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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.
By Jani Ziedins | End of Day Analysis , Free CMU
Free After-Hours Analysis:
Tuesday was another good session for the S&P 500 as the index closed at the highest levels in over a month.
But paradoxically, headlines are not improving. Oil remains at the highest levels in eight years, inflation is at 40-year highs, the Fed is cooling the economy with a long string of rate hikes, and the war in Ukraine gets uglier by the day.
But as is always the case in the market, anyone waiting for headlines to get better before buying is going to be waaaaaay too late.
To get the best prices (and make the most money!), we have to buy before everyone else feels comfortable. And this crazy environment definitely counts as one of those times when most people don’t feel comfortable.
The market is forward-looking by nature and that means it trades based on what it thinks is going to happen in the future, not what is going on today. While all of the above situations are dreadful, they are not getting materially worse. And as is often the case, “less bad than feared” is an excellent reason to buy stocks.
As I’ve been saying all year, markets hate uncertainty more than they hate bad news. The market’s correction started on the double gut punches of rate hikes and a full-on war in Ukraine.
While it is obvious stocks will fall in an environment like that (and is why I recommended readers bailout back in early January), but two months later and there is far less uncertainty. Now the market can finally put a dollar amount on inflation, rising interest rates, the war, sanctions, and oil prices.
We are no longer worried about what could happen but are finally able to price in what is happening. And as is almost always the case, reality is turning out less bad than feared. (Our reality is most definitely ugly, but not nearly as ugly as the market’s runaway imagination.)
As wrong as this rally feels, this is the way it always goes. Savvy traders buy when everyone else is too afraid to buy because that’s the point when everyone who is going to sell has already sold and supply dries up. That capitulation point always occurs when headlines are their worst.
While there is always room for things to get worse (Inflation breaching 10%, oil breaking $150/bbl, Russia bombing Polish airfields, or Russia nuking Ukrainian civilians), it will take a significant escalation for stocks to crash under recent lows.
Trading always involves risk, but savvy traders trade what is happening, not what could happen. The greatest strength we have as independent traders is the nimbleness of our size. While I like the way the market is trading right now, if something changes tomorrow, no big deal, I lock in some really nice profits in the mid 4,500s and wait for the next bounce.
As for anyone sitting out of this market and looking to get in, I’m sorry to say, but this is most definitely the wrong time to be buying. These big two steps forward are poised for a very normal and healthy step back. Wait for that step back before jumping in.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 spent Monday bouncing between modest gains and losses before finishing the session almost exactly where it started.
An afternoon slump was sparked by news the Fed is willing to move in half-percent increments as it raises interest rates this year. That is a little more aggressive than some investors expected, but at the same time, a 25-point midday give-back on the heels of last week’s towering 300-point rebound is hardly anything to worry about.
Two steps forward, one step back. That’s the way markets work, always have, always will. Given how much ground we covered last week, it wouldn’t surprise me to see a bigger than usual step-back, even something in the range of 150 points is reasonable.
But if a 150-points pullback is reasonable, Monday’s 25-point dip still had a lot of room left to run, so why did prices bounce and close flat?
Very few dip buyers are looking to cash in profits and that afternoon weakness vanished by the close.
At this point, more people are looking up than down. And that’s not a surprise. It’s been more than two months since this correction kicked off, meaning all of the worrywarts have been given plenty of opportunities to abandon ship. And more than that, all of these nervous owners sold their stocks to dip buyers demonstrating a willingness to hold stocks in this headline environment.
While the bearish headlines haven’t gotten any better, at some point, we run out of people willing to sell those headlines and that’s when prices stop falling. And it appears like this market has crossed that tipping point.
Don’t be surprised if we slip a little further in a very normal and healthy step-back this week, but unless the headlines get materially worse (ie $150/bbl oil, 10% inflation, or Russia bombing Poland or nuking Ukraine), expect stock prices to find their footing quickly after taking a quick break.
The pullback from January’s highs already priced in all of this bad news and as bad as things seem, stocks have already started rallying on “less bad than feared”.
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By Jani Ziedins | End of Day Analysis , Free CMU
Free After-Hours Analysis:
The S&P 500 surged 290 points since Monday’s close and is now sitting at the highest levels in a month. And to think, five days ago the crowd was predicting another big crash. So much for conventional wisdom.
In percentage terms, the index is up 6.9% since Monday’s close. Catch this wave in a 3x ETF and now we’re talking about real money! Not bad for a week’s worth of “work”.
Now, I wish I could say I knew the market was going to bottom Monday afternoon and rally sharply the rest of the week. Unfortunately, I’m not psychic and was along for the ride like everyone else.
But while I couldn’t predict the exact when and where this rebound was going to happen, I knew the odds of a sharp bounce were good. This is a volatile market and that means oversized moves in BOTH directions.
First, the market loves symmetry, meaning big drops are followed by big bounces.
Second, headlines are dreadful, but they haven’t been getting worse. The correction since the January highs priced in a lot of bad news. Owners that fear these headlines have been given plenty of time to bail out of the market and have been selling to far more confident dip buyers.
And third, as I’ve written before, the market hates uncertainty more than bad news. While nothing is getting better, we can finally quantify what we’re dealing with. Ukraine is horrific, but it isn’t turning into WWIII. The spike in oil prices stabilized in the low $100s. And the Fed is only planning to push interest rates up near 3%.
While none of this qualifies as good news, it wasn’t as bad as some people feared and stocks have rebounded in a “less bad than feared” trade.
Given the above, I knew the market was poised for a big bounce, what I didn’t know was when. And that’s why I started buying bounces the week before. When I don’t know which bounce will turn out to be the real bounce, the only way to make sure I don’t miss it is to buy all of the bounces.
But rather than do this in a reckless, pick a spot and wager everything on it sort of way, I start small, get in early, and keep a nearby stop. When a bounce fizzles and retreats, no big deal, I get out and wait for the next bounce. And when that one fizzles, I get out and try again.
Two weeks ago people thought I was crazy buying these bounces. But markets don’t bottom until most people have given up. That simply means I need to be more persistent than the average trader.
Some of my early buys turned a small profit. Others broke even. And a few lost a few bucks. Throw all of those trades together and it was largely a wash. But more important than the profit or loss on those small trades is I was ensuring I would be standing in the right place at the right time when the real bounce finally came along.
I’m more than happy to lose a few dozen points on a 1/3 position when the potential upside is 300 points on a full position. This is the kind of risk/reward traders dream of! All it takes is the vision and courage to buy when everyone else thinks we’re foolish. Four days later and who’s the real fool?
At this point, there is nothing to do but lift our stops up near 4,400 and see where this goes. (You bought the bounce on Tuesday, right?)
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 undercut 4,200 support Monday afternoon and just when things looked their worst, the index exploded 240 points higher over the next three sessions and is now resting above 4,400 resistance. Funny how that works.
While a lot of people were caught off guard by this “unexpected” strength, it doesn’t surprise savvy traders that have been doing this for a while. As I’ve been explaining to readers since this correction started back in January, this is a volatile market and that means oversized moves in BOTH directions! Oversold turns into overbought in the blink of an eye and if you hesitate, even for a moment, you miss a fantastic trade.
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While cynics criticized my testing the waters last week with small buys and nearby stops that kept dumping me out near my entry points, this week shows why smart traders stick to their trading plan no matter what other people say.
I wish I could tell people there is still time to buy this bounce, but unfortunately, that ship sailed and only fools are chasing prices at these levels. Smart money buys bounces off of support, they don’t chase big moves near resistance.
Maybe the index continues up to 4,600, and as someone fully invested in 3x ETFs, I’d love to see that. Unfortunately, this remains a volatile market and that means oversized moves in BOTH directions. (I cannot repeat that often enough!) Adding new money up here is way too risky for my blood. Luckily, I loaded up Tuesday and am already sitting on a pile of profits.
The window for offense closed and this is time to shift to defense. My stops are spread between 4,300 and 4,350. If the index retreats to these levels Friday, no big deal, I collect my profits and get ready to buy the next bounce. But if the rebound continues higher, even better, I move my stops up to 4,400 and let those sweet profits come to me.
Fortune favors the bold and that means buying bounces when everyone else questions your sanity. In reality, the biggest fools were the ones waiting until stocks fell to 6-month lows before finally abandoning ship. (I bailed out back on January 5th, in case you missed that post.)
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 exploded 2.2% higher Wednesday after the Fed hiked interest rates for the first time since 2018 and laid out plans for another SIX hikes later this year…ouch!
That’s a bitter pill for investors addicted to cheap money, but the market was actually relieved the Fed’s plans weren’t even more aggressive and longer-term projections show rates topping out in a moderate 3% range.
Wednesday’s big gains add to Tuesday’s decisive rebound off of 4,200 support and that 4.4% two-day total is the biggest win in nearly two years. (Catch a ride on a 4.4% wave in a 3x ETF and now we’re talking about real money!)
So much for Monday’s bearish close under 4,200 support. But that’s the way this usually goes. Stocks only bounce after most people have given up. And unfortunately for all of Monday’s late sellers, not only do they have the humiliation of abandoning stocks at the lowest prices in over six months, they get to watch this rebound race higher without them. That’s the definition of adding insult to injury.
While I was equally discouraged by last week’s pathetic price-action and had low expectations Tuesday morning, I bought the bounce anyway because that’s what my trading plan told me to do. (Start small, get in early, keep a nearby stop, and only add to a position that’s working.)
Well, as is often the case, my gut was wrong while my trading plan was right. That’s a lesson I learned the hard way a long, long time ago and this single idea made more money for me than every other trick, tool, and strategy combined.
Come up with a simple, sensible trading plan and stick to it. Successful trading doesn’t need to be any more complicated than that.
As for what comes next, I’m fully invested and my trailing stops are above my entry points, meaning no matter what happens next, this is pretty much a free trade for me.
If prices continue higher, great, I let those profits pile up. If the selloff resumes and the index retreat under 4,200, I get out at my stops, collect some small profits, and get ready to try again next time.
If I’m right, I make a ton of money. If I’m wrong, I make a little bit of money. I love trades like this! But these opportunities only come to people willing to act early and decisively.
So to answer my opening question, is this the real bounce? Maybe. Maybe not. But no matter what happens next, this is a great trade for me.
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If you find these posts useful, please return the favor by liking and sharing them!
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What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, receive actionable analysis and a trading plan every day during market hours
Follow Jani on Twitter @crackedmarket
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