Category Archives for "Free Content"

May 18

How to trade the Trump volatility

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Thursday the S&P500 recovered a portion of Wednesday’s big crash. It was comforting to see the selling take a break as the supply of nervous sellers dried up. One day is certainly not enough to call this a bottom, but this is definitely a step in the right direction.

The turmoil started Tuesday night when a memo surfaced alleging Trump pressured the FBI director to drop the investigation of a former member of his administration. This ultimately resulted in the appointment of a special counsel to investigate the Trump White House. At best this is a huge distraction that will affect Trump’s ability to govern. At worst it could lead to his impeachment.

To this point the market has largely ignored the Trump circus, but this SNAFU poses the largest threat to the Republican’s tax cut and regulatory reform agenda. Since this is the foundation of the post-election rally, anything that threatens it also puts recent gains in jeopardy.

So far Trump has not been accused of doing anything illegal. This leaves the odds of impeachment low, especially in a Republican controlled congress. But Trump’s political capital is quickly evaporating. Lucky for him the Republicans in Congress share many of his same goals. While Trump might not get his Wall and the tax cuts might not look like what he proposed, Congress will still put bills on his desk and he will sign them. This continues to be the most likely outcome and after this brief bout of anxiety, the market will come to this realization too. That is why today’s selling took a break. Most likely this is nothing but a blip on our way higher.

That said, we might not have seen the bottom of this dip just yet. These things usually last more than one day and it is definitely premature to call the pullback over. If we were truly oversold, we would have seen a more decisive rebound Thursday. Instead we bounced a little bit and then mostly traded sideways through the remainder of the day. That tells us a lot of traders were not read to jump onboard the rebound.

Trading-wise we need to see the market hold Wednesday’s lows for a couple more days. If we don’t get a second leg lower by Monday morning, then this selloff is dead and we can start looking for the next trade. But if prices slip Friday morning and undercut Wednesday’s lows, expect that to trigger another wave of reflexive defensive selling. But rather than be the start of something bigger, this will most likely be the last push lower before a capitulation bottom. This would be a better place to be buying stocks than selling. Remember, risk is a function of height. This is the lowest prices have been in months making this is the safest time to buy in a while. Remember, we make money buying discounts, not paying premiums.

Jani

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May 11

Why today’s selloff failed

By Jani Ziedins | End of Day Analysis

End of Day Update:

Thursday provided a dramatic ride for the S&P500. We started the day with the biggest losses in several weeks. Within minutes of the open we undercut 2,390 support and that triggered a wave of reactionary stop-loss selling. But just as quickly as the selloff started, the rush for the exits stalled and we bottomed near 2,380 support. And just like that, the selloff was over and we spent the rest of the day climbing out of that hole. While we didn’t quite reach breakeven, the intraday reversal was impressive and told us most owners continue to believe in this market and won’t be spooked out so easily.

The biggest headline continues to be Trump’s dismissal of the FBI director. While the media is making a huge deal out of it, the stock market doesn’t care that much. Even at today’s lowest point, we were still within 1% of all-time highs. Hard to call such a small blip panicked selling.

While it felt awful in the moment, all selloffs feel that way. If they didn’t, no one would sell and we wouldn’t dip in the first place. But given how quickly we bounced off the lows, that tells us few owners were spooked by this price-action. Most owners have been rewarded by patiently waiting for higher prices and every bounce makes it easier to hold through the next dip. This confidence is infectious and the VIX is hovering just above all-time lows as traders continue to believe in this market’s strength. While it is easy to claim this market is too complacent, the harder part is figuring out when that complacency will become a problem. At the moment complacency is keeping supply tight because owners are not selling and that is propping up prices. While this might be the calm before the storm, the calm can last for an extended period of time. It is good to be cautious, but shorting just because the market is complacent is costing a lot of smart people a lot of money.

Expect prices to be resilient as long as owners remain confident. Until some headline comes across that makes the crowd start second-guessing their optimistic outlook, expect every dip to keep bouncing. Even though the market is vulnerable with so many people standing on one side, we need a significant event to trigger the panic. Until then the smart money is sticking with the rally.

Jani

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May 09

Should we fear this complacency?

By Jani Ziedins | End of Day Analysis

End of Day Analysis

The S&P500 poked its head above 2,400 resistance in early trade for a second consecutive morning, but just like Monday, we were unable to hold those highs on Tuesday. But before we get too pessimistic, both the gains and losses were small and mostly insignificant, measuring only a handful of points in either direction. While 2,400 has been a ceiling for the last few weeks, few traders were enthusiastically buying this breakout and that lack of demand is keeping a lid on prices.

On April 27th I wrote in my free blog:

Currently we are at the upper end of the trading range, meaning this is a better place to be taking profits than adding new positions. The longer we hold near these highs, the more likely it is we will break through 2,400 resistance, but without a substantive headline driving the breakout, expect the buying to fizzle and prices to tumble back into the heart of the trading range.

And so far this is exactly how things have played out. Stubbornly confident owners are keeping supply tight and propping up prices, but new money isn’t willing to chase prices higher and the breakout fizzled. But that was then, and this is now. What people really want to know is what comes next.

The post-election rally has been built on the back of expected tax cuts. We came a long way in anticipation of these cuts, but now we are getting to the point where traders need to see our politicians start delivering on their campaign promises before they will push prices any higher. Confident owners are keeping supply tight, but new money is no longer willing to push us any higher.

It is tempting to point to the record low VIX and claim this market is complacent. And I don’t disagree, this market is incredibly complacent. But the thing about complacency is it can persist for long periods of time. If confident owners haven’t sold any of the bearish headlines and price-action over the last several months, why are they going to start selling now? The simple answer is they won’t. Not until they have a good reason to change their mind. This bull market will die like every other one before it, but it needs something more than complacency to take it down and right now we don’t have that.

Markets like symmetry. We find ourselves in a very unemotional period, meaning traders on both sides are not very engaged in this market. We go up a few points, we go down a few points. No one is getting too excited in either direction. Even though the market is stalling at 2,400 resistance, we shouldn’t expect prices to tumble from here. Instead look for a pullback that matches the intensity with which we broke out. A few points higher and a few points lower.

Unfortunately for us traders, it is hard to profit from these small moves. But that is the way this goes. Sometimes we have great opportunities, other times not so much. It turns out this is one of those not so much times. But don’t despair, good trades are never far away. I don’t know what and when the next market moving event will be, but I do know it is coming. The challenge is for us to resist the temptation to over-trade this sideways chop and give back our hard-earned profits. Long-term success in the market doesn’t come from our winners, but minimizing our losers. It is easy to make money, the hard part is keeping it.

Jani

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Apr 27

Near all-time highs, what happens next

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 stalled at 2,400 resistance Thursday, ending an impressive streak of gains that kicked off the week. Investors cheered the positive result from the French elections, but after the initial euphoria faded, there wasn’t enough substance behind the headlines to justify buying above recent highs.

As I wrote in Tuesday’s free blog post “the thing about “not-bad” news (the French elections) is it doesn’t do anything to improve corporate earnings in the U.S. We experienced a brief period of relief this week when we avoided a worst-case scenario, but now that we traversed those waters, we are largely left where we were a couple of weeks ago. We remain near the highs as hope for tax and regulatory reform remains high, but we are still waiting for Trump and the GOP to deliver on those promises. We couldn’t break through 2,400 in March and not much has changed since then.” And up to this point, the market is reacting exactly as I expected.

Now that we are at the upper end of the trading range, we need something new to keep this going. The Trump administration unveiled “the biggest tax cut in U.S. history”, but the market didn’t react because there is zero chance he will get this by Democrats and fiscally conservative Republicans. While 15% tax rates make a great soundbite, he might as well be promising the moon because neither one is going to happen.

Right now the market is trading in opposite world. Meaning it does the opposite of what conventional wisdom says it should do. Rather than selling a violation of support, we should buy it. Instead of buying the breakout, we sell it. When it feels like the market is about to collapse, buy. If everything is right in the world, sell.

The reason traditional rules do not work is because the wider crowd of investors is not joining these directional moves. Overactive day-traders jump from one extreme to the other and cause these daily gyrations, but when the wider group of investors doesn’t join in, the move fails and reverses. As long as the larger group of bulls and bears remain stubbornly attached to their outlook, we shouldn’t expect these directional moves to take hold. Instead, keep buying weakness and selling strength.

Currently we are at the upper end of the trading range, meaning this is a better place to be taking profits than adding new positions. The longer we hold near these highs, the more likely it is we will break through 2,400 resistance, but without a substantive headline driving the breakout, expect the buying to fizzle and prices to tumble back into the heart of the trading range. At this point the only thing that will support sustainable breakout is the GOP getting their act together and coming up with a passable tax plan. Until then expect us to stay in this trading range and keep selling strength and buying weakness.

Jani

Apr 25

Are Bulls Wrong this Week?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 added to recent gains Tuesday and is within a few points of all-time highs. This is a long way from the anxiety and uncertainty traders felt last week. In my April 18th free blog post, “Don’t Let the Bears Scare You”, I wrote that weakness was “a better place to be buying stocks than selling them”. Given this week’s strong performance, that was definitely the prudent trade. While it feels good to pat ourselves on the back, the most important trade is always the next trade. Now that we returned to the highs, everyone wants to know what comes next?

The first thing we need to analyze is what brought out of last week’s doldrums. This rebound kicked into overdrive Monday when the French election went according to the market’s plan. While it was nice to eliminate this risk factor, “not-bad” news is a lot different than good news. The market would have been upset if two anti-EU candidate’s made the final round, but for what seems like the first time this year, a moderate is the clear front-runner.

But the thing about “not-bad” news is it doesn’t do anything to improve corporate earnings in the U.S. We experienced a brief period of relief this week when we avoided a worst-case scenario, but now that we traversed those waters, we are largely left where we were a couple of weeks ago. We remain near the highs as hope for tax and regulatory reform remains high, but we are still waiting for Trump and the GOP to deliver on those promises. We couldn’t break through 2,400 in March and not much has changed since then.

The next bogie on the horizon is Congress passing a federal budget. Even though the GOP controls the government, they have been unable to use their strength effectively. Last month they failed to repeal Obamacare and right now it looks like they are on the verge of screwing up even simple procedures. If the GOP cannot agree on the budget, then that endangers even more important things like tax reform.

Most traders know market trade sideways more often than they rally or pullback. But we often forget that in the heat of battle. When prices are falling, we assume they will keep falling. When we rebound, we assume prices will keep rallying. But most of the time these periods of strength fizzle and bouts of weakness rebound. While most investors feel a lot better than they did last week, we should assume we will stay inside this trading range until something more meaningful happens. Just like how last week was a buying opportunity, this week we should be selling this strength. Expect us to remain rangebound until tax reform either passes or dies. Until then keep buying weakness and selling strength.

Jani

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Apr 18

Don’t Let the Bears Scare You

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 slipped for the fourth day out of the last five trading sessions. This time we were brought down when the British Prime Minister shocked everyone by announcing snap election in a few weeks. That launched the pound higher while punishing the export heavy London stock market. This weakness carried over to our shores, but to a far lesser extent since we only lost 0.3% as compared to the FTSE’s 2.5% drubbing.

My last free blog post was nearly a week ago when I wrote how this was a buyable dip. At that point we had been down for six sessions over the previous two weeks. It didn’t get much better since then because almost every day over the last week has ended in the red. Given the huge number of down-days over the last few weeks, you would expect stocks to be dramatically lower. But that’s hardly the case. After more than six-weeks of selling, the best bears can manage is a 2.2% dip from all-time highs! That hardly seems like something to worry about.

I’ve been trading for nearly two decades and the one thing I can tell you is market crashes are breathtakingly fast. They happen so quickly most traders don’t have the time to react, let alone understand what is going on. The “selloff” we find ourselves in middle of is the exact opposite. It is happening so slowly it is almost painful to watch. If stocks crash from unsustainable levels quickly, holding near the highs for nearly two months tells us this is a constructive consolidation, not the verge of a collapse.

If we need further evidence, the healthcare bill blew up a few weeks ago. Today the Brit’s interjected more political uncertainty by calling for new elections. Over the last month we’ve seen negative technical price-action pile up as we undercut key price levels and moving averages. But to this point none of the headlines or weak trading has been able to trigger follow-on selling. Instead of being spooked, confident owners are staying confident. When confident owners don’t sell, supply stays tight and prices remain firm. Say what you want about the underlying fundamentals, but it is really hard for a selloff to take hold when no one is selling.

One of the most profitable ways I’ve found to analyze the market is asking myself “what is the market not doing?” Right now the market is definitely not selling off. We have had wave after wave of bearish headlines and so far every violation of support is met with dip-buying, not emotional herd selling. We have been given countless excuses to implode, but the market is clearly not interested in taking the bait. Countless bloody noses have taught me market’s don’t give us this long to sell the top. If that is the case here, that means this cannot be the top.

If this market doesn’t want to go down, that makes this a better place to be buying stocks than selling them. That said, I don’t believe this market is poised to rip higher either. Markets love symmetry and this 2% dip will likely be met with an equally uninspiring rebound. Expect the S&P500 to stay 2,300/2,400 range-bound until further notice. Nimble traders can trade the swings inside this range, but longer-term investors should stick with their positions and ignore this noise.

Jani

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Apr 12

Why it is okay to keep buying the dip.

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 slipped for the sixth-time over the last two-weeks and finds itself under the 50dma. But as bad as this sounds, this “selloff” hasn’t even given up one-percent over this period. The reason we slipped under the 50dma is because it came up to meet us, not that we dipped down to find it. Clearly the Trump Trade is cooling off, but this is hardly panic material.

The interesting thing is the mood in the market has changed from unbridled optimism to reservation and caution. Trump’s had his share of missteps, the health care repeal blew up, and there is simmering tension with Russia, Syria, and North Korea. Add to this the negative price-action we’ve seen recently and the market has plenty of excuses to sell off. That leaves us with the question, why is this dip so modest?

One of the most useful ways I found for analyzing the market is looking at what it is NOT doing. We have all the excuses I listed, plus we can add “too-high, too-fast” and stretched valuations to the list too. With all of these reasons, why aren’t we dramatically lower? Why aren’t more people selling and taking profits? Why isn’t anyone panicking?

When we ask, “what is the market not doing?” Clearly it’s not selling off in a meaningful way. While some people will tell us to be patient, one of the things I learned during my two-decades in the market is big selloffs are breathtakingly fast. They happen before you know what hit you. Not this slow motion stuff we find ourselves in the middle of. If we were extended and vulnerable to a breakdown, it would have happened by now.

No matter how good the reasons the bears have, it doesn’t matter when owners refuse to sell. As long as stubbornly confident owners continue keeping supply tight, the market will keep finding support and defying the skeptics. Clearly this cannot last forever, but it will last far longer than anyone thinks possible.

This market will crack and break down because every bull market eventually ends, but we are not there yet. As long as these dips fail to attract follow-on selling, expect them to be modest and bounce. That means this is a better place to be buying stocks than selling them. As long as we keep recycling the same old headlines, we don’t have anything to worry about. If the healthcare dud and launching missiles at Syria didn’t faze owners, it is hard to imagine a headline that will convince them to change their mind.

Over the near-term I will keep buying the dip, but I will keep an eye out for that new and unexpected headline that sends chills through this market. That will be the one we have to watch out for. But until then approach this rangebound market by buying weakness and selling strength.

Jani

Apr 05

Death of a Bull, or Another Buyable Dip?

By Jani Ziedins | End of Day Analysis

End of Day Update:

It was a wild ride for the S&P500 as respectable gains evaporated in a late-day selloff. The Fed’s meeting minutes poured cold water on the market when they told us the easy-money party was coming to an end. Many people believe the Fed’s aggressive bond buying program inflated this market and now the Fed is telling us they plan on shrinking their enormous balance sheet later this year. While today’s dramatic reversal on elevated volume was noteworthy in of itself, the bigger question is if this is just another buyable dip like all the others before it, or if this is a true turning point that represents a fundamental change in the market’s outlook.

The market clearly didn’t like today’s news and that’s what lead to the largest intraday reversal in quite some time. But for this to represent a real change, this needs to be a new and unexpected development. Something that caught optimistic owners by surprise and will finally be the catalyst that causes them to give up hope and sell.

Personally I didn’t find this revelation all that surprising. The Fed told us they were going to boost interest rates and that’s what they’ve been doing. So far stocks have brushed off the last three rate-hikes and we continue hovering near all-time highs. Shrinking the balance sheet is the next logical step in the return to normalized monetary policy. It’s been eight-years since the depths of the financial crisis and the economy has proved itself far more resilient than most expected. While equity owners would love to keep the money printing presses running full-tilt, we find ourselves at a point where the risks outweigh the rewards.

If I knew this was coming, was it a surprise to you? If it doesn’t seem like a big deal to either of us, should we really expect this to send a chill through the market? The current crop of owners is stubbornly confident. Every other dip this year bounced because owners refused to sell. Do we think this headline is so shocking and unexpected that it will turn these stubbornly confident owners into fearful sellers? I doubt it. And there’s our answer. Today’s news doesn’t change anything. Stubbornly confident owners will remain stubbornly confident and this dip will bounce like all the other ones before it. No matter what the market “should” do, when people don’t sell, supply stays tight and prices resilient. Something will break this market eventually, but this isn’t it.

As a trade, I would give this reversal a little time to work its way through the system. These things are rarely one-day events, but I would be buying this weakness, not selling it.

Jani

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Mar 21

Common Sense Part II

By Jani Ziedins | End of Day Analysis

End of Day Update

The S&P500 experienced its first one percent loss since October. This came as quite the shock for those that assumed the Trump trade would take us to the moon. But it was little surprise for those of us that have been doing this for a while. Many people will claim they saw this was coming, but the following is what I wrote the day S&P500 exploded to record highs following Trump’s first address to Congress and when Trump mania reached a fever pitch:

While owners feel good and comfortable with their positions, we really should be asking ourselves if this is a better place to be adding new positions or taking profits. Risk is a function of height and by that measure this is the riskiest the market has been in quite some time. Momentum is clearly higher and will likely continue, but I feel much safer buying discounts than paying a premium. It is simply a matter of risk versus reward. This breakout carried us to record highs and has already moved us 15% above the November lows. While we can keep drifting higher, what are the odds we rally another five, ten, or fifteen percent? With history as our guide, a near-term dip is more likely than a continuation. As we started with, markets move in waves. You know it, I know it, everyone knows it. Unfortunately many in the crowd have temporarily forgotten it.

And given today’s meltdown, we now we find ourselves in the midst of this expected pullback. The more pressing question is if this the start of a major correction, or just a routine two-steps forward, one-step back?

The excuse for today’s selloff was the failure of a Republican controlled Congress to quickly reach a deal on repealing Obamacare. The thinking goes that if they cannot get their ducks in a row on Obamacare, then the much more important tax reform is also in jeopardy. But the thing to remember is this is how politics works. As the saying goes, there are two things you don’t want to know how they are made, sausages and laws. This is an ugly and drawn out process. Just because Representatives claim they won’t support this bill doesn’t mean they won’t support a bill. This is how negotiations work in politics. Grind the process to a halt, get concessions for your constituents, and then let everything proceed. If our politicians were not doing this, they wouldn’t be doing their job.

So if this is the way politics always works, should we really be worried that the repeal of Obamacare and Tax Reform are dead? No of course not, that is just as ridiculous as assuming the Trump trade was taking us to the moon. Today’s pullback is normal, routine, and most importantly buyable. But the thing to remember about buyable dips is they wouldn’t happen unless they felt real. If everyone knew it was a buyable dip, no one would sell and we wouldn’t dip in the first place. Of course this feels real and of course it is scary. Every buyable dip feels this way.

The challenge isn’t knowing if we will bounce, but when. Most owners have been confidently holding for higher prices despite concerning headlines and price-action. Are today’s headlines likely to change their mind after they stood their ground through far more bearish headlines? No probably not. That means we should expect this selloff to run out of supply soon and rebound back into the heart of the trading range. What happens after that is an entirely different debate, but at the moment this is a better place to be buying equities than selling them.

The one exception is if we stumble across truly unsettling news that shifts the market back into a half-empty outlook. That said, today’s headlines are definitely not that. Repealing Obamacare is not dead. Tax cuts are not dead. Reducing regulation is not dead. This is simply a process and that takes longer than the stock market was hoping for. The great thing for us is these discounts create profit opportunities for those that are willing to take them.

Jani

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Mar 09

What is Sentiment Telling Us?

By Jani Ziedins | End of Day Analysis

End of Day Analysis

The S&P500 continues hovering above 2,360 while oil fell under $50 for the first time this year. The last few weeks of enthusiasm is crumbling and giving way to second thoughts. This shift is clearly evident in popular sentiment measures. The StockTwits’ $SPY stream plunged from 60% bullishness last week to 40% today. AAII’s weekly sentiment survey saw bearishness spike nearly 11% and is at the highest level since the election. Given how dramatically sentiment changed, surely it must have been a painful week for stocks. While we slipped almost every day since last Wednesday’s record high, the losses have been relatively trivial and we are down little more than 1% from last week’s all-time high. Clearly something is askew and as traders it is our job to figure out who is right, the resilient market, or the increasingly pessimistic crowd.

When all else is equal, we always give the benefit of doubt to the market. While it is not always right, it is far larger than we are and will run over us if we get in its way. One of the most useful techniques I found for analyzing the market is focusing on what it is not doing. This is typically far more insightful than trying to guess at what it is doing and why it is doing it.

This week’s dramatic swing in sentiment tells us the crowd thinks stocks went too-far and are vulnerable to a pullback. I can relate because that is exactly what I was expecting last week too. But here’s the rub, we haven’t pulled back very far after a week of selling. As I often write, breakdowns from unsustainable levels are breathtakingly fast. The market rarely gives us this much warning before crushing us. Jumping back to the “what is the market not doing?” view of the market, the obvious answer is it is not crashing. When the market isn’t doing what the crowd expects, that means it is setting up to do the opposite. While I’m not ready to predict another strong move higher, at this point that is far more likely than the widely feared imminent collapse. That means we should be looking for dips to buy, not selling stocks and adding shorts.

Jani

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