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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 | Weekly Analysis
Free Weekly Analysis:
Friday was another choppy session for the S&P 500 with the index traversing more than 150-points throughout the day.
The morning started off well enough with a nice opening gap that pushed the index back to 3,800 support. Unfortunately, those gains evaporated and turned red within a couple of hours. 10-year Treasury yields flared up again that that unleashed another wave of selling in the equity markets. But not long after the index challenged Thursday’s lows, the selling capitulated and stocks bounced hard, rallying 100-points from the intraday lows and closing up nearly 2%.
When it was all said and done, this choppy week crashed through 3,800 support and it still managed to close 0.8% in the green. As hopeless as things felt Thursday afternoon, we actually finished the week in pretty good shape.
As I wrote previously, equity investors are not afraid of 1.5% Treasury yields. It wasn’t all that long ago when 1.5% was a record low. And in fact, most equity investors would be thrilled if 1.5% rates were our new reality. But that’s not what investors are afraid of. They worry this jump to 1.5% will continue to 3%, which is a much different proposition when it comes to interest rates and stock valuations.
While I was cautious following Thursday’s collapse under 3,800 support, I also warned readers the bounce could be just around the corner:
I have no idea how much further this selloff will go, but chances are it will only last a few days and that means shorts need to be ready to lock-in profits quickly. Fight the urge to get greedy. Remember, this is still a bull market and these things bounce hard and fast. Hold a little too long and all of your short profits will evaporate.
It turns out my estimation of “a few days” was overly generous and in reality, we could have measured this violation of 3,800 support in hours.
I’m impressed with Friday afternoon’s bounce. Thursday’s violation undercut recent lows and could easily turn into this pullback’s capitulation point. In more normal times, I’d be embracing Friday’s bounce with open arms.
The problem is this time equity investors are not trading stocks, they are reacting to the bond market. Was Friday afternoon’s stabilization in Treasury yields the real deal? If so, all the lights around us are green. But if the bond market continues to struggle, the index will tumble even lower next week.
While I love the way stocks responded Friday afternoon, I have a lot less confidence in the bond market. But that’s the way this usually goes. Most of our best trades have very questionable beginnings.
At this point, as long as the S&P 500 remains above 3,800, stocks are ownable. If yields flare up again next week and the index retreats back under 3,800 support, lower prices are ahead.
Given how volatile things have been lately, we should have our answer pretty quickly on Monday. If prices retreat, sell. If the bond market calms down over the weekend and stocks rally Monday, buy. 3,800 is the tipping point and we should follow the market whichever way it goes next week.
While I’m cautiously optimistic about the indexes, it is a lot harder to find nice things to say about TSLA. At the depths of Friday’s collapse, the stock was down 40% from the highs of only a few weeks ago. Easy come easy go. If $600 doesn’t hold, unfortunately, $400 is the next logical support level.
TSLA’s bounce is buyable as long as the stock remains above $600. But all bets are off if prices violate $600 support again. At that point, it’s best to step aside and wait for the dust to clear.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Thursday was another bad session for the S&P 500. Not only was this the third loss in a row, but the previously rock-solid 3,800 support crumbled before our eyes.
As bad as this sounds, putting this pullback in perspective, today’s 3,768 close would have been a record high less than two months ago. This latest selloff only looks bad when compared to where we were a few weeks ago.
That said, it feels like sentiment flipped from half-full to half-empty following this latest runup in interest rates. As I wrote yesterday:
Even if this rise in yields is nothing more than another false alarm, the only thing that matters over the near-term is if equity investors believe this is the real deal. If they want to abandon the market and sell their favorite stocks at steep discounts, no one can stop them.
And that’s exactly what happened Thursday as the index crashed through support. This violation of 3,800 was shortable with a stop just above this level. At this point, proactive shorts should be moving their stops to at least their entry point, making this a free trade.
I have no idea how much further this selloff will go, but chances are it will only last a few days and that means shorts need to be ready to lock-in profits quickly. Fight the urge to get greedy. Remember, this is still a bull market and these things bounce hard and fast. Hold a little too long and all of your short profits will evaporate.
Jumping from the frying pan and into the fire, the S&P 500’s 5% loss pales in comparison to TSLA‘s 30% collapse. Back in mid-February, I warned TSLA owners to get defensive if the stock retreated under $800 support. And here we are a few weeks later, testing $600. And before anyone starts thinking the worst is behind us, a dip under $600 could easily fall all the way back to $400. I don’t think anyone needs to be told holding through a 50% pullback is an awful pill to swallow.
Savvy traders lock-in profits when everyone else is overcome with greed. And those same savvy traders are there to pick up the pieces when the crowd gets terrified and starts selling their stocks at steep discounts.
If a person locked-in profits back at $800, no doubt they are hoping TSLA tumbles all the way back to $400. I’m not sure this falls that far, but it will definitely get worse before it gets better.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Everything seemed so promising for the S&P 500 Monday afternoon following the biggest up-day in nine months. Fast forward two sessions and everything feels different.
While the index hasn’t violated last week’s lows, retesting support so soon after bouncing off of it is never a good sign. We want to see a surge of relief buying carry us higher, not waves of nervous selling knock us back down.
And while I count myself as one of the bulls, I recognized this retreat was a real possibility. As I wrote Monday evening:
All of this uncertainty stems from equity investors’ newfound obsession with 10-year Treasury yields. Yields go up, stocks go down. It doesn’t get any more complicated than that.
As I wrote last week, I don’t think this rise in yields is the real deal. Unfortunately, the market never once asked me what I think. Even if this rise in yields is nothing more than another false alarm, the only thing that matters over the near-term is if equity investors believe this is the real deal. If they want to abandon the market and sell their favorite stocks at steep discounts, no one can stop them.
I continue to believe this rise in rates is not the real deal and further, major bull markets do not turn off like a light switch. That said, even if this latest wobble ultimately resolves to the upside, things could get fairly bumpy over the near-term if nervous traders continue overreacting to these interest rate headlines.
If the S&P 500 undercuts 3,800 support, expect stock owners to start panicking as if the end is coming. That frenzied selling will likely last for a few days. But once it dies off, those of us that practice safe trading and sold at much higher levels have the cash to start snapping up all of those attractive discounts.
Speaking of safe trading strategies, by now most people who were following this rally higher with a sensible trailing stop have locked in their profits and are waiting for what comes next. Get ready because the bounce is coming. We just don’t know if this will bounce off of 3,800 again (boring!) or something much lower. (I’m hoping for much, much lower!)
Either way, be ready to put your cash to work. As always, wait for the bounce, start small, keep a near-by stop, and only add to a trade that is working. If the first bounce fizzles, no big deal, pull the plug and wait for the next one.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
On Monday the S&P 500 produced its biggest gain since last summer. On Tuesday it gave back a chunk of those gains. Two steps forward, one step back.
There is nothing wrong with a minor step back following such a large up-day. The key is hanging on to what’s left. Stay above 3,850 and everything is fine. Falling under 3,800 so soon after bouncing off this key support level tells us there is a serious demand problem and the selling is only just getting started.
This bull market deserves the benefit of doubt because it hasn’t let us down yet. Until we experience a more material breakdown, expect every dip to bounce within days, if not hours. If this market was fragile and overbought, it would have collapsed a long time ago. (Pro-tip for all the cynics out there, weak fragile don’t keep setting record highs.)
But enough about the indexes. One of the most noteworthy stock performances of the day came from ZM. It announced blowout quarterly results Monday after the close and the stock popped Tuesday morning. Unfortunately, that was as good as it got. Within hours, that impressive 8% opening gain turned into a dreadful -9% closing loss. That’s a 17% swing from the highs to the lows.
There are few things in the stock market that look worse than this. In fact, I cannot think of anything worse than such an epic midday collapse. Rather than cheer the news, most owners did their best impersonation of rats abandoning a sinking ship.
A stock that cannot go up on good news is in desperate shape and destined to keep going lower. ZM is a strong short as long as it remains below $400.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 popped 2.4% in the biggest up-day since last summer. There wasn’t a clear headline driving Monday’s flurry of buying. Instead, this was a sharp snap-back from last week’s reflexive herd selling that got too carried away.
As I wrote last week, 3,800 was the tipping point. Either we fall over the edge or we bounce decisively off of support. Given the elevated volatility, there really wasn’t anything in between. And fortunately for the bulls, we got that decisive rebound off of support.
Like many people last week, I believe rising interest rates are what is going to kill this bull market. I just don’t think this is that time. Despite everyone trying to call a top, bull markets don’t die with the flip of a switch. Topping in a process that takes months.
We are only days removed from the last record high. If there is one thing we know about weak markets, they don’t keep setting new record highs. Until we see a clear pattern of lower-highs, assume this bull market is very much alive and well.
This bull market will die like all of the others that came before it. But this is not that time.
(Note: The one thing that would make me reconsider all of this above is if the index retreats back to 3,800 over the next few days. If this bounce is the real deal, it shouldn’t look back. If prices retest support so soon after the bounce, the selling isn’t over.)
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By Jani Ziedins | Weekly Analysis
Free Weekly Analysis:
It’s been a rocky couple of weeks for the S&P 500. Rather than bounce back from last week’s string of down days, we added to them. This week’s 2.4% loss was the largest since the final week of January and the second-biggest since November’s election.
As bad as that sounds, these periodic pullbacks keep turning into bullish higher-lows. At this point, the index remains above a trendline stretching back to just after the Covid lows. This pullback needs to keep going if it is going to do any meaningful technical damage.
That said, everything could change next week if the selling resumes. But until that happens, this isn’t anything more than a routine and healthy step-back on our way higher. Two-steps forward, one-step back. Rinse and repeat.
This leaves the market at a key tipping point. If this dip is truly like every other step-back over the last several quarters, the bounce is just around the corner. Rebound back to the highs and nothing has changed. Extend the selloff and we are entering uncharted territory.
Investors have become fixated on rising 10-year Treasury yields. Is this finally the start of something new and we should be concerned? Maybe. But this bull market ignored a once-in-a-hundred-year global health pandemic, it shouldn’t surprise anyone if it shrugs off a jump in interest rates from 0.5% to the still absurdly low 1.5%.
Is the bull market dying? No, probably not. But we will learn a lot about the market’s intention next week when either the index bounces or it continues lower.
As for a trading strategy, it is pretty straightforward. The market is buyable above 3,800 and sellable under this level. It doesn’t get any more complicated than that.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Volatility exploded this week as the S&P 500’s last three trading sessions produced some of the largest intraday swings of the year.
The biggest wild card continues to be 10-year Treasury yields, surging from 0.5% last autumn to 1.5% today. While 1.5% is trivially small by historical standards and investors are not afraid of these 1.5% rates, they are afraid this surge will turn into 3% or even 5% over the next several months.
Remember, the investors don’t price stocks based on where we are today, but what they think we will be in six to twelve months.
Stocks are stupid expensive by conventional measures (forward P/Es, etc). But these valuations are actually reasonable given these historically low interest rates. That’s because the lower interest rates are, the more valuable future cash flows become.
The problem is one percent interest rates justify really high stock valuations. Four percent interest rates do not. And that’s the million-dollar question, where are interest rates headed?
With all of this money printing supporting the Covid economy, most people assume inflation and higher rates are inevitable. But you know what? They said the same thing after the Fed pumped the economy full of cash following the housing bubble and 2008 financial crisis. Quite a few “forward-thinking” hedge funds lost a ton of money a decade ago when they bet on higher inflation and ended up being wrong.
Now I will count myself as one of the people concerned about inflation and higher interest rates. As I described, these crazy high stock valuations are built on a foundation of low interest rates. Take that away and the whole thing comes crashing down.
I have little doubt higher interest rates are what will kill this bull market. The problem is I don’t know when it will happen. As I’ve written previously, these rallies go so much further and last way longer than anyone thinks possible. While we might already know how this ends, the demise is still probably a few innings away.
The one thing we know for sure is dying markets do not keep making new highs. If the S&P 500 returns to the highs over the next few days, all of this talk of the end is premature. If prices retreat under recent lows, then we have to take this more seriously.
The great thing about being independent investors and traders is we don’t have to predict the future. We are small enough that we can react to these developments in real-time as the future unfolds in front of us. If the market bounces tomorrow, buy and hold. If prices retreat under the lows, sell and even consider going short.
It doesn’t get any more straightforward than that. Volatility is picking up, meaning the next move will be large. We just need the market to pick a direction and then hang on.
My intuition and educated guess is higher, but I have no problem being wrong. (In fact, I’ll make more money if stocks decline sharply, so here’s to hoping I’m wrong!)
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What’s a good trade worth to you?
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Follow Jani on Twitter @crackedmarket
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