Category Archives for "End of Day Analysis"

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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Mar 01

A Common Sense Reminder

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 surged to fresh highs in the biggest up-day since the election. Trump addressed Congress Tuesday night and clearly the stock market liked what it heard. Today’s move caps a 15% rally since the November lows. It’s been a great ride, but the pressing question is if it is time to get off, or if this thing has a lot further to run?

Let’s start with the basics, everyone knows the market moves in waves. Most traders acknowledge even the strongest markets move two-steps forward, one-step back. While we cognitively recognize this, we often forget it in the heat of battle. Human nature compels us to find patterns and extrapolate those patterns far into the future. This behavior worked well when it came to surviving in the wild, but many of these instincts are a liability in the financial markets.

Traders are excited, everyone is making money, and it is hard to resist the crowd’s enthusiasm. Everyone else is making money and we want to join the party. It is perfectly natural to feel nervous when everyone around us is nervous and relaxed when everyone else is relaxed. When a lion entered a camp, those that automatically ran when everyone else was running survived while those that waited to see what the fuss was about quickly became lunch. We’re pack animals by instinct. Rather than fight it, just recognize it and factor it into our trading decisions.

 

And this brings us back to the current market. We surged 15% in four-months with only the smallest dips along the way. Then today we experienced the largest single-day gain of the entire move. Let me ask the rational side of your brain, is today’s surge the start of a much steeper rally higher? Or is it more likely to be part of a near-term climax before a much needed pullback and consolidation?

Let’s just get this out of the way pullbacks are inevitable. It will happen because it always happens. The hard part is getting the timing right. Traders don’t get paid for knowing what will happen, they get paid for knowing when it will happen. And so the question isn’t if this breakout will stall and step-back, the question is when. Without a doubt this rate of gains is unsustainable. But the same thing could have been said yesterday, last week, or even last month. While I don’t know when we will peak, what I do know every day brings us one day closer.

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.

All of that said, we need a something to shake the confidence of stubborn owners. Something to get them to sell this market they are so excited about. Two bogies on the immediate horizon are the Fed’s interest rate decision and Republicans getting together to repeal Obamacare. If either of these don’t go the market’s way, that could be what gets traders to start looking down and realize how high they are and convince many to start taking profits.

Don’t get me wrong, I’m not a doom-and-gloom perma-bear. I’m simply being a realist. The biggest up-day in a nearly straight-up 15% move makes me nervous. Markets move in waves and it’s been some time since we took a step back. Be careful.

Jani

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Feb 16

Where we go from here

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 snapped a seven-day win streak Thursday, but it is a stretch to call a 0.09% bump a meaningful loss, especially since we rebounded nicely off the intraday lows.

Looking at the chart it is obvious the recent rate of gains is unsustainable and today was finally the day we took a break. While there might be a little more upside left in this move, we are definitely closer to the end than the start. If a person is not already in the market, they are late to the party and should resist the urge to chase. Risk is a function of height and it is more dangerous to buy up here than it was before we broke out. Wait for the inevitable cooling off before rushing in. Institutional money hates chasing breakouts and we should follow their lead. If big money is holding back, in a bit of a self-fulfilling prophecy their lack of buying actually creates the dip they are waiting for. We should exercise the same restraint. As the saying goes, “It is better to miss the bus than get hit by the bus!”

It’s been a tough stretch for bears who were convinced the market was going to tumble from 2,300 resistance. Instead we broke through and surged 50-points. But that shouldn’t come as a surprise to regular readers of this blog.

I wrote on February 9th:

“the thing to remember is we tumble from unsustainable levels quickly. We have been hanging out near these record highs for two-months. If this market was fragile and vulnerable, we would have crashed a long time ago. There have been more than enough reasons for this market to selloff, yet every time it refuses the invitation and we run out of sellers. Say what you will about the fundamentals of this market, but when confident owners don’t sell bearish headlines and weak price-action, supply stays tight and prices remain resilient. If the sellers failed to materialize over the last eight-weeks, why would they show up now and sell far more benign headlines and price-action? That is the question every bear needs to answer. If it didn’t happen then, why is it going to happen now?”

Bears could have saved a lot of money if they used a little common sense, but that is that is a lesson to save for next time. Now that we are up here, the question is what happens next? As I already stated, the recent rate of gains is unsustainable, so at the very least expect the market to slow down. That doesn’t mean we are going to tumble, just that we need time to consolidate recent gains. As I wrote on February 9th, confident owners are ignoring all the reasons to distrust this market. Until we find something new and unexpected to shatter this calm, expect the bull market to remain resilient.

If we cool off, the nearest level of support is 2,320. That acted as resistance last Friday and we bounced off that level Monday and Tuesday. I would not expect a routine pullback to dip a lot further than that. Traders that missed the initial breakout can use this dip as a safer entry point.

Until something new and unexpected happens, expect this post-election drift higher to continue.

Jani

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Feb 09

The Inevitable Breakout

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 closed above 2,300 for the first time ever on Thursday. We started consolidating under this psychologically significant level in early December, but it’s taken us this long to find the demand necessary to push on through. While it’s been a long time coming, it shouldn’t be a surprise for anyone who has been reading this blog. As I said many times over the last several weeks, the longer we hold near the highs, the more likely it is we will break through. We tumble from unsustainable levels quickly and holding on this long told us the market wanted to go higher, not lower.

But now that we’re up here, the bigger question is what happens next. While I think the path of least resistance remains higher as we squeeze shorts and suck in breakout buyers, tepid demand continues to be a real obstacle for this bull market. No doubt we will get some recent profit-takers to jump back in when 2,300 resistance turns into support, but so much optimism has been priced into since Trump’s election that it is getting harder and harder for this market to exceed expectations. Even though momentum will keep us drifting higher over the near-term, this is a better place to be taking profits than initiating new longs. While cashing in over the next few days is a prudent move to make, going outright short creates a far different risk/reward. Even though this strength leaves us vulnerable to the unexpected, we need that unexpected event to happen first. It is far too dangerous to short for no other reason than “we are due for a pullback”. Just ask all the shorts that were crawling over each other to get out this afternoon when we smashed through their stop-loss levels.

There isn’t a lot more to add since this is such a benign market. Emotion is practically nonexistent, meaning there is not a lot of force behind these moves in either direction. Last week we saw a modest retreat from the highs the first time we tried to break 2,300. Now that we finally broke through, expect an equally lethargic breakout. Momentum is higher, but this thing is moving so slow we don’t need to chase it. If you are not already in the market, wait for a better trade. The hardest thing for a trader to do is not trade, but often that is the best move to make.

Jani

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Feb 07

Common Sense

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 flirted with 2,300 resistance Tuesday, but yet again failed to break through. Is this a healthy and normal pause before the next leg higher? Or are we running out of steam and on the verge of rolling over? That’s the question on everyone’s mind.

2,280 has been a ceiling for this market since early December. We broke through briefly at the end of January but failed to hold those gains. This is our second assult on 2,300 and thus far things don’t look any different. But the thing to remember is we tumble from unsustainable levels quickly. We have been hanging out near these record highs for two-months. If this market was fragile and vulnerable, we would have crashed a long time ago. There have been more than enough reasons for this market to selloff, yet every time it refuses the invitation and we run out of sellers. Say what you will about the fundamentals of this market, but when confident owners don’t sell bearish headlines and weak price-action, supply stays tight and prices remain resilient.  If the sellers failed to materialize over the last eight-weeks, why would they show up now and sell far more benign headlines and price-action? That is the question every bear needs to answer. If it didn’t happen then, why is it going to happen now?

That said, tepid demand has been a major headwind for the market at the upper end of the trading range. While confident owners are keeping supply tight, those with cash prove just as stubborn when it comes chasing record highs. When no one is selling and no one is buying, we trade sideways. We know this stalemate cannot last forever, and at least for the near-term, the path of least resistance is higher. What happens after we breakout is less clear, but unless something unexpected happens, don’t bet against this market just yet.

Jani

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Jan 31

Fizzled Breakout

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

After spending most of Tuesday in the red, a recovery in the final hour of trade pushed the S&P500 most of the way back to break even. Monday’s weakness killed last week’s breakout and pushed us back into December’s trading range, but Tuesday’s resilience tells us most owners are not abandoning their stocks yet. Volume was the highest of the year, no doubt boosted in large part by end-of-month adjustments.

The headline of the week has been Trump’s executive order to stop admitting immigrants from seven Middle East nations. As far as corporate earnings go, the financial impact is negligible but that that hasn’t stopped traders from selling the news. In large part they are not reacting to this story, but being reminded Trump’s unorthodox leadership style cuts both ways. Stocks enjoyed a strong close to 2016 on hopes of reduced regulation, tax cuts, and corporate tax reform. Largely forgotten in the cheer has been Trump’s less business friendly stances. Trump’s moves over the weekend reminded traders that his presidency won’t be all sugar and cream.

Demand near record highs has been an issue since early December and it is not a surprise to see stocks retreat from last week’s breakout. While confident owners continue holding for higher prices, few with cash are willing to chase the market to record levels. This standoff between bulls and bears has kept us rangebound for nearly two-months and at this point it doesn’t look like that is changing anytime soon. As long as we struggle to find new buyers at the upper end of the range and owners refuse to sell the lower end, we are not going anywhere fast.

At this point I’m more cautious than optimistic. The 200-point rebound from November’s lows priced in a lot of good news our leaders and the economy need to deliver. Hit these targets and the market will yawn because it already priced in most of those gains. But run into a snag and we tumble into all the clear air underneath us. Momentum is higher and all else being equal, we should expect the slow drift to continue. But the reward from owning a slow drift is small, especially when compared to the risk if something unexpected sends a chill through the market. Small gains and large risks create a poor risk/reward. That said, it is a tad too early to short this market because we will continue creeping higher until we have a reason to tumble. This is not a bad place to take profits, but wait for that worrying headline before attempting a short. Only options sellers and nimble day-traders make money in flat markets, the rest of us are not getting paid to own risk and are best served waiting for a better trade.

Jani

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Jan 19

Don’t overthink this market

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 did a lot of nothing Thursday, continuing 2017’s trend of doing absolutely nothing. We’ve been sandwiched between 2,260 support and 2,280 resistance since the year started because traders are stubbornly sticking to their positions. Price move when people change their mind and right now bulls are staying bullish and bears are staying bearish.  Headlines and economic data no longer matter when people stop trading them.

Trump will become the 45th president of the United States Friday. Love him or hate him, it will be nice to put all of this behind us next week. Clearly the Trump trade is struggling to find new buyers since we stopped rallying in early December. Maybe we are simply consolidating gains before the next leg higher, or maybe we exhausted the supply of new buyers. Given how sanguine the market feels, it is hard to claim there is a lot of upside left because everyone is too pessimistic. If anything, I’d say traders are too optimistic and that leaves us vulnerable to a reversal in sentiment.

Even though the market barely moved 1% since early December, you’d hardly know it given all the arguing going on in the Twitter and StockTwits streams. Flat stretches like this chew up opinionated, over-active traders who jump on every “breakout” and bailout of every “breakdown”. Buying high and selling low rarely work out, but traders who come to the market with a bias on their sleeve are helpless victims to the market’s countless head-fakes. Directional traders make a lot of money when the market is moving, but they get eaten alive during these flat stretches. Sometimes the best trade is to not trade. That simple piece of advice could have saved a lot of people a lot of money and heartache.

What is the market going to do next? I wish I knew the answer. But the great thing is we don’t need to know because the market is going to tell us. The longer we hang out near resistance, the more likely it is we will eventually poke our head above it. We’ve encountered numerous negative headlines and bearish price-action. If this market was fragile and vulnerable to breaking down, those would have been more than enough to kick off a wave of selling. Instead supply dries up and we rebound within hours. That bodes well for a continuation. But demand continues to be a real problem for this market, so any gains will be slow. At this point, a continuation is more likely than a correction.

That said, if something comes along and actually spooks this market, there is a lot of air underneath us. 2,200 support is an easy jump from here and it wouldn’t take much to break through that and test the 200dma. High probability of a small gain, or a smaller probability of a large loss. Which way you trade this depends on your risk appetite, but no matter what, be ready to jump out of the way if hints of fear start cropping up. A dip under 2,260 driven by a new and unexpected headline that doesn’t bounce within hours is our sign that the market is starting a pullback to support. Trade accordingly.

Jani

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Jan 17

Sell the news? Not so fast.

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 slipped modestly following the MLK holiday. Brexit headlines make a comeback when the British Prime Minister laid out her plan for leaving the EU. The pound rallied sharply when she said she the matter would be voted on by Parliament, but the same enthusiasm didn’t spread to equities.

The biggest event this week is Trump’s inauguration. Previously I suggested we could experience a sell-the-news deflation as air leaks out of the Trump rally next week, but now it seems like everyone is touting the same thing so now I’m no longer convinced. The more people expect something, the less likely it is to happen. That’s because traders try to get ahead of the market by trading early, but their early trading actually prices in the expected move before the event. If too many people expect a sell-the-news event this Friday, they are taking profits this week and could be the reason we are struggling with 2,280 resistance. Once this proactive selling subsides, we could actually do the opposite and continue rallying after the inauguration.

No matter what happens, we are within spitting distance of all-time highs and only the most stubborn bears are claiming the world is falling apart. The longer we hold near the highs, the more likely it is we will break through them. Markets tumble quickly from unsustainable levels and right now the market is quite comfortable near these highs. At this rate it will only be time before we break through and test the psychologically significant 2,300. No matter what the market “should” be doing, when confident owners keep supply tight, prices continue creeping higher.

Jani

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Jan 12

A Bullish Loss

By Jani Ziedins | End of Day Analysis

End of Day Analysis

Thursday was another seesaw session for the S&P500 when early losses rebounded in afternoon trade. Even though we closed in the red, finishing well off the intraday lows turned this into a bullish day. Volume was near average, but less than Wednesday’s levels. While most money managers have returned from vacation, the modestly muted volumes tell us they are not fully engaged in this market yet.

The early losses were primarily fueled by an echo from Trump’s first press conference the previous day. While nothing new was revealed Wednesday morning, it didn’t take much to convince anxious owners to lock-in profits. But these defensive minded traders were in the minority because not long after undercutting Wednesday’s lows, supply dried up and we rallied into the close.

Bull markets are typified by weak opens and strong closes. Cynics are always trying to pick a top and their selling pressures the market early in the day. But big money underweight stocks and desperately trying to catch up uses this weakness as an opportunity to buy at a discount. Late day strength signals institutional accumulation and is why the market axiom tells us it’s not how you open, but how you close that matters.

This is the seventh session in a row the S&P500 closed above 2,260. Markets collapse from unsustainable levels quickly and holding support for this long tells us we are standing on solid ground. Everyone is looking toward Dow 20,000 and S&P 2,300, but like a watched pot, the market is being stubborn about breaking these psychologically significant levels. While many traders are getting impatient, the longer we hold near the highs, the more inevitable it becomes that we will poke our head above this level.

The question isn’t if we will break 20k/2,300, but what happens after we do. Demand has been a real issue for this market. It’s not because people are afraid of stocks, but because the crowd finally believes in the market and is finally fully invested. Long gone are the days of predictions of doom-and-gloom around every corner. Now the crowd is giddy over the business friendly policies the GOP is going to implement. While these are great developments and will no doubt boost the economy, the problem is stocks are struggling to rally on this optimism. I love to buy stocks that stop going down on bad news and fear stocks that cannot rally on good news.

Over the near-term I expect us to break 20k/2,300, but I’m less optimistic about what happens after that. Most likely that will be the final hurrah of the post-election rally before we fall into a much needed step-back to support. Two-steps forward, one-step back. Everyone knows the market moves this way, but somehow they continue to be surprised by it every time it happens.

Jani

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