Category Archives for "Free Content"

Jun 13

Why nothing matters to this market

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 rebounded from Friday’s early selloff and finds itself right back near all-time highs. Anyone who sold Friday’s dip is kicking themselves for overreacting to that weakness. If they were paying attention to the way this market has been behaving, they would have known better and not made that mistake.

Last Thursday I wrote:

“While this market makes me nervous, the path of least resistance is clearly higher. If we were vulnerable to a crash, it would have happened by now. There have been plenty of excuses for traders to sell defensively. But when no one sells the headlines, they stop mattering. These things rarely end well, but they also last longer and go higher than anyone expects. I don’t trust this market, but it will most likely continue creeping higher for the foreseeable future.”

A few hours the market “crashed” in one of the biggest dips in nearly a month, but that was clearly a place to be buying the dip, not selling the weakness. To be honest, I cannot even remember what traders were so spooked over Friday morning it was that trivial. If interest rate hikes, a presidential scandal, and the U.K. government in disarray didn’t bother the market, why should some nominal headline Friday morning make a difference? And a few hours later, it turned out those headlines didn’t matter and we find ourselves right back near the highs.

Risk is a function of height, meaning this is the riskiest the market been in quite some time. But just like skating on thin ice, it’s only dangerous if you fall through. Right now the market continue skating on thin ice without a care in the world. The path of least resistance remains higher…….until it doesn’t.

While I’m skeptical of this market and don’t trust it, it will keep going higher until is has a good reason not to. So far it has refused every reason we’ve thrown at it. That’s because this market is built on high hopes for generous tax cuts. At this point it is clear nothing else matters. The market doesn’t care that a special counsel has been appointed to investigate our preside. That doesn’t have anything to do with tax cuts, so it doesn’t matter…..right?

But if this market is built on a foundation of tax cuts, that is also the thing we are most vulnerable to. If the Republican coalition in Congress devolves into party infighting, or this looming Russia/Trump scandal erodes all of the president’s political capital, expect this market to give back a big chunk of the post-election gains. At this point that is the only thing that will kill this rally. But until this happens, enjoy the slow glide higher and ignore all the other noise along the way.

Clearly this is a buy-and-hold market. Anyone trying to trade this crap is getting their ass kicked. Traditional breakout and breakdown signals mislead us when they fail hours later. The only trade to make is either sticking stocks, or staying in cash. Anyone trying to outsmart this market by jumping in and out is doing nothing but accumulating losses. There are trading markets and there are buy-and-hold markets. This is definitely a buy-and-hold. But don’t despair. This won’t last long and great trading opportunities will come to those who are patient enough to wait for them.

Jani

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Jun 08

Is anyone paying attention?

By Jani Ziedins | End of Day Analysis

End of Day Update:

It was an exciting day for politics on both sides of the pond. We started the day with a General Election in the U.K. and capped it off with Comey’s testimony before a Senate committee. These two events were widely anticipated by pundits and news junkies for weeks. But it seems someone forgot to send the memo to the stock market. Given the market’s tepid, almost boring price-action, it looked like any other boring summer trading session.

Luckily for us boring is a good thing. It means traders are calm and not overreacting to headlines. Rather than sell nervously ahead of uncertain events, most traders are confidently assuming everything will blow over and this isn’t worth worrying about.

It’s easy to see why the market shifted to this half-full outlook. Every defensive sell over the last few years was a painful mistake. After getting burned three, four, and five times by prematurely selling a dip, traders learned their lesson and now confidently hold any and every dip because it will bounce like all the others before it. And so far that strategy has worked brilliantly. In fact the lack of defensive selling has gotten to the point that dips are measured in hours and tenths of a percent. Blink and you’ll miss them.

I miss the old volatility. I made a lot of money buying steep discounts from traders overreacting to headlines. People would dump their stocks “before things got worse”, but typically that was as bad as it got and we rebounded when things turned out less-bad than feared. But these days it is hard to find bargains when traders are demanding premium prices for uncertain times.

It was easy and safe to buy a dip when the market overreacted. Risk is a function of height and the lower we went, the less room there was left to fall. Buying at $80 is always less risky than buying at $100. But the opposite is true here. Long gone are the days of buying at $80, or even $100. Instead sellers are demanding $120 for an imperfect product. Good for them if they can sell at $120, but the thing is most are greedily holding for even higher prices. Their confidence is keeping supply tight and propping up prices, but these premium prices mean there is far less margin for error. We’ve gotten to the point where need to hit the ball out of the part just to keep this rally alive.

While this market makes me nervous, the path of least resistance is clearly higher. If we were vulnerable to a crash, it would have happened by now. There have been plenty of excuses for traders to sell defensively. But when no one sells the headlines, they stop mattering. These things rarely end well, but they also last longer and go higher than anyone expects. I don’t trust this market, but it will most likely continue creeping higher for the foreseeable future.

This post-election rally was built on expectations of tax cuts. Nothing else matters. Corporate tax cuts, repatriation of overseas profits, more money in consumers’ pockets. That is what propelled us from the November lows. But expectations are high. Maybe a little too high. What happens if Trump and Republicans fail to deliver on their generous promises? It won’t be pretty. Right now the stock market is giving the benefit of doubt to Trump and the Republicans. But there is a good chance the tax cuts won’t be as impressive as hoped for and we will stumble into a sell-the-news dip. Tax cuts are what got us to these heights and they are also one of the few things that can knock us off this perch. Keep riding these waves higher over the near-term, but bailout as soon doubt about the size of the tax cuts starts to creep in.

Jani

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Jun 06

Are things a little too good?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 finished lower for a second day, but the losses were minor and we are still well above the 2,400 breakout. The lack of material selling tells us most owners are more inclined to keep holding for higher prices than taking profits. Even though there are several ominous headlines floating about, it doesn’t matter if no one is selling the news. While conventional wisdom tells us markets are complacent just before they collapse, what conventional wisdom often forgets is those periods of complacency last far longer than anyone expects. The path of least resistance definitely remains higher, but expect the rate of gains to remain slow. While confident owners keep supply tight, we are running out of people willing to throw new money at these record highs and that is keeping a lid on prices.

Just because the path of least resistance remains higher doesn’t mean we shouldn’t be shifting to a defensive mindset. Even though I expect prices to continue rising over the near-term, we have never been closer to the market’s top. It’s been a great ride since the 2009 Financial Crisis bottom and I’ve been long-term bullish the entire time. As the saying goes, be greedy when others are fearful. Up until last year the market was afraid of its own shadow and traders thought every bump in the road was leading to the next market crash.

But eight years later, those traumatic memories are fading and being replaced with fear of being left behind. Starting last year the market experienced a major shift in sentiment as we went from a nervous, half-full outlook to this confident, half-full assumption that everything will turn out alright. Long gone are the fears that a Fed taper or interest rate hike would derail this market. Instead we have gotten to the point where the market is fairly blaze about an investigation into our president that could end in impeachment. While I agree the chances of this outcomes is remote, the consequences will be catastrophic for a market that is built entirely on Trump’s promised tax cuts.

It isn’t hard to see why most traders shifted to this half-full mindset. Every defensive sale over the last eight-years was a mistake because the prices rebounded even higher a short time later. After the third, fourth, and fifth time of feeling stupid by selling prematurely, traders learned it is best to hold through these periods of uncertainty and spooky price-action. And so far every trader who has become patient and confident has been rewarded as we climbed to record high after record high. It has gotten to the point where almost no one is reacting to headlines anymore. Rate hikes are no big deal. Missing employment expectations is met with a yawn. Heck, this cynical market finished in the green following the latest terrorist attack. Even a scandal that threatens to derail the Trump administration was hardly good for more than 24-hours of selling. Traders have been conditioned to hold through every dip and as a result no one is selling ominous headlines. The lack of supply means we stopped dipping at all.

While this complacency makes me nervous, I know it is foolish to call a top. This will go higher and longer than even the bulls think possible. The thing is this isn’t about predicting a top but finding good enough. To recognize the risk/reward is no longer stacked in our favor. That this is a better place to be taking profits than adding new positions.

I’m certain this market will keep going higher over the near-term, but I doubt this is the last time the market will trade at these levels. I don’t know when or why the next bear market will happen, but it isn’t unreasonable to expect our next bear market to cut 30% out of the market. That means even if we rally another 1,000 points and peaks above 3,400, we could still find ourselves tumbling back to these levels. The key isn’t about picking the top, but finding a level that is good enough, taking profits, and waiting for a better entry point. It is impossible to buy a dip if we are fully invested and ride our positions all the way down.

The post-election rally is built entirely on expectations of tax cuts. The market has been more than willing to give benefit-of-doubt to Trump and the GOP, but if they fail to deliver, expect the market to give back a huge portion of those gains. Given the high prices and low implied volatility, this might not be a bad place to look at a black swan trade. Buy longer-dated, out-of-the-money puts. While they will most likely expire worthless, the costs are relatively low and the payoff is huge if things turn out worse than the market is hoping for.

Jani

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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

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