramatically different. On Thursday, value buyers were finding deals they couldn’t refuse and owners were unwilling to discount their stocks any further. Elevated demand and tightening supply put a floor under the market and kept the selling from spiraling out of control.

Most likely this bounce will push us up to 1,950 support/resistance. From there it is anyone’s guess as to what happens next. But the great thing is no one is forcing us to pick sides right now. Instead we can wait for the market to show its hand before we decide which way to trade this move. Stall and stumble? That means August’s 1,860 lows are the next stop as we dig out a double bottom. On the other hand, if fear evaporates and the recent dip priced in the inevitable rate hike, then we could continue higher and this slip is simply a higher-low on our way up. The key is how traders respond to 1,950. Do they buy the strength? Or do they sell before the inevitable fall? While I cannot tell you right now what will happen, the market will let us know soon enough.

Jani

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The “No Hike” Selloff Continues

By Jani Ziedins | Intraday Analysis

S&P500 daily

End of Day Update:

Stocks continued the “no hike” selloff as the S&P500 lost another 1.25% and closed fractionally above 1,940 support. Volume was restrained, not even reaching average levels.

Investors were hoping the Fed would keep rates near zero and in order to avoid further spooking fragile markets, the Fed acquiesced when they decided not to hike last week. But rather than cheer, waves of traders have been selling the news ever since. We are still well within the heart of the 1,900 to 2,000 trading range, so stock owners are not panicked yet, but you can feel the uneasiness growing with each leg lower.

There was no real headline driver for Tuesday’s global selloff, but overseas markets were hit hard and that selling spilled over to U.S. shores. And as I write this, it looks like we will have more of the same Wednesday because Asian and S&P500 futures are sharply lower. While we are still well within the trading range, it won’t take much to push us down to recent lows where the uneasiness will give way to fear and panic.

When the herd is panicked and we see our screens filled with red, it is hard avoid being infected with the same feelings of dread and despair. But a further selloff is actually the most bullish thing that can happen. The two most common reversals are the v-bottom and the double-bottom. V-bottoms are sharp and fast. We’re nearly a month into this correction, well past the window of opportunity for a v-bottom to save us, so we can eliminate that as a trade setup. The next best savior is the double-bottom. For those that are not familiar, a key attribute of the double-bottom is having the second dip undercut the first dip’s lows. That means the most bullish thing that could happen to us involves us falling under 1,860. This is something we should be bracing ourselves for, but rather than fear this capitulation bottom, we should welcome it and even trade it to our advantage.

Of course we might not go straight to 1,850, or even get there at all. The next likely level to bounce off of is the 1,900-1,910 region. We could easily see an intermediate support at these levels. Where we go from there largely depends on how traders respond. If we see full panic and volume is off the chart, that could be our capitulation bottom. But if the bounce is feeble and fails to recover 1,950, the new lows under 1,850 are likely. While it will be uncomfortable, if we know what is coming, then we will be better prepared to trade it well.

Jani

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The Fed Speaks

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The Fed decided to keep rates near zero, citing global economic uncertainty and low domestic inflation as their justifications. This lead to dramatic volatility and the S&P500 traversed nearly 100-points intraday as it tried to figure out what all of this meant. The initial dip gave way to a huge surge higher, but we were unable to hold those gains and closed near the day’s lows.

It is hard to find anything encouraging about Thursday’s price-action. We got the “good” news people were hoping for, but it failed launch a sustainable move higher. No doubt the previous five-day rally priced in a big chunk the “no hike” pop, turning this into a “buy the rumor, sell the news” trade. That’s what happened intraday and we will see if the fizzle continues Friday.

This week’s rally pushed us to the upper end of the recent 1,900-2,000 trading range. The post-Fed pop launched us well above 2,000 resistance, but it didn’t take long for the breakout buying to stall and we tumbled back under 2,000. It seems few were willing to chase prices higher and that lack of demand could be a huge obstacle in coming days. This left us with an ugly intraday reversal on the chart that stands out like a sore thumb. Thursday’s pathetic close could easily make prospective buyers take a step back as they wait to see what happens. If enough people pause and asses, it becomes a self-fulfilling prophecy as prices continue tumbling on weak demand. This downward spiral will continue until it reaches levels so low that dip-buyers can no longer resist the temptation. Since we are near the upper end of the recent consolidation, we have a ways to fall before we will reach those irresistible levels.

While people were relieved the Fed didn’t do anything to threaten the fragile global economy, that relief could very easily turn into anxiety because the global economy is so fragile the Fed worried it might not be able to handle a nominal 0.25% interest rate hike. While the medicine tastes great, maybe we should be worried about why we need it. Between the weak technicals and renewed worries over global growth, we could easily see the market slip back to 1,900 support. If this dip reignites the emotional selling, we could easily undercut last month’s 1,860 lows.

In the near-term we should be prepared for more volatility and weakness, but this is most likely giving us another opportunity to buy stock closer to recent lows. We need to undercut 1,860 to form a double-bottom and while that will feel scary, it will be another great chance to buy stocks even cheaper.

Jani

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Four Ways to Trade the Fed’s Decision

By Jani Ziedins | End of Day Analysis

End of Day Update:

It was another strong day for the S&P500 as we closed at the highest levels since the August correction began. As worried as people have been, we’re up four out of the last five days and that lone down day was only a modest eight point decline. Without a doubt buyers are growing increasingly confident. Is this sustainable, or the highs before we tumble back into the trading range?

It is hard to get away from the Fed’s rate hike since that is the only thing people are talking about. Will they hike or won’t they hike, that is the question on everyone’s mind. As a contrarian, I like to trade against the crowd, but opinion is divided on this issue. Without a consensus to trade against, it is hard to figure out what comes next.

Even if I knew ahead of time what the Fed was going to do, it wouldn’t do me any good because I cannot begin to guess how the market will respond. That’s because with such a divided opinion, it is hard to figure out who has been buying these last couple of weeks. Is this a short-squeeze? Or have we finally run out of fearful sellers and are rebounding on the resulting tight supply? Maybe those that are hopeful the Fed will keep rates artificially low are buying ahead of that expected announcement? Or are people are buying for no other reason than other people are buying? Without a popular opinion driving this move, it is hard to figure out what is behind it.

But all is not lost. While we might not know what the market is thinking right now, it will show us its hand following the Fed’s decision. There are four possible outcomes and four ways to trade it.

Rate hike followed by a rally:
This is a bullish signal because it tells us the market no longer cares about China or rate hikes. Everyone who fears these things sold weeks ago and when there is no one left to sell a headline, it stops mattering.

Rate hike followed by a selloff:
Over the medium-term this is a bullish outcome because the rate-hike debate and uncertainty is finally over. While the knee-jerk reaction was to sell the news, a 0.25% bump in short-term interest rates will not have a material impact on our economy. There will be plenty of value oriented buyers ready to jump in and snap up discount shares from fearful sellers. While we could slip to the lower end of the trading range, even undercutting the 1,860 lows, the Fed hiking rates tells us they believe in this economy and so should we.

No hike followed by a rally:
This is most likely a temporary relief rally that will fizzle. Delaying the rate hike by six or twelve weeks isn’t going to make much of a difference and isn’t something to get excited about. In fact, I would be concerned about the Fed not hiking rates because it tells us they think our economy and stock market are too fragile to handle such a nominal rate hike. If they’re worried, then we should be too.

No hike followed by a selloff:
A bloodbath following good news will be our signal to stay clear of this market. If the Fed doesn’t believe in this market, we could smash through the lows. The situation is further compounded because the cloud of rate hike uncertainty continues indefinitely. The market can handle bad news because it is quantifiable. This not knowing is what drives it crazy.

While it is hard to read the market ahead of time, the way it responds to the Fed’s decision will tell us a lot about what traders are thinking and how they are positioned. This will be interesting!

Jani

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To Hike, or Not to Hike?

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

Tuesday’s 1.3% gain in the S&P500 was one of the best looking day’s we’ve had in a while. We closed at the highest levels in weeks as fear of a bigger selloff continues to dissipate. But there are a lot of flaws in this strength.

Volume was light as few people traded ahead of the Fed’s rate hike decision due later this week. This reduced volume leaves the market vulnerable to larger moves because smaller traders have greater influence. Another concern is Tuesday’s intraday trade was fairly one-direction, suggesting more of a short-squeeze than legitimately fought for and earned gains. This notion is s further reinforced by the lack of a fundamental or headline catalyst behind this move. It felt like a day where people were buying for no other reason than other people were buying. While a legitimate reason can emerge to justify this move, without something substantial to support us, this strength will likely fizzle. And lastly we are approaching the upper end of a recent trading range that we retreated from a couple of times previously. In range bound markets, relief often gives way to fretting. Until we breakout and hold those gains, we should be more inclined to take profits at these levels than continue chasing prices higher.

It is hard to avoid the rate hike chatter. Will they? Won’t they? If our economy is so fragile that its fate rests on the outcome of a 0.25% change in short-term interest rates, then we have far bigger things to worry about.

Personally I think the Fed should raise rates because that is consistent with all the things they’ve been telling us. Markets are far better at dealing with bad news than uncertainty. A 0.25% rate hike now or in six or twelve weeks isn’t going to make much of a difference to anything. But the market is paralyzed by now knowing what is going to happen. Postponing the rate hike will only extend this largely unproductive debate over when the first hike will be.

We saw the same anxiety and fear ahead of Taper, but once the Fed announced Taper and started reducing its bond purchases, the market embraced that certainty and predictability, paradoxically rallying throughout the entire taper process. I have little doubt the same will happen if the Fed lays out a responsible and methodical rate hike plan. That eliminates the uncertainty hanging over us and finally lets the market focus on our steadily improving economy.

In the near-term, I have absolutely no idea how the market will react to either a hike or delay. Give me the Fed statement early and I wouldn’t know how to trade it. Only after the fact will we be able to come up with the “official” explanation for why the market rallied on a hike/delay or plunged on the hike/delay.

While we cannot get ahead of the Fed announcement, the way the market trades afterward will go a long way to telling us its mood and where it wants to go next. Will it embrace the half-full story, or obsess over the half-empty? The ideal bullish setup will be a knee-jerk selloff on a rate hike, but then the selling quickly exhausts itself and we break through 2,000 resistance. That would be the capitulation bottom of the correction. This reversal could play out over hours or weeks, but it would be a strong sign the market will rally into year-end. The harder price action to get behind will be a pop if the Fed keeps rate at zero. That is far more likely to fail since what the Fed is really telling us is they don’t think our economy is strong enough to handle a 0.25% bump in interest rates. Surely not a ringing endorsement of our economy.

Jani

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Building Support

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 exploded higher today, one trading session after plunging lower last Friday. This followed two huge up-days, which was proceeded by a gigantic plunge, that was on the heels of an epic multi-day rally. And so on, and so forth, you get the idea. It’s been a volatile few weeks as we consolidate the recent selloff and build a base between 5% and 10% under recent highs. While these moves have been dramatic and emotional, the non-stop plunge has yet to resume, a good sign prices are stabilizing in the 1,900s.

This volatility has been driven by economic uncertainty in China and the Fed’s looming rate hike. But while it doesn’t feel like it, down nearly 10% makes this one of the safest times to own stock all year. Risk is a factor of heights and this is the lowest we’ve been in quite some time. Common sense tells us the lower we go, the closer we are to the eventual bottom. Rather than fear this market, we should embrace it. While there is still the potential for further downside, no matter how much lower we go, the downside will still be less than the fall experienced by those that bought a couple of months ago. Take advantage of this new-found safety due to lower prices, don’t run from it.

China continues to dominate traders’ thoughts and is the source of most of the market’s anxiety. I have little doubt the situation in China will continue to deteriorate over coming months, but it will matter less and less as the market grow accustomed to the situation and it becomes priced in. Very few US companies rely on the Chinese consumer as a major source for their corporate profits. That’s why a weak Chinese economy will have a limited impact on S&P500 earnings. In fact, since we are an import driven economy, we will actually see a net benefit as companies input costs fall due to weaker Asian currencies. The knee-jerk reaction was to fear a Chinese slowdown, but it won’t take long before traders realize the actual situation is nowhere near as bad as feared.

As for the near-term trade, we are forming a trading range between 1,900 and 2,000. One day’s euphoria gives way to the next day’s stampede for the exits. Closing near 1,970 leaves us near the upper quarter of this range, making us more vulnerable to another overnight hand grenade out of China. This a better level to be locking in profits than chasing the bounce. The safest way to trade this market remains to be either ride out the waves by sticking to a buy-and-hold plan, or stay on the sidelines until there is a little more price stability. The choppiness will likely last for another week or two as the Chinese situation gets priced in and we wait for clarity on our Fed’s rate hike intentions.

Jani

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How to Respond to a Crisis

By Jani Ziedins | Intraday Analysis

End of Day Update:

I’m changing things up a little tonight. Normally I write about the daily fluctuations in the stock market, but given the dramatic and emotional moves in recent days, a bigger picture analysis is warranted. This blog post is for all the nervous owners out there that are not sure how to respond to these uncertain times.

As I write this, overnight stock futures are plunging nearly two-percent because of continued Asian weakness. No doubt this will carryover to our shores Tuesday morning and compel many owners to sell their stocks at even greater discounts. Their rationale is to sell now before things get worse.

But as investors and traders, the first questions we should ask ourselves is if we want to buy stocks when they are cheap or expensive? The natural follow-up is if we want to sell when they are cheap or expensive? While the answers are obvious, this isn’t consistent with the way most people trade.

Many owners are desperately selling their stock right now because they want to get out before things get worse. “What if this is another 2008?” they are asking themselves. Surely we all want to avoid that type of disaster again. Not so fast, some of the best buys I made over the last 20-years were in 2008. Not as a trader, but as an investor.

I rarely write about the buy-and-hold portion of my portfolio because there really isn’t much to talk about. Every month I add to my long-term investments and then forget about them. Through thick and thin, they just sit there. Sometimes they go up in value, other times they go down. But every month I keep adding to them because I believe in the US economy and that our stock market is the best place to grow my money until I need it 20 or 40 years from now.

While we only recently climbed out of the “lost decade” where our market was flat from 2000 to 2013, those were actually fantastic years for the long-term investor who dollar-cost-averaged into the market over that entire period. When everyone was selling and reducing their 401k contributions because of the dotcom bubble and financial crisis, I kept buying more. Those buys in 2002, 2003, 2008, and 2009 have more than doubled. All my buys in 2004, 2005, 2010, and 2011 are up in the high double digits. While the stock market had a “lost decade”, my buy-and-hold account had a phenomenal decade because I continued buying when other people were selling.

Think about that tomorrow as you contemplate selling your stock or decreasing your 401k contributions because of this Asian uncertainty. Personally I’d love to see another 2008 because that would be another fantastic buying opportunity for the buy-and-hold portion of my portfolio.

Jani

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Where Did the Dip Buyers Go?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It was another dramatic day in the market as the S&P500 gave up a healthy 2% rebound to end the day solidly in the red. Volume was elevated, but well off of Monday’s historic levels.

The market opened sharply higher on the coat-tails of an impressive European relief rally. But our rebound never built momentum and traded sideways under 1,950 for the first half of the day. While it was nice to see the emotion fueled selling take a break, the lack of further progress revealed those with cash were not ready to buy the dip. Without demand to extend the rebound, we started sliding lower midday. The selling picked up speed as fear of regret compelled many to dump their stock at any price. This became a self-fulfilling prophecy that accelerated until we closed near Monday’s lows.

Those that thought they could hold the dip lost their nerve and bailed out this afternoon. While this close looks atrocious technically, it is actually laying the foundation for the inevitable rebound. Weak and fearful owners were selling shares to far more confident dip-buyers willing to hold this volatility. While people try to outsmart the market with fundamental and technical analysis, it trades on nothing more than supply and demand. Once we exhaust the supply of fearful sellers and replace them with confident owners, prices will stop falling regardless of what the headlines and gurus claim it should do.

The hottest topic in the financial press is if the Fed will raise interest rates in September. Many claim there is no way the Fed can raise rates when the stock market is struggling. My question to these people is what changed since the last Fed meeting? Has employment gone up? Has GDP gone down? Outside of the chronically weak energy market, have we seen deflation flare up? I cannot think of anything that materially changed in the U.S. economy since the Fed’s last meeting. The only thing that is different is the Chinese stock market’s bubble that burst, but is this Chinese gambler’s paradise really something our Fed should be making policy decisions on?

Which of the following two scenarios scares you more?

A) The Fed raised interest rates 0.25% today because they are confident the U.S. economy no longer needs artificial support.

B) The Fed chose to keep rates near 0% today because they believe the economy is too fragile to withstand a modest bump in rates at this time.

I don’t know about you but I would be far more fearful if the Fed doesn’t raise interest rates than if they do. And I suspect this will also be the market’s reaction. Expect prices to rally on a modest and sensible rate hike, and fall if the Fed thinks the economy is too weak to withstand a rate hike.

But Fed decision is weeks away and most of you want to know how to trade this market on Wednesday. The most bullish thing this market can do is sell off sharply Wednesday morning and then bounce into the green Wednesday afternoon. That would mark a capitulation bottom. A less compelling bottom would be continuing to consolidate between 1,850 and 1,950. While the consolidation would be volatile and choppy, this is the easier bounce to jump on board because the recovery will be far slower than the capitulation’s vee-bottom. And lastly and most bearish would be another relentless slide that closes on the lows of the day. That tells us there is still further downside and this might not stop until we hit bear market territory.

Jani

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The Only Thing We Have to Fear

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 officially entered correction territory Monday as the index closed down more than 11% from recent highs. Trading volume surged to one of the highest levels in history. It’s hard to put today’s move in context since so few times have we seen such a volatile day where prices jumped multiple percentage points every hour.

Clearly this is one of the most emotionally charged markets this decade. The question before us is if these dramatic moves are warranted based on severely deteriorating fundamentals, or if this is simply an overreaction and the buying opportunity of the year.

The first thing we need to understand is what kind of selloff this is. Selloffs take one of two forms, the insidious grind lower that slips under the radar because few are alerted by slow moving declines. The other is the breathtaking plunge that makes front page headlines around the world. I don’t think anyone needs me to tell them which type we find ourselves in the middle of.

But here’s the thing, the selloffs we fear the most are typically the ones we don’t need to worry about. Sharp moves lower are often followed by sharp rebounds. Last October’s 10% Ebola plunge bounced back within two-weeks. Five-years ago we recovered from 2011’s 20% U.S. Debt downgrade within six-months. While everyone remembers 1987 for the largest single-day selloff in market history, few remember that we actually finished 1987 up 2%. The most similar selloff to our current situation was the 1998 Asian financial crisis that saw us tank over 20%. But you know what, we were making new highs within five-months.

The selloffs we really need to worry about are the slow grinds lower. While most people remember the financial crisis that consumed our markets in October 2008, the market actually topped a year earlier in October 2007. One of the largest selloffs in market history started in the Fall of 2007 when no one was paying attention. While this recent plunge shoved us down nearly 250-points across five trading sessions, in 2007 it took us four months to fall 250-points! The lesson from history is we should fear the selloffs that few pay attention to, not the one the world is fixated on. People are free to disagree with me because “this time is different”, but they’re arguing against history.

To clarify a little confusion that arose from last night’s post. In one breath I said that buy-and-hold investors should stick out this volatility, while in another breath I said I pulled my money out before Friday’s big plunge. Many people were confused by these conflicting statements, so let me clear things up. The difference is timeframe. I’m a reasonably active trader and move in and out of the market one or two times a month. My trading strategy is to take advantage of one, two, and three percentage moves in the index, take my profits and then move on to the next trade. Most savvy active traders would have gotten out of bullish positions last week when the market started moving against them. That is why it is my assumption that anyone still in the market has a longer holding period than I do. If someone makes a couple trades a month, I would suggest they get out of the way of any move lower. But if a person only makes a couple trades a year, holding through dips is part of their game plan. That’s why it is called buy-and-hold, not buy-and-hold-until-you-get-scared. While this move is dramatic, I don’t see a reason for long-term investors to dump their stock at a steep loss. Hold on and in six months or less we’ll be making new highs. As always, keep the comments and questions coming.

Jani

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