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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 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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By Jani Ziedins | End of Day Analysis
End of Day Update:
On Tuesday the S&P500 bounced back from last week’s selloff. Volume was “suspiciously” light, but that was expected because the selloff also occurred on light volume. These recent moves are driven more by a lack of buying and selling, and not a surge in selling and buying. That tells us most traders lack conviction are more inclined to do nothing than rush in and out of the market. As I’ve been saying for months, confident owners are showing zero interest in selling any headlines. The same goes for those with cash who stubbornly refuse to chase record prices higher. And so the stalemate continues.
I saw a headline today that claimed we bounced today because traders felt like the prospects for tax reform were improving. Yeah, sure whatever. The thing to keep in mind is journalism majors are paid to come up with explanations for every market gyration whether it is real or not. Read the news so you understand what is going on, but don’t take it at face value.
What is the real reason we bounced? My free blog post last Thursday evening explained it before it even happened:
We could see another day or two of selling, but as long as owners remain confident, supply will dry up and prices will rebound like they have every other time this year. Without a doubt this bull market will die like all of the ones that came before it, but confident owners need a reason to change their outlook and “too high” ain’t it. We need something new and unexpected. Something that threatens corporate profits. I didn’t see anything like that in today’s news flow and is why most confident owners will brush off this dip like all the others that happened this year.
Quite simply we bounced because there was zero substance to last week’s selloff. Trump fumbling the Charlottesville situation doesn’t have an impact on corporate profits. Neither did the terrorist attacks in Spain. Last Thursday was little more than a day where nothing went right and demand evaporated. But none of the events that transpired last week have a lasting impact and is why so few owners changed their outlook. Those that believed in the market still believe in it and those that criticized it are still criticising it.
The shame about selloffs is most people manage to turn a great profit opportunity into a losing trade. Traders have been praying for a buyable dip for months. Yet the first one we get these people same people run away because they are afraid things will get worse.
The first thing to understand is all selloffs feel real. If they didn’t, no one would sell and we wouldn’t dip. There is no such thing as an easy trade and the present always feels uncertain and scary. Trades only look obvious months after the fact and with the benefit of 20/20 hindsight.
The second thing is a trend continues countless times, but it reverse only once. This market has been bouncing all year long. What were the odds that this time was the “real one”? Pretty darn low. But that doesn’t stop people from predicting the next collapse every time we slip five-points.
It takes confidence and conviction to make money in the market. We cannot be right every time, but it is important to keep your nerve when everyone else is losing theirs.
Most people are now wondering what comes next. I liked the way the market responded today and it appears like the path of least resistance remains higher. We’re not setting the world on fire with these rate of gains, but a market that refuses to do down will eventually go up.
The sharp selloffs over the last two-weeks helped clear a lot of dead weight from the market. Weak and nervous owners bailed out and sold to confident owners who were willing to buy the dip despite the bearish headlines and horrible price-action. Purging weak owners and replacing them with confident ones gives us a stronger foundation to stand on. This process is why double bottoms are such a reliable buying signals.
That said, triple bottoms are not a thing. If we stumble under Monday’s lows over the next few days, that tells us this weakness is chronic and we should expect further losses. Most likely this market is headed up to 2,500 over the next few weeks, but if we cannot hold 2,420 support, then we will tumble through 2,400 support. Trade accordingly.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Analysis:
Thursday was one of worst days for the S&P500 this year as we plunged 1.5%. There wasn’t a clear catalyst driving the selling. Instead it was a combination of Asian weakness, D.C. dysfunction, weaker than expected earnings, and terrorism in Europe. It was simply one of those days where nothing went right. Even this “half-full” market couldn’t find anything to be positive about.
Given the size of the selloff, volume was suspiciously light. The waterfall price-action gave the impression the market was overwhelmed by a giant wave of panic selling. But the below average volume tells us that’s not what happened. Today’s weakness was more about a lack of buying than fearful selling.
The above shouldn’t come as a surprise since confident owners have propped up the market up all year long. If confident owners were not scared out of their positions through all of this year’s countless bearish headlines, was today’s news any worse? Not really. And that’s why most owners continued to hold their stocks through today’s brutal selloff. Their confidence is aided by the fact most owners are having a great year and are still sitting on a pile of profits. To them this is just another bump on the way higher and nothing to worry about. That’s why despite the gruesome price-action, few owners sold and volume was uncannily light.
Instead the damage was primarily done by the lack of demand. This is not new and has been an issue all year. Every breakout fizzled because those with cash refused to chase prices higher. That forced us into this slow grind higher. Today’s dip was larger than most, but it isn’t unusual to see sideways churn before staging the next move higher.
I’ve been defending this market all year. Every dip has been a buying opportunity and I don’t feel any different this time. Many have criticized my analysis, but so far the market has proved me right dozens of times. Can this time be different? Might this be the end? Sure. But the thing to remember is while a trend continues countless times, it reverses only once. Which side do you think has the better odds?
We could see another day or two of selling, but as long as owners remain confident, supply will dry up and prices will rebound like they have every other time this year. Without a doubt this bull market will die like all of the ones that came before it, but confident owners need a reason to change their outlook and “too high” ain’t it. We need something new and unexpected. Something that threatens corporate profits. I didn’t see anything like that in today’s news flow and is why most confident owners will brush off this dip like all the others that happened this year.
Holding through a dip is not easy but this is a better time to be buying stocks than selling them. The best trades are the hardest ones to make. That means holding when you don’t want to hold and buying when you don’t want to buy. Maybe this time is different, but the odds are against it.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
The S&P500 traded flat Tuesday. While it would have been nice to extend Monday’s rebound, holding ground is still constructive. If traders remained nervous, another round of selling would have hit the market today as owners took advantage of this strength to lock-in profits. Instead most owners remain confident and choose to keep holding for higher prices.
Conventional wisdom tells us complacency is bad. What it fails to mention is periods of complacency last far longer than anyone expects. Confident owners don’t sell and that keeps supply tight. In a self-fulfilling prophecy, when confident owners don’t sell a dip, we stop dipping. Tight supply has propped up this market all year-long and it doesn’t look like last week’s headlines and volatility changed that.
Last week I told readers “North Korea still doesn’t matter and how to profit from it“. Those that listened are a little richer this week. I don’t have a crystal ball and I wasn’t predicting the future. There is no magic in this, it is simply a matter of using common sense. This was not the first time a war of words broke out with North Korea and it won’t be the last. But these things never go anywhere because neither side can afford to escalate it beyond words. And that is exactly what happened this time. Reactive traders who acted without thinking were simply giving money away to those who better understood the situation.
Something will eventually break this bull market. Every bull market eventually dies and this one will be no different. While it is okay to be cautious after eight years of strong gains, being bearish just because we’ve “gone too far” is a great way to give away money. Don’t fight what is working.
Confident owners keep supply tight and the only way this market will crack is by convincing these stubbornly confident owners to sell. So far Brexits, rate hikes, and a dysfunctional Congress haven’t spooked owners. Over the last several years, every time an owner got nervous and sold a dip, he came to regret it. After making that mistake one too many times, most owners have now swung to the other extreme and are not selling anything for any reason. And for the time being this supreme confidence is working. Markets don’t dip when no one sells bad news.
As a trader, I enjoyed last week’s bout of volatility and am hoping more is on the way this fall. While this calm has been nice for many investors, it would be foolish to expect this period of historically low volatility to last much longer. I expect a return to more normal levels later this fall when big money managers return from summer vacation and start positioning for year-end.
But thing to remember is volatility can occur in either direction. At this point nothing is convincing confident owners to sell and I doubt there is much that will change their mind. That means the likely outcome is we will see underperforming managers be forced to chase stocks higher into year-end. There is a smaller probability that further dysfunction in D.C. could finally get to this market when we don’t get the promised tax reform. But so far this market doesn’t seem to care about politics and is why I think this outcome is less likely than a chase higher into year-end.
The great thing about being an independent traders is our account size allow us to enter and exit full positions with the click of a mouse. That means we don’t need to know what will happen this fall and can instead wait for the market to tells us what it wants to do. Until then expect this slow creep higher to continue for a few more weeks. Markets that refuse to go lower will eventually go higher. Keep doing what is working and enjoy the ride
Jani
By Jani Ziedins | End of Day Analysis
End of Day Update:
The S&P500 sold off for a third day following Trump’s “Fire and Fury” threat to North Korea. The first two days of selling were relatively benign, but today’s defensive selling crashed through 2,460 support and the 50dma. This was the biggest single-day loss since mid-May and it puts us back to levels not seen in a month.
Thursday’s selloff felt especially dramatic since it came following a period of historically low volatility. Many traders assumed there was nothing to worry about and we would coast into the end of summer. Unfortunately for them today’s steep selloff reminds us there is no such thing as easy money in the market.
It is hard to talk about what is going on in the stock market without first dipping into geopolitics. This isn’t the first time we’ve gotten into a war of words with North Korea and it won’t be the last. But this situation is unique because no one knows how far Trump or Kim Jong Un will take it since both leaders are new to this high-stakes game of chicken. One miscalculation by either side could escalate this situation from words into something far more deadly.
Kim Jong Un’s primary “Trump” card continues to be the thousands of artillery cannons armed with chemical and biological weapons pointed at Seoul’s ten-million plus citizens. There is nothing North Korea can do to prevent us from bombing their nuclear program, but they can retaliate by attacking the civilians in Seoul.
Millions of hostages are what makes this situation so much different from the ones we face in the Middle East. Trump can talk a tough game, but unless he is willing to sacrifice millions of South Korean civilians, his hands are tied just like they were for all of his predecessors.
Most of the time these situations with North Korea diffuse themselves over a few weeks and things return to “normal”. There is a 99.9% probability this is what will happen here too, but that hasn’t stopped traders from reacting strongly to these headlines.
What started out as a little uneasiness earlier in the week turned into a mass exodus Thursday. This weakness was compounded by all the technical traders using stop-losses to automatically get them out of the market. While this strategy sounds good in theory, it can be tricky in practice because people often use similar support levels to trigger their stop-losses. That means any dip through a widely followed level will trigger another wave of autopilot selling.
2,460 has been support for several weeks and we violated that this morning. That lead to the first cascade of selling that pushed us down to the 50dma. Then Trump told the world his “Fire and Fury” threat wasn’t strong enough and that was enough to extend the selloff under the 50dma.
While this selloff feels scary, the thing to remember is risk is a function of height. Last week when we were trading at record highs and everyone was in a cheery mood was actually a far riskier place to own stocks than jumping in and buying this dip. While it definitely doesn’t feel like it, the discounts sellers are offering make this a safer place to buy stocks because a big chunk of the selloff has already been realized.
For months I’ve been saying this is a buy-and-hold market. Holding is an easy thing to do when the market is gently gliding higher, but holding through a dip hard to do when everyone around us is selling. Our natural instinct is to join the crowd and get out before things get worse, but then that is no longer buy-and-hold.
Every dip this year bounced and this time will be no different. If you don’t think the U.S. will start a war with North Korea, then this is a better place to be buying stocks than selling them. It takes courage to go against the herd, but take comfort in knowing it is a lot safer to buy this fear than last week’s complacency. Many of us have been praying for a buyable dip, here it is. Don’t lose your nerve now.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Analysis:
Tuesday was one of the most volatile sessions in months. A small opening loss rebounded into a breakout to record highs. But the good times didn’t last long before Trump announced to the world he was willing to go to war with North Korea. That threw a bucket of cold water on the bulls’ party and we finished well off the midday highs.
As dramatic as that description sounds, the actual price moves were not all that impressive. At our highest we were up 0.4%, and after the “big” selloff we end up closing down 0.24%. The only reason it felt so volatility is the market has been hovering lifelessly between 2,470 and 2,480 for the last three-weeks.
This war of words with North Korea is certainly something new and unexpected. For a while I’ve been saying that the summer’s slow drift higher will continue until something new and unexpected happened. Is this war of words between Trump and Kim Jong Un that thing? Probably not. While consequences could be quite dire, the odds of this grudge match escalating to a nuclear war are almost non-existent. Neither side can afford to let it go that far.
This will keep the talking heads on TV busy for weeks, but I doubt many stock owners will take this seriously and even fewer will sell the news. So while it is new and unexpected, it isn’t really material and unlikely to derail this bull rally. Any near-term weakness should be viewed as a buying opportunity. But given how modest today’s dip was, I wouldn’t expect this to go much further unless the threats from both sides escalate significantly.
Until further notice, expect the path of least resistance to remain higher. Stock owners are stubbornly reluctant to sell their stocks and that tight supply is propping up prices. Of course their stubbornness is only matched by the reluctance of those with cash to chase record highs. But keep in mind any gains will be slow coming, it took us three weeks to rally from 2,470 to 2,480. Don’t expect that rate to increase any time soon. This is a buy-and-hold market and keep doing what is working.
That said, things will get more interesting in a few weeks when big money managers return from vacation. They have the firepower to move us out of these summer doldrums and most likely their buying or selling will drive the market’s next move. Most likely we will see underperforming managers chase record prices into year-end as they desperately try to catch up. But there is a small chance air could come out of the Trump rally if Congress fails to deliver the promised tax reform.
The best part about being an independent investor is we can buy and sell full positions with the click of a mouse. That means we don’t need to decide ahead of time what will happen. Instead we can wait for the market to reveal its intentions and then we hop on the band wagon and enjoy the ride. Enjoy the slow climb higher over the next few weeks, but start looking for a bigger trade to come along in September or October.
Jani
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