All Posts by Jani Ziedins

Where is the Breakdown?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

This morning stocks continued Friday’s late-day sell off and undercut recent support at 1,990. This was the lowest we’ve been since mid-December and the technical weakness triggered a wave of stop-loss selling. But it didn’t devolve panicked rush of the exits and we quickly bounced off 1,980, ultimately closing higher by a very respectable 1.3%.

Today’s wild, 120-point intraday ride continues the wide and loose trade. While volatility is rarely good for markets, the inability for threatening headlines and dramatic price-action to trigger wider selling leads me to believe we are close to a near-term bottom. The market’s given us plenty of reasons to sell, yet owners and buyers have stubbornly hung on to this 2,000+/- region.

Source: Stocktwits.com 2/2/2015

I remain fairly pessimistic, but when the market isn’t doing what I think it should, then I have to reevaluate. Resisting so many opportunities to breakdown tells us there is more support than most assume. I continue to be wary of the market’s medium-term prospects, but when it doesn’t want to go down, then we cannot fight it. Even if this is just a bull trap that stalls near the 50dma, it is best for shorts to take profits and step aside.

Part of what makes me reconsider my negative outlook is how pessimistic traders have become. Stocktwits’ SPY bullish sentiment dipped under 40%, a fairly reliable buy signal recently. Many of the gurus on TV also expect us to continue sliding. But if the pessimists have already sold and those still holding are hunkered down and prepared to sit through bigger declines, then who is the incremental seller? When we run out of supply, then it doesn’t matter what the headlines are.

Jani

Does This Mean We’re Safe?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks bounced back, reclaiming a big chunk of Wednesday’s losses. Volatility remains insane as today’s 35-point intraday surge nearly matches yesterday’s 40-points intraday slide.

While today’s third bounce off of 1,990 revives bull’s confidence, it is hard to feel good about a market that whips around 2% a day. Boring markets are healthy and bullish, but this market is anything but boring.

We are only three-percent from all-time highs, but this volatility shows uneasiness creeping in. The Wall Street Journal reports intraday price ranges have swelled 50% this year as compared to 2014’s more sedate trade. Yet the VIX remains under its 10-year average of 20, showing lower than typical levels of fear. And not only is the market near all-time highs, we are also trading at premium forward earnings multiples versus historic averages, 17 vs 14.6.

Source: WSJ.com

Record stock prices, increasing realized volatility, low implied volatility, and stretched multiples; makes you wonder if smart money is buying or selling here. Okay, I admit that was a rhetorical question because the answer is obvious.

Stay safe.

Jani

That Hurt

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks took bullish, blowout earnings from AAPL and turned them into a gut wrenching selloff. When the market crumbles on good news, you know we are in trouble. Some blame the weakness on the Fed’s midday policy statement claiming the economy is expanding at a “solid pace” and job gains are strong. Funny the world we live in when great news triggers a 40-point intraday selloff.

But this shouldn’t surprise regular readers of this blog. For a while we’ve noted the weak demand every time this market tried to rebound. The elevated volatility is also a grave concern because it tells us the market’s personality is changing. That doesn’t mean we are headed for a 2008 style collapse, but we shouldn’t automatically expect every dip to be a buying opportunity. We knew this pattern couldn’t last forever and this time the weakness feels different.

Today’s selloff closed above key psychological support at 2,000, but the market closed before the late-day sell off could take us any lower so I’m not sure that qualifies as holding support. There is a lot of pressure on bulls to get this turned around Thursday. If we break under 2,000 support, December lows and the 200dma are the next stop as formerly confident and complacent bulls turn into scared sellers.

While I remain skeptical of this market, I will have to reevaluate my outlook if the market bounces and breaks through overhead resistance at 2,060.

No doubt Thursday will be an interesting and insightful day.

Jani

Failing Support

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks stumbled on a combination of disappointing economic news and weak blue chip earnings. We crashed through technical support at the open, recovering some of those losses by the close, but not enough to push the market back above support.

It is a strange world we live in when markets rally on seemingly devastating news for Euro stability, but then a hodgepodge of obscure economic indicators and company earnings take the market’s legs out. Volatility has become par for the course and nothing should surprise us anymore.

The thing that troubles me is we have seen very little volatility in the market’s steady ascent from the 2011 lows. For a long stretch, we could count all the 1% moves on our fingers. But more recently, a 1% move is benign and more often we are surging and crashing from day-to-day. It really feels like the market’s personality is changing. If that’s the case, it means we are going from steady up trend to something else. Maybe that’s choppy sideways trade. Maybe it’s the long-awaited correction. Or maybe we explode higher in one last surge before collapsing. Only a few percent from all-time highs, it is hard to conclude which of these outcomes is happening, all we can say for sure is this feels different.

Index futures are up after Apple’s blowout earnings, but the market decoupled from Apple a few years ago and the two often trade independently. A big move for Apple doesn’t automatically raise all boats in the S&P500. Outside of a brief pop at the open, the Apple story will become a single stock event and the rest of the market will quickly return to whatever else has been driving it recently.

Technically, if the market cannot reclaim 2,050 by Wednesday’s close, that shows we are running out of buyers and should prepare for a test of the 200dma. This the time for bulls to show they are still in control. If they cannot, lookout below.

Jani

What Grexit?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks bounced back from opening weakness following the Greek elections. While this result significantly increases the chances for a “Grexit”, we’ve been down this road before. Last time selling Greek uncertainty was a mistake and it appears traders don’t want to be fooled a second time. Headlines that triggered a wave of selling a few years ago, barely budged the needle today.

Two mitigating factors are the election’s result was widely expected and most institutions have hedged their exposure to Greek default. So it’s not a surprise the market’s reaction was so muted. Of course the thing to be aware of is the lack of a selloff leaves us vulnerable if the situation devolves and is worse than expected.

But just because we don’t have to worry about Greece doesn’t mean we have nothing to worry about. The market is up nearly 100% from the 2011 lows and anyone betting on this market is fat, dumb, and happy. While the market can always continue higher, it is getting harder and harder to find cynics to convert into believers. Markets top when everything looks the best because that is when everyone has already bought all the stock they can.

Trading near record highs, it is hard to identify the next buying catalyst since there is so little fear. While we could see a temporary surge if we break through recent resistance at 2,060, that momentum will likely only carry us to previous highs near 2,100. After that it is hard to figure out what is going to get those that haven’t bought yet to start. If we run out of demand, that leaves us with two outcomes, an extended trading range, or the larger selloff everyone’s been predicting since 2011.

If we hold 2,050 through Wednesday, then we will test the old highs. Fail and prepare for a swift ride to the 200dma.

Jani

Not Done Yet

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks slipped for a fifth consecutive day as overseas concerns dominated financial headlines. After three years of currency manipulation, Switzerland gave up and let the franc float. It exploded higher, catching many traders and institutions off guard.

While this move won’t have much of an impact on US earnings, it affects the financial system. Traders who have margin calls in one asset class, raise capital by selling other assets, often those showing the biggest gains. That means we could see some liquidation pressure on US equities. But bigger than just margin calls, this also affects sentiment.

We went from all-time highs a few weeks ago, to obsessing over the half-empty side of the glass. Since every dip has been a buying opportunity, many owners are complacent and not worried about headline noise. The market bounced before and they assume it will bounce again. That’s why we haven’t seen huge waves of selling yet. It also means there are a lot of potential sellers still hiding in the market.

Currently overnight futures are down nearly a percent. If this weakness holds to the open, that puts us near December’s lows. Break that and previously confident owners will start getting nervous. Not far below is the 200dma. Undercutting both of these key levels would trigger a large wave of selling and finally form a capitulation bottom. And that is the bullish scenario. Things get ugly if we crash through 1,950 without finding a bottom. That’s when panic selling takes over and we retest October’s lows.

Jani

What Was That?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update: 

Stocks gapped higher at the open, but buyers failed to embrace the surge and we crashed into the red by early afternoon. It is difficult to come up with anything constructive to say about this price-action. The market gave bulls the perfect kick-start to setoff a short-squeeze and trigger another wave of dip-buying. If we were oversold, that is exactly what would have happened…but it didn’t.

The obvious takeaway is this market is not oversold and we are not poised to rebound. That means we still have more downside before this correction is done. While today’s volume was higher, this wasn’t capitulation. We didn’t undercut recent lows and even though the intraday move was more than two-percent, the closing loss was a barely noteworthy quarter-of-a-percent. The only people who noticed the enormity of today’s move were the ones who follow the market tick-by-tick. To everyone else, this was another uneventful day.

The market is searching for direction. While we are several percent off the highs, we are also making a series of higher-lows. This pennant pattern can only last so long before the market has to breakout to either the upside or downside. This morning we stubbed our head on the high side, but we also found afternoon support on the low-end.

For all the reasons I listed in previous posts, it looks like we have more downside ahead of us. Breaking 2,000 will set off a wave of selling that takes us down to the 200dma. Fail to hold that and a retest of October’s lows is in the cards. While this could be a plunge over a few days, it could also be a slow grind lower over several months. We will see what happens in coming days, but it is hard to get excited by anything the market is showing us since logging new highs two weeks ago.

Jani

Down on Good News

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks tumbled, unimpressed with a stronger than expected employment report. Many pundits and talking-heads blamed the weakness on lagging wage growth, but that is a fairly obscure detail to to trump the headline numbers and derail a two-day rebound.

It is worrisome when markets ignore a bullish headline and instead fixate on a minor detail buried in the report. There was more than enough good news to launch us higher if that is the direction the market was poised to go. Since we sold off instead, that tells us the market is not in the mood to go higher and we need to be prepared for further weakness. When good news cannot move us higher, what will happen when we get some legitimate bad news?

Technically, the market slipped back under 2,050 and is resting on the 50dma. Volume was the lowest in five days, showing not a lot of traders joined in todays selling. That can be interpreted two ways. Either owners are not interested in selling and we will bounce soon. Or, few people sold and there is still a mountain of supply waiting to hit the market. Since complacency is the rule these days, I fear the next trigger that turns confident owners into fearful sellers.

Jani

Sentiment, Sentiment, Sentiment

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks exploded higher as the S&P500 retook the 50dma and 2,050 technical level. While the price move was impressive, a similar surge in volume was conspicuously absent. That tells us the rise was more due to a reluctance of owners to sell than a huge wave of buying.

Sentiment’s been swinging just as wildly as price. Stocktwit’s SPY sentiment went from 68% bullish in late December to 38% earlier this week. Along with price, it bounced back decisively to 50% in recent days. AAII investor sentiment has been on an equally volatile ride, up 10% last week and then down 10% this week. The lag in the AAII poll means most of the responses came before Wednesday and Thursday’s impressive gains. If the survey was real-time, I’d expect a similar resurgence in bullishness as we saw on Stocktwits.

Another interesting nugget from AAII is while sentiment is down, equity allocations in December haven’t been this high since 2007. It appears individual investors haven’t owned this much stock since the top of the last bull market. Contrarian or not, that should give anyone pause.

Friday morning we get monthly employment, but few are worried about it. That means a decent result is already priced in and we shouldn’t expect big gains due to a strong report. Unfortunately the opposite is not true. The complacency about employment means we are vulnerable to the downside if the market is blindsided by anything unexpected.

Personally I expect another respectable employment number to follow the equally impressive US GDP we’ve seen. In the United States, everything looks great and we have little to be concerned about. But that is exactly what makes me nervous. Bull markets run out of gas on good news, not fear and anxiety.

Between the bullish equity allocations, general sense of wellbeing, and increasing volatility, that is enough to make this buy-the-dip guy think twice about buying this dip. This time feel different. While we could easily make new highs in coming days, it just doesn’t feel like the risk/reward is on the dip-buyers side anymore.

Jani

Can We Buy the Dip Yet?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks rebounded and a sigh of relief spread across the market as another crisis was averted. At least that was the initial reaction to Wednesday’s bounce off of 2,000. If this was last year, then we’d have a green-light to buy the dip with reckless abandon. But that was back when pessimism ruled and underweight fund managers were forced to chase a market that was quickly leaving them behind. Can we say the same conditions exist at the start of 2015?

The change in calendar gives fund managers three-months of breathing room before they are required to report positions and performance to their customers. There is far less pressure for cautious managers to chase since they now have time on their side. As for pessimism, it is hard to get the market to worry about anything since investors have a ready-made excuse for every concern. This is a dramatic reversal from the days when an economic boogeyman was hiding around every corner (Cyprus, Taper, etc).

Every rally ends and so will this one, but what we really want to know is if this is that time. Dip-buying has become so routine that we will easily coast back up to the 50dma and 2,050 region in coming days. What happens next holds the key to where this market is headed. If we smash through 2,050, then the Teflon rally continues and we have nothing to worry about. If we struggle with 2,050, then it is time to get defensive, very defensive.

I’ve been behind this rally for years, but increasing volatility makes this time feel different. I want to see this run continue, but failing to make new highs will tell us the trend is changing.

Jani

Can Both Bulls and Bears Be Right?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Another brutal day for the market, this time slipping under prior support at 2,000. The saving grace is we reclaimed this technical level by the close, even if just barely. Volume was higher than yesterday and well above average. No doubt the continued weakness and violation of a widely followed technical level triggered a wave of stop-loss orders, causing this surge in volume.

Timeframe and timing are everything in the market. In a situation like this, both bull and bear can be right. A nimble dip-buyer can make a quick buck when this selloff bounces on Wednesday or Thursday. But the bear could also be right when the rebound fizzles and the selloff continues next week.

Sentiment on Stocktwits SPY boards has been all over the place. Last week it was oozing with 68% bullishness, but a few short days later it flipped on its head with 61% bears boasting about the imminent collapse. We need to remember this is primarily a measure of day-trader sentiment. While a very active group, they are small and cannot sustain directional moves without the support of big money. This Stocktwits sentiment skew likely means we are getting close to near-term bounce, but we need to widen our lens if we want to figure out what happens next. That means looking at investors with a longer time horizon.

Source: Stocktwits 1/6/2015

There have been countless 2015 predictions circulating the financial press and the vast majority of pundits and big money managers expect this to be another good year. But the thing to remember is people naturally talk their book. If they are bullish on the market, then they are already fully invested. Where we run into trouble is when everyone is bullish, that means few are left to buy the market and keep pushing it higher.

We’ve gotten used to sharp selloffs followed by equally fast rebounds. If the market finds a floor Wednesday or Thursday, expect the dip-buyers to rush in and send us back to the 50dma and 2,050. But since this trade is getting a tad too obvious, be prepared for the relief to be temporary. The market is split in two, diametrically opposing camps, bulls expecting us to continue marching higher and bears predicting a devastating collapse. The third, and most widely overlooked option is a slow grind lower with countless head fakes along the way to zing and humiliate overly aggressive bulls and bears.

Jani

This Feels Different

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks tanked on the first real trading day of 2015, continuing the selloff that started in the final sessions of 2014. Volume was above average and this was a meaningful move, unlike the low-volume, holiday fluff we’ve seen recently. The question is if this is just another routine, buyable dip like all the others, or the start of something different?

Volatility often picks up during changes in trend. This is where one side is losing control and the other is getting stronger. For the first time in a while, both forces are on equal footing. The battle gets scrappier and price moves are more dramatic. Big drops followed by big rebounds. And more plunges and bounces.

For the last three-years I’ve been a buy-the-dip guy, but this one feels different. Back then the market sold off as traders feared the worst around every corner. But bull markets feed on this fear. Low expectations make it easy for a market to rally. But here we find ourselves without a worry. The rest of the world has been melting down over the last six-months, but US Blue Chips have been immune to whatever ales the rest of the world. No doubt they became a safe harbor in a turbulent world, but how much longer can that last? If US markets are still pricing in continued strength, it is harder to exceed those expectations and all too easy to miss the mark. That doesn’t give us a favorable risk/reward.

Every market tops when it runs into a dip that doesn’t bounce to new highs. The big tell for us is what happens next. Today we sliced through the 50dma on accelerating volume. No doubt we took out technical stop-losses and triggered a wave of defensive selling. Buy-the-dip has become such a routine trade that it shouldn’t surprise anyone to see the market bounce in the next day or two. But will there be enough buying behind that rebound to send us back to new highs? Or will the move stall and we stumble into another round of liquidations?

It feels different this time and it is hard to get excited about buying the dip. The confirmation will be a string of lower-highs and lower-lows. If that is the case, forget about the 200dma, October’s 1,820 lows are at risk. While everyone fears a huge selloff over a couple of days, the real damage comes from a six-month grind lower.

Jani

Slow and Steady Wins the Race

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Wow. What else is there to say about this monster rebound? Buyers haven’t been this desperate to own stocks over a two-day period since 2011. But is this aggressive buying good for the market? Is it sustainable? Does it give us a stable foundation to build on?

As kids learn from the Tortoise and the Hare, slow and steady wins the race. By that measure it is hard to get excited about the speed and size of this rebound from the 1,970 lows. The biggest concern I have is choppy trade is often a symptom of changes in trend. We’ve had three material dips since summer and now this uncharacteristically sharp up-move. The bull rally turned five this spring, making it fairly mature as far as bull markets go. And there is little fear priced into the market since it has largely ignored bearish geopolitical and economic headlines from around the world as it keeps setting record high after record high. US large cap stocks are the last-man standing in a world where almost all other markets and asset classes have seen material selloffs. How much longer can this continue?

Anyone taking the time to look through the CrackedMarket archives will see I’ve been a resolute buy-the-dip guy since I started this blog in early 2012. Greece, Cyprus, Euro breakup, Fiscal Cliffs, Govt Shut Downs, Taper, etc. It didn’t matter what the headline, I embraced the fear and saw every negative headlines as an excuse to pick up stock for cheap. But we all know this must come to an end at some point. Buying the dip has become so routine now that everyone is doing it. Good employment, bad employment, strong GDP, weak GDP, Russia invading sovereign nations, nothing matters to this market. That is until it does. We might finally be arriving at that point where it does.

While I’m not ready to say tomorrow is the first day of a 20 or 30 percent bear market, all these factors lining up here are enough to make a buy-the-dip guy far more cautious going forward. The market has enough momentum that it can coast into year-end, but what happens in January is anyone guess. Markets typically look ahead six to 12 months, which means if the market suspects we will see inflation/deflation/increasing interest rates/currency contagion/recession/or anything else next year, it will start pricing it in starting in January. If the rate of gains slows down and becomes more sustainable, then this can continue. But if we retreat back under key support levels in the near-term, I wouldn’t be so quick to buy the dip this time.

Jani

Third Time’s a Charm?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

End of Day Update:

Stocks bounced decisively from yesterday’s lows, reclaiming 2,000 support and the 50dma. The 2% move was the largest gain since 2013 and came on the highest volume we’ve seen since the pullback started.

The headline catalyst was continued accommodative language from the Fed and Janet Yellen. While they didn’t specifically say recent global turmoil would delay interest rate hikes, that is the way many traders took it.

A gain is always better than a loss, but it is usually safer and more sustainable to see the market grind higher in more measured steps. Huge moves often result in equally dramatic moves in the opposite direction. That’s clearly been the case over the last three days. Will we see more of the same tomorrow? Only time will tell.

The last time we saw an equally impressive up-day was October 10th, 2013 as the market also rebounded from a dip under the 50-dma. While the market held those gains and eventually climbed another 100-points over the next two months, the moves immediately after the 2% gain were much slower. If that situation plays out again, there will be plenty of time for traders to jump on board the rebound.

The risk is if the selling isn’t over and we see another equally dramatic move lower tomorrow. Markets typically rebound quickly from oversold levels. It’s taken four days for us to reclaim 2,000 support after a couple failed rebound attempts. That shows traders previously refused to embrace the bounces. Is the third time the charm? We will find out on Thursday.

While it is okay to buy the dip, keep the trade on a short leash and don’t allow these gains to retreat into losses. Failure to continue this momentum higher is very bearish and says we haven’t found the bottom yet.

Jani

Start of the End, or End of the Start?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis:

It was a wild ride as the market gapped lower at the open, rallied 40-points by lunchtime, only to give all those back and then some by the close. While the market closed lower by 16-points, we traveled nearly 120-points to get there. Absolutely stunning.

The crashing oil story took the day off as the market obsessed over the imploding Russian Ruble. Many pundits drew parallels to 1998’s currency crisis and that was enough to roil markets around the world. But was this just a hiccup, or the start of another global meltdown?

Russia’s been the target of sanctions from the West since they exploited and inflamed the crisis in Ukraine. These political tensions and preexisting economic weakness already reduced Western exposure to Russia, so it is far less likely this crisis will take Western banking and economies down with it. This story should leave the front pages in no time.

As for oil, it’s funny how bears try to have it both ways. Rising oil prices are clearly bad for consumers, but then so are falling oil prices?!?!? On popular social media it is hard to find many people on Main Street that are worried about $2 gasoline. This video clip got nearly four thousand up-votes on a popular website when one guy shared his feelings from his last trip to the gas pump.

Technically today’s price action was as ugly as it gets. We blasted above key levels in midday trade, but couldn’t hold them and made new lows by the close. This wild ride lead to lots of trading and volume was 28% above average and one of the most active days of the year.

Source: Stocktwits 12/16/2014

But technicals are only half the picture. What about sentiment? Last week’s selloff saw bullish sentiment on Stocktwit’s SPY boards plunge from 65% to 41% while bearishness spiked to levels last seen near the bottom of October’s selloff. While hardly conclusive, it does show many traders have changed their minds recently and their selling is clearly evident in the falling prices. But the thing about markets is they operate on supply and demand, not sentiment. By the time the crowd is overwhelmingly pessimistic, that means they’ve already sold their stock. Once the crowd finishes selling their stock, we run out of supply and prices rebound.

While today’s headlines feel horrific, we have to remember they feel this way during every dip. If they didn’t, no one would sell the headlines, and we wouldn’t have a dip to begin with. The question is if this time is more than another routine dip. In a bull market we have to operate under the premise that every dip is buyable. That’s because a rally continues countless times, but only reverses once. When trading, I would rather put my money on countless profit opportunities, than bet everything hoping this is that one time.

But we cannot be ignorant to the risks either. If we are already at oversold conditions, the market should bounce and race higher into year-end. But if we cannot find a bottom, the next stop is 1,950. After that it’s 1,900. Break 1,900 and we’ll race past October’s lows.

Jani

Not a Big Deal

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Stocks tumbled Wednesday, giving back all of Tuesday’s rebound and then some. Volume was modestly higher, but far from panic levels. The 60-point selloff from last week’s highs was enough to knock 10% off of Stocktwits’ SPY bullish sentiment gauge, but the reading is still in bullish territory at 55%.

The thing both bulls and bears need to remember is markets go up and markets down. That’s what they do. Talking heads try to come up with a reason for every gyration, but the simple fact is prices fluctuate. They always have and always will. A dip from 2,075 shouldn’t surprise bulls and bears shouldn’t expect the market to collapse after slipping a couple percent from all-time highs. It’s been a strong, one-direction move from October’s lows and everyone should agree it is normal and healthy for the market to trade sideways here.

While the dip has dampened bullish enthusiasm, we probably need to test 2,000 support before we can say sentiment has been reset. Holding 2,000 and the 50-dma sets up an interesting buy-the-dip opportunity. If we slice through support and selling accelerates, then the next stop is 1,950.

Jani

Buyers MIA

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks stumbled in late morning trade, challenging 2,050 support before recovering a small portion of the losses by closing at 2,060. There are a handful of explanations for today’s weakness, but the simple truth is we ran out of buyers.

The first hints of weak demand came on Friday as the market failed to make material headway following an unexpectedly strong employment report. This news was more than enough of a catalyst to launch us higher if there was upside remaining in this move. The fact we barely budged showed us an abundance of bullishness was already priced in. When we no longer rally on good news, look out below.

That is exactly what caught up with us today. Anyone who wanted to buy this market already bought it, meaning there was no one left. For much of the rally, the Stocktwits SPY sentiment gauge remained stubbornly stuck in bearish territory. It was the widespread reluctance to believe in this rebound that propelled us from the October lows. But last couple weeks saw a dramatic reversal as sentiment swung from 55% bearishness to 65% bullishness. That 20-percentage point reversal told us bears were giving up and bulls were getting cocky. The market is an equal opportunity humiliator. After thoroughly demoralizing bears with a 250-point rebound, it is now turning its attention toward bulls.

Source: Stocktwits 12/8/2014

While we bounced above 2,050 support Monday, it is inevitable the market will dip under this key technical level before this is all said and done. How the market responds after violating support will tell us where we go next. If selling stalls and we quickly retake 2,050, this is just another buyable dip. But if buyers are MIA and the selling accelerates, 2,010 is the next meaningful support level. Trade accordingly.

This analysis diverges from my previous expectation of a Santa Claus rally, but we have to be flexible enough to change our outlook when presented with new evidence. The Santa Claus rally theory predicted a pop following bullish employment. When the market didn’t behave as expected, it meant the underlying theory was flawed. While there is still time for a Santa Claus rally in the second half of the month, at the very least expect weakness over the next few days.

Jani

Be careful

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis:

It was another interesting day. Weakness in European markets knocked us down at the open, but we came roaring back midday. Even though we closed in the red, we were well off the early lows. It is always encouraging when selling stalls and rebounds, instead of accelerating lower.

2,075 is resistance as the market struggles with this level, but the longer we hold near it, the more inevitable it becomes we will break through it. At this point in the year, fundamentals no longer matter as big money jockeys for position into year-end. While the S&P500 is up a very respectable 14% for the year, it left many cynical managers in its wake. Some never believed in this rally, others were flushed out in October’s dip under 1,900. Both groups are trying to figure out how to repair the damage before sending out annual reports to their investors in a few weeks. While they would love to see the market pullback to 2,000 before then, all too often the market does the exact opposite of what the most desperate traders are praying for.

Source: AAII 12/4/2014

The AAII sentiment survey took a nosedive this week. Bullish sentiment plunged 9.5% even though the market remains within a fraction of all-time highs. This shows many investors are afraid of heights and reluctant to embrace this rally. But all too often today’s holdouts become tomorrow’s chasers. But not to get too far ahead of ourselves, bulls finally overtook bears on Stocktwits’ SPY sentiment gauge this week.

While momentum is higher, end-of-year buying is an artificial tailwind that will vanish January 1st. Rather than put new money in this market, we should be thinking about taking profits. Breaking 2,075 could trigger one last short-squeeze, pushing us up to 2,100 before finally running out of steam. Its been a great run, but we need to consolidate recent gains.

Source: Stocktwits $SPY 12/4/2014

Friday we have employment. While it gives the talking heads something to obsess over, the market hasn’t cared about employment since we started showing positive numbers several years ago. Hit, miss, or exceed expectations, it hasn’t mattered as this market rallied through it all. Outside of some intraday volatility, this report will be ancient history by the close.

Jani

Why we keep going up

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Today we closed at another all-time high. The unfortunate thing for anyone betting against this market is new highs come in clusters. We set a dozen records over the last few weeks and will most likely continue doing so for some time to come.

Many people have a hard time understanding how this market can keep going up in spite of all the economic and political uncertainty. What they fail to realize is we are going up because of this uncertainty, not in spite of it.

Everyone knows supply and demand drives prices, but few understand what that really means. People only trade stocks when their outlook about the future changes. Something happens that causes them to decide they want more of one thing or less of something else. It is this changing of opinion that translates to buying and selling, and ultimately moving prices. Since October 15th we’ve gone from acute levels fear and panic, to things are not so bad. It is this softening of negative sentiment that propelled us higher.

And this brings up back to our current situation. October was a painful month that not only inflamed fear and anxiety, but it also flushed many individual and institutional investors out of the market. These investors find themselves underweight equities as we continue making new highs. Over the last several weeks, the fear of a market collapse is giving way to fear of being left behind and many of these October sellers are turning into December chasers. The pressure to buy here is especially strong with institutional money managers who will send quarterly and year-end reports to their clients at the end of the month. Expect all this catch-up buying to fuel the Santa Claus rally. But this end-of-year buying is artificially driven by a date on the calendar. We could very easily find ourselves with vacuum of demand starting January first when institutional money managers are no longer under pressure to dress up their books for the quarterly reports.

Jani

Testing Support

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Stocks slipped to 2,050 support on the first day back from the holiday weekend. Journalists and talking heads are paid to come up with a reason for every market gyration. Real or imagined, producers and editors don’t care as long as it makes good copy. And today we were told the market sold off on poor Black Friday sales and weak economic numbers out of China. Maybe the truth is a lot more boring. Maybe we slipped to support for no other reason than a minor imbalance between supply and demand following an impressive run of up-days.

Traders know stocks cannot go up every day, but anytime we slip a few points, they start predicting this is the next collapse. Today’s elevated volume, the highest in nearly a month, shows a lot of people responded to this weakness by selling the dip.  While it is clearly an overreaction to claim a 1% pullback from all-time highs will lead to the next big selloff, this is actually a healthy response for the uptrend. The more cynical the crowd, the more viable the rally.

The market is still setting up nicely for October sellers to chase prices higher into year-end. Underweight money managers can only wait so long for their predicted pullback before they have to concede defeat and start buying. If they want to keep their job, they cannot look foolish by missing this easy up-trend when end of year statements come out.

Jani