Category Archives for "End of Day Analysis"

What makes Tuesday’s rebound different

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

There is a good chance that weeks from now we will look back at this Tuesday as a key turning point in S&P 500. It was only the second time the index finished in the green in the last ten sessions, but that’s not the only thing that made it feel different. Volume has been ramping up over the previous six sessions and Tuesday’s rebound was the highest of them all. Clearly, something big is happening, the only question is what.

If there is one thing both bulls and bears can agree on, it is that markets don’t move in straight lines. It has been a brutal October for stocks. At the very least, a near-term bounce is overdue. After definitively undercutting the early October lows and setting off a tidal wave of panicked defensive selling, this is about as good of a double-bottom setup as we will ever see.

While nothing in the market is ever certain, double bottoms are some of the most resilient bottoming signals the market gives us. Prices undercut the prior lows, triggering an avalanche of reactionary selling. But rather than trigger the next leg lower, that dip is the last gasp of defensive selling. Once we run out of emotional sellers, supply dries up and prices rebound.

Monday’s frighteningly horrific collapse was as bad as it gets. We opened green, but it was downhill from there and by early afternoon, the index shed more than 100-points. But what if that really was “as bad as it gets”? Maybe, just maybe, that was the worst and everything will get better from here. As the saying goes, it is darkest just before the dawn.

As I already stated, both bulls and bears can agree a bounce is coming. And most bears will even concede that the biggest bounces come in bear markets. This means that no matter which side of the bear/bull debate you stand on, there is an excellent chance this market is ripe for a sharp move higher.

2,700 is the next most obvious price target. But the market likes symmetry and a rebound to 2,700 doesn’t even come close to matching the intensity of October’s selloff. While we could pause and even retrench a little at 2,700 over the next few days, the most likely target for this rebound is the 200dma/2,800/2,820 region the previous bounce stalled at in mid-October. Even rising up to and above the 50dma and the start of this selloff near 2,870 is on the table.

But just like how selloffs don’t go in straights lines, neither do recoveries. After recovering 200-points from the selloff’s lows, it will be time for another dip. How big of a dip depends on which side of the bear/bull debate you fall on, but at least both sides can agree that a bounce and a dip are still ahead of us. We can argue about the magnitude after we get there.

If a person wants a preview of what this looks like, scroll your favorite charting software a little to the left and see what took place this spring. A big crash in February, a sharp rebound from the lows, and a pullback from the rebound’s highs. Predicting the market isn’t hard. That’s because it keeps doing the same thing over and over again. The challenge is getting the timing right.

There are no guarantees in the market and the best we can do trade when the odds are stacked in our favor. This selloff is ripe for a bounce and right now that is the high probability trade. If it doesn’t work out this time, we retrench and try again.

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Jani

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CMU: How much worse will this get?

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Update:

Tuesday was another ugly open for the S&P 500 as overnight weakness in Asia and Europe pressured our markets. We crashed lower at the open and undercut this selloff’s prior lows near 2,710. But rather than trigger another avalanche of defensive selling, that early dip was as bad as it got. Supply of nervous sellers dried up after the first hour of trade and we recovered a majority of the losses by the close. Not very often does a 0.5% loss feel like a good thing, but that is what happened today.

Even though Trump’s tariffs haven’t done much harm to our economy, they are strangling the already weak Asian economies, most notably China. While this is Trump’s desired outcome, global markets are more intertwined than ever and what huts one is felt by everyone else. By taking down China, Trump is indirectly taking down our markets.

The biggest question is what comes next. Is the worst already behind us? Or are we on the verge of another tumble lower? I wish I knew for sure, but the best we can do is figure out the odds and make an intelligent trade based on the most likely outcome. For that, a look back at history is the most logical place to start.

The above chart shows pullbacks in the S&P 500 from all-time highs since January 1950. That gives us nearly 70 years worth of data to analyze.

One of the most notable things is how rare big selloffs really are. Over the last 69 years, only 11 times have prices tumbled more than 15% from the highs. We often think of big crashes like 1987, the Financial Crisis, or the Dot-Com bubble. But those events are exceedingly rare. All the other pullbacks over the last 69 years have been 15% or less. While 15% is a lot, it isn’t terrifying. And even better, all of those under 15% pullbacks were erased within a few months. Small and short. That sounds like something we can live with.

Currently we find ourselves 7% from the highs. Those losses are already behind us and we cannot do anything about them. But we can prepare for what comes next. Assuming we are not on the verge of another Financial Crisis or similar catastrophe, the most likely outcome is a dip smaller than 15%. From current levels, that is another 8%. But that is the worst case. The actual dip will most likely be smaller than 15%.

Over the last 69 years, the S&P 500 has tumbled between 10% and 15% 22 times. That’s about once every three years. Not unheard of, but not common either. The last pullbacks of this size were 15% in 2016 and 12% earlier this year. Are we due for another one? Maybe. But it definitely doesn’t seem like we are overdue given we already had two over the last two years.

More common are pullbacks between 5% and 10%. There have been 36 of these over the last 69 years, meaning these happen every year or two. From 7%, that means we could be as little as 1% or 2% from the bottom. And even better is most of these 15% or smaller pullbacks return to the highs within a few months.

We are down 7% and there is nothing we can do about that. But going forward we have a decent probability of only slipping a little further. And assuming the world doesn’t collapse, worst case is another 8%. While that wouldn’t be any fun, is that really worth panicking over?

The price action has been weak the last few days and that led to today’s weak open. And the market loves double-bottoms, meaning we could see a little more near-term weakness. But what is a little more downside if we will be back at the highs in months month? While I cannot say the bottom is in yet, the odds are definitely lining up behind buying this market, not selling it.

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Jani

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Where this market is headed next

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Thursday the S&P 500 tumbled sharply for the first time since last week’s big plunge. The market opened modestly lower, but the selling accelerated after the U.S. Secretary of State pulled out of a big economic summit in Saudi Arabia, heightening tensions between the two nations following the disappearance of a journalist. The market was already on edge after last week’s selloff, and it didn’t take much to push traders back into a selling mood.

But the thing we cannot forget is markets never move in straight lines, especially when emotions are this high. And not only are these sharp back-and-forth moves normal, they are actually part of the healing process. Every fearful seller over the last ten days has been replaced by a confident dip buyer. Out with the weak, in with the strong. While it would be more fun to watch the market zoom right back to the highs, that’s not the way this works. Buying dips are never easy, and that is true this time too.

Early weakness pushed us under 2,800 support. Without a doubt, quite a few traders used this widely followed technical level as a stop-loss. Their autopilot selling pushed the market down even further, triggering the next tranche of stop-losses, adding even more selling pressure. It didn’t take long for regretful owners to start having flashbacks of last week’s plunge and they reactively bailed out “before things got worse”. In a self-fulfilling prophecy, their fearful selling created the very plunge they feared. But by early afternoon, we exhausted the supply of fearful sellers, and prices found support near the 200dma.

There are two ways this story can play out. Bears believe this nine-year economic expansion is on the verge of collapse and it will take the “overvalued” stock market down with it. Blame it on interest rates, trade wars, or downright old age, pick your favorite reason. Or alternately, this is just another one of the 100+ dips and gyrations this nine-year-old bull market weathered on its way higher. 

While everyone loves predicting a top, what is more likely, the thing that happens 100+ times, or the thing that only happens once? Remember, bull markets bounce countless times, but they die only once. Could this be the top? Sure. But is it likely? Not even close. The odds are heavily skewed in favor of the continuation, but that never stops people from calling every dip a top.

The thing about this weakness is it is built on the premise that things will get worse. No one is afraid of 3.25% Treasury yields. The are afraid of 3.25% becoming 4.25%, and then 5.25%. Things need to get worse for the worst case scenario to materialize. But on the other hand, if things turn out less bad than feared, prices will rebound. Despite all the naysaying, there are plenty of reasons for stocks to keep going up. Namely, earnings are up 19% this quarter, while stock prices most definitely haven’t kept up with this phenomenal earnings growth. That sounds pretty bullish to me.

Bears need a lot of things to get worse for their thesis to turn into a reality. I just don’t see it happening. Reality is almost always less bad than feared and no doubt this time won’t be any different. People pray for a pullback so they can jump aboard the hot trade they missed, unfortunately, most people are too afraid to buy the dip when the market finally answers their prayers. This game is never easy, but that is what makes it so rewarding when we beat it.

Expect prices to remain volatile as the market comes to terms with recent events. But remember, collapses are brutally quick. The longer we hold last week’s lows, the less likely it is we will undercut them. The most nimble day-traders can buy these intraday dips and sell the intraday bounces. Those of us with a little longer timeframe can buy the larger dips and sell the larger rebounds. The biggest level ahead of us is 2,870 resistance where last week’s plunge started and is likely where this rebound is headed. It won’t be a straight line, but markets that fall down the elevator shaft usually land on a trampoline.

All of this assumes the worst is behind us. All bets are off if we undercut last week’s lows. That tells us buyers are afraid of this market and nothing shatters confidence like screens filled with red. But until then, this rebound is alive and well and believe it or not, we could see new highs before year-end.

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Jani

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Is it safe yet?

By Jani Ziedins | End of Day Analysis

Free After-hours Update:

What a difference a few days makes. Last week the market was collapsing. This week we recovered a big chunk of those losses and things feel significantly better. The only question is if this rebound is the real deal, or just a false bottom on our way lower.

The buying kicked off Tuesday morning when Goldman Sachs and Morgan Stanley reported solid earnings. That was enough to move the conversation away from rising Treasury yields and put traders back in a buying mood. Last week’s selloff lowered expectations and now “not bad” is good enough to send prices higher.

There were a lot of “what ifs” last week asking if rising interest rates and trade war tariffs were going to strangle the economy and crush corporate profits. But if companies continue to hit their numbers the way GS and MS did, expect these “what ifs” to quickly fade from memory. Reality is rarely as bad as feared and it won’t take much to put traders back into a buying mood.

And this week’s dramatic reversal shouldn’t surprise anyone. Markets that fall down the elevator shaft typically land on a trampoline. Last Wednesday I wrote the following after stocks tumbled 3.3%:

“I fear the slow, insidious grind lower. Those are the losses that accumulate when no one is paying attention. What I don’t fear are the big, headline-grabbing down-days. The one that gets everyone’s attention and makes headlines around the world. That’s because those big, flashy days don’t have any substance. As the saying goes, the flame that burns twice as bright only lasts half as long.”

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While it is most certainly premature to claim last week’s selloff is over, the situation is far less scary than it was a few days ago. And that matters a lot when talking about emotion-fueled selloffs. Last week people reflexively sold first, asked questions later. But this week’s bounce gives traders more time to be thoughtful and make rational decisions. Without the pressure of falling prices, most owners will stop overreacting to the fear-mongering headlines.

Risk is a function of height and believe it or not, last week’s dip was actually one of the safest times to buy in months. Prices plunged and impulsive sellers bailed out, but those discounts and turnover in ownership made stocks far more attractive. It certainly didn’t feel that way, but buying dips is never easy. By rule, every dip feels real. If it didn’t, no one would sell and we wouldn’t dip.

We are not out of the woods, but we are close. Hold near 2,800 support through Wednesday’s close and we can say last week’s emotion-filled selloff is over. Even a dip to the 200dma wouldn’t be bad as long as it found support and didn’t trigger a waterfall selloff. Market collapses are breathtakingly quick and holding last week’s lows for four days means cooler heads are prevailing and the impulsive selling is over. Without a doubt, the market could experience another leg lower, but it would take a fresh round of headlines to trigger that next wave of selling.

And while I continue to believe in this market over the medium- and long-term, we should expect volatility to persist over the near-term. If we survive the next few days, then this bounce will continue all the way up to the old highs near 2,870. That is where waterfall selloff started, and the market will likely hit its head back toward 2,800 support. But rather than fear the next dip, that back-and-forth is the healthy way the market recovers from a big scare.

As usual, long-term investors should stick with their positions. More nimble traders can profit from these back-and-forth gyrations. A person that cannot stomach another dip should sell the strength as we approach the old highs and buy the next dip. And if everything goes according to plan, the market will put this bout of indigestion behind it, and we are still on track for a nice rally into year-end. Every dip over the last nine years has been buyable and chances are this one is no different.

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Jani

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What happened the last time we fell 3%?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 was murdered Wednesday, collapsing 3.3% as the market plunged for the fifth-consecutive session as interest rate fears spiraled out of control. This was the worst down-day since last February’s selloff.

While that sounds dreadful, could this actually be a good thing? Did anyone look back at that fateful day in February when we fell 3.75%? If you did, you already know what happened next. Panic driven selling pushed us down another 50-points early the next day, but rather than collapse lower, supply actually dried up and we finished the day up 1.5%. And not only that, that morning’s lows were the lowest point for all of 2018 and we have been higher ever since. Will this time be any different?

Without a doubt, we could fall further, but is that an excuse to abandon this market? Or is this a golden opportunity to jump in? Only time will tell, but at this point, the best we can do is look at history.

I fear the slow, insidious grind lower. Those are the losses that accumulate when no one is paying attention. What I don’t fear are the big, headline-grabbing down-days. The one that gets everyone’s attention and makes headlines around the world. That’s because those big, flashy days don’t have any substance. As the saying goes, the flame that burns twice as bright only lasts half as long.

They don’t get any bigger than 1987’s 20% collapse. That day will forever live in market folklore. But what you rarely hear is the market actually finished 1987 with a respectable 6% gain. And not only that, all of those 20% losses were erased within 12 months. It doesn’t sound nearly as scary when you put that 20% loss in context.

But forget 1987, we don’t even need to look further back than earlier this year to see the same behavior. February’s selloff sliced nearly 10% off this market. Yet we reclaimed all of those losses within six months.

I will be the first to admit I didn’t see Wednesday’s dramatic selloff coming. I have been bullish on this market since February’s bottom and today’s 3% selloff doesn’t change anything. Dips are a healthy part of every move higher. And that includes frighteningly dramatic days like Wednesday. If a person cannot handle a 3% dip in the broad market, or a 10% dip in a highflying tech stock, they probably shouldn’t be speculating in stocks.

If I wasn’t already fully invested in this market, I would be buying this dip with both arms. I’ve been doing this for way too long to let a little irrational selling scare me off. But that is what works for me. If the market’s volatility is keeping a person up at night, that is a sign they need to reduce their position sizes to something that is more manageable. The key to surviving the market is keeping your head when everyone else is losing theirs. Do whatever is necessary to reclaim your perspective. If that means dialing back your position sizes, then that is what you need to do.

Back to the big picture, if a person believes a 0.25% bump in Treasury rates will strangle the economy, then they definitely need to sell and lock-in their profits. But if a person doesn’t believe this economy is teetering on the verge of a recession, then they can ignore the noise and wait for higher prices. As crazy as it sounds, I still believe this market is setting up for a year-end rally. Come back in three months and we’ll see who was right.

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Jani

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While the ride was scary, did anything change today?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update

Thursday was brutal for the S&P 500. Ten-year Treasury yields surged to the highest levels since 2011 and fear of sharply rising interest rates sent global equity investors scrambling for cover.

The S&P 500 opened down a modest 0.2%, but that was as good as it is got and by midday, we crashed through 2,900 support and the selling didn’t stop until we shed nearly 1.5%. This was definitely a sell first, ask questions later kind of day. But not all was bad. A late-afternoon rebound reclaimed 2,900 support before the close. Not very often do we breathe a sigh of relief when the market finishes down 0.8%, but that was so much better than it could have been.

The question on everyone’s mind is what happens next. Today’s frenzied selling hit us out of the blue and is unlike anything we’ve seen in months. Wednesday we were flirting with all-time highs, but barely 24-hours later we crashed through support and shed nearly 60-points from the previous day’s highs. We have to go back to this winter’s big selloff to see two-day price-action that dramatic. It was especially shocking given how benign volatility has been lately. But the market has a nasty habit of smacking us when we least expect it, and that is exactly what happened Thursday.

While this price-action was dramatic, the first thing we have to ask ourselves is if anything actually changed. A surge in interest rates was the excuse for Thursday’s selloff, and while rates climbed to the highest levels in years, they didn’t really go up that much. We broke through 3% for the first time back in May and have been consistently above this level since September. And this week’s “surge” took us from 3.1% all the way up to 3.2%. It’s not nearly as impressive when you look at it that way.

But a segment of traders was looking for an excuse to sell, and once the floodgates opened, the race to the exits was on. Early selling pushed us under the first set of stop-losses, and that selling pushed us under the next tranche of stop-losses. That pattern of reactive selling, dropping, and more reactive selling continued until we triggered all the stop-losses and ran out of defensive sellers willing to abandon this market.

And so what happens next? We don’t need to look very far because what will happen next is the exact same thing that happened last time, and the time before that. This is an incredibly resilient market. Owners refused to sell an escalating trade war between the world’s two largest economies. They refused to sell an ever-expanding investigation into the president. They refused to sell the Fed raising interest rates three times this year and promising another hike before the end of the year. Should we believe confident owners would sit through all that, only to lose their nerve and turn into panicked sellers when Treasury rates go from 3.1% to 3.2%. Really???

I don’t see anything that materially changed Thursday and that means my positive outlook remains intact. Everyone knows stocks cannot go up every…single….day. Dips are inevitable. The thing to remember about dips is they always feel real. If they didn’t, no one would sell and we wouldn’t dip! Without a doubt, Thursday’s selloff felt real. But nothing changed, and that means we should ignore the noise. This is a strong market and the rally into year-end is alive and well. Savvy traders are buying these discounts, not selling them.

Last week I wrote the following and nothing changed since then:

There is not a lot to do with our short-term money. Either we stay and cash and wait for a more attractive opportunity, or we stretch our time-horizon and ride the eventual move higher. Of course, there is no free lunch and holding stocks is risky. Anyone waiting for the next move higher needs to be prepared to sit through near-term uncertainty and volatility.

If a person has cash, they are a great position to buy these discounts. If a person was taking a longer view, they should have expected dips and gyrations along the way. If they knew something like this could happen, they would be less tempted to reactively sell the weakness. Unfortunately, a lot of traders were not prepared for this dip, and they joined the crowd jumping out the window. But it’s not all bad, their loss is our gain when they sell us their heavily discounted stocks. Sign up for Free Email Alerts so you are on the right side of the trade next time.

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Jani

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When to ignore red flags

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Tuesday the S&P 500 continued hovering near all-time highs as it digests recent trade war and interest rate headlines. We’ve been trading near 2,900 for nearly six weeks as the market consolidates August’s breakout to all-time highs.

But this isn’t a surprise for regular readers of this blog. I wrote the following nearly a month ago, and the market has behaved exactly as expected since then:

 “I didn’t expect much out of this dip and that is exactly what it gave us. Since the market likes symmetry, we shouldn’t expect much out of this rebound either. The next move is most likely trading sideways near the psychologically significant 2,900 level. It will take time for those with cash to become comfortable buying these levels before we will start marching higher again.”

With the benefit of hindsight, it is obvious the market isn’t up to much. But that didn’t stop countless people from losing money by selling last month’s dip and chasing Monday’s rebound. Easy mistakes that could have been avoided if people were paying attention. Make sure you sign up for Free Email Alerts so you don’t miss profitable insights like these.

Over the weekend the United States and Canada struck a compromise on a revised NAFTA. That sent prices higher Monday morning, but the market has struggled to add to those gains.

Typically a market that fails to react to good news makes me nervous, and Monday’s fizzled breakout definitely raised a red flag. A lack of follow-on buying often tells us we are running out of buyers and a price collapse is imminent. But this is not a not a normal market and the same rules don’t always apply.

Without a doubt, yesterday’s fizzle got my attention. But at the same time, this muted reaction is consistent with this bull market’s personality. Volatility is extremely low and that works in both direction. Since market selloffs are quicker and larger than rallies, this market’s reluctance to sell off on bad news is far more impressive than this week’s inability to surge higher on good news. I’d love to see prices race higher, but I’m not overly worried about this modest move becaue it fits this market’s personality. As I’ve been saying for a while, this is a slow market, and we need to be patient and allow the profits to come to us.

I’m willing to forgive the market for not holding Monday’s early highs, but that does count as one strike. If I see more warning signs, it will force me to reevaluate my outlook. But until then, I’m still giving this resilient bull market the benefit of the doubt.

FB is still struggling to get its mojo back. Between last quarter’s earnings disappointment, looming privacy regulations, and last week’s hacking revelation, it’s been hard for this stock to turn sentiment around. This is still the hottest social media property and nothing else comes close. As long as technology continues to be the hottest sector, FB will continue to be a buy. But if FB cannot catch back up to its FAANG peers, that could be an early sign the other FAANG stocks are skating on thin ice. At this point, FB is far more likely to catch up to the other tech high fliers than it is to bring everyone else down to their level. Things still look good over near-term and into year-end, but the situation could look a lot different next year. Stocks and sectors often take turns leading the way higher and at some point technology will hand the baton to the next hot sector.

AMZN announced it is boosting starting pay to $15/hr for its warehouse and other front-line employees. The stock initially dipped on the news, but it has since recovered those losses. Paying employees well is far better than dealing with high turnover, disgruntled workers, and public relation campaigns against the company. Plus, this has always been a growth story, not one about profits. Attracting and retaining the best employees will help it extend its growth streak.

Despite the flurry of headlines over the last few days, TSLA is right back where it was last week. The bulls are as dug in and entrenched as the bears. Both sides are prepared to fight to the death, and that is resulting in this stalemate. At this point, I still give a slight edge to the bulls simply because we are still at the lower end of this summer’s trading range.

Bitcoin is still struggling to break $6.8k resistance. If buyers wanted to buy this dip, they would have jumped in already. The chronic lack of demand at these levels is a concern, and the path of least resistance remains lower.

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Jani

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You call that a taper tantrum?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Thursday the S&P 500 recovered Wednesday’s late-day selloff and continues consolidating recent gains above 2,900 support.

But this is failed selloff is no surprise for regular readers of this blog. This what I wrote a few days ago and Thursday’s rebound played out exactly as expected:

“This market most definitely doesn’t want to go down. All summer it refused countless opportunities to tumble on bearish headlines. As I’ve been saying for a while, a market that refuses to go down will eventually go up.”

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The Fed released its latest policy statement Wednesday and told us it was raising interest rates a quarter percent. This move was widely expected, and the market initially rallied on the news. But later the Fed chairman told us rate hikes would continue through next year, eventually pushing us to 3%. The market got cold feet and tumbled into the red, and the selling got worse after Powell commented he thought stocks were overpriced.

For anyone that lived through 2013’s “Taper Tantrum”, Wednesday’s 0.3% dip wasn’t even a bump in the road. Thursday’s resilient price-action further confirmed most owners are not worried about the Fed’s rate increases…as long as the economic forecasts remain strong. The Fed lifted interest rates eight times over the last few years and another three or four increases over the next couple of years won’t be any more shocking to the system.

As shorter-term traders, the only thing that matters is the market’s reaction to these headlines. And so far stocks are shrugging them off. Maybe this will turn into a bigger deal down the road, but until then we don’t need to worry about it. This is a strong market, and it wants to keep going higher. Until that changes, we stick with what has been working.

The consolidation above 2,900 remains intact. If we were overbought and vulnerable to a correction, this week’s trade war and interest rate headlines were more than bearish enough to send us tumbling. Maybe bears will be proven right eventually, but they are definitely wrong right now. Timing is everything in the stock market and early is the same thing as wrong.

The biggest advantage of being small investors is we don’t need to look months and years into the future like big money managers do. Our smaller size means we can dart in and out of the market and only need to look days and weeks ahead. Things still look great for a year-end rally and that is how we should be positioned. No doubt we will run into challenges next year, but we will worry about those things when the time comes. For now, we stick with what has been working.

There is not a lot to do with our short-term money. Either we stay and cash and wait for a more attractive opportunity, or we stretch our time-horizon and ride the eventual move higher. Of course, there is no free lunch and holding stocks is risky. Anyone waiting for the next move higher needs to be prepared to sit through near-term uncertainty and volatility.

Highflying tech stocks lead Thursday’s charge higher, and worries about this sector are fading from memory. Even FB and NFLX are joining the party and climbed off their post-earnings lows. This hot sector will peak at some point, but this is not that point, and these stocks will lead the year-end rally.

TSLA got hammered after the close when securities regulators sued Elon Musk for fraud and sought to remove him from Tesla. The stock tumbled 13% in after-hours trade as the “Musk Premium” evaporated. While this will be a much bigger story and no doubt the selloff could get larger, I actually think the market is getting this one wrong. TSLA is currently navigating the rocky transition from disruptor to operator. No doubt Musk is a great visionary, but his execution skills leave a lot to be desired. The company no longer needs bold ideas; it needs to deliver on the promises it already made. The company needs leadership to take it from small, niche producer to a global competitor. Many people thought Jobs’ departure from AAPL would end of the company’s ride at the top, but AAPL didn’t need more innovation, it needed execution. And since Tim Cook took the reigns, the stock is up 450%. Something very similar could happen at TSLA……assuming they don’t go bankrupt between here and there. But if the company recruits a world-class operator as its next CEO, this whole episode could actually be a good thing for the company and its stock.

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Time to be patient

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 traded sideways for a second day as it consolidates last week’s breakout to all-time highs. Trump and his trade war continue dominating economic headlines, but so far our stock market doesn’t mind. As usual, confident owners refuse to sell and that is keeping a floor under prices. But stubbornly tight supply is only half of the story. To keep going higher, we need demand and right now that is in short supply.

This market’s restrained breakout isn’t a surprise to readers of this blog. Two weeks ago I wrote the following after prices finally reclaimed 2.900 support:

“Since we are not refreshing through a bigger dip, that means we should expect a prolonged sideways period. When the market doesn’t scare us out, it bores us out. Things still look great for a year-end rally, but we need to be patient and let those profits come to us. This is a slow-money trade and we will have to wait a while before the next fast-money trade comes our way.”

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This market most definitely doesn’t want to go down. All summer it refused countless opportunities to tumble on bearish headlines. As I’ve been saying for a while, a market that refuses to go down will eventually go up. And that is precisely what happened here. But at the same time, there is enough headline uncertainty to keep those with cash from chasing prices higher. Their lack of buying is keeping a lid on this market. No doubt we will keep going higher over the medium- and longer-term, but it will take time for those with cash to warm up to these record high prices.

There is nothing to do with our favorite long-term positions except keep holding them and letting the profits come to us. This is a slow-money market and it rewards patience. As for our short-term money, there isn’t a lot to do here. Either we sit in cash and wait for the next trading opportunity (we cannot buy the next dip if we don’t have cash!), or we stretch our time horizon a little and enjoy this ride higher. But if you are buying, be prepared to ride through a few dips along the way. Remember, this is a strong market and we buy the dips, we don’t sell them.

This market is still setting up nicely for a year-end rally and we should keep doing what has been working. Don’t let the bears convince you otherwise.

AMZN and AAPL continue consolidating following last month’s impressive, but ultimately unsustainable climb higher. Pullbacks and consolidations are a very normal and healthy part of every move higher. These stocks are acting well and I would be far more worried about them if they didn’t pause to catch their breath.

FB and NFLX are basing following last month’s disappointing earnings. But this is a good thing. Traders that missed these highfliers had been praying for a pullback so they could jump aboard. Unfortunately, many of these same people are now too afraid to take advantage of these discounts. The thing to remember is risk is a function of height. These are some of the least risky places to be buying these stocks in six months. Without a doubt, this is a better time to be buying than a few months ago when the crowd thought everything was great.

Bitcoin continues holding $6k support, but I wish I could say that was a good thing. While we held $6k support firmly for nearly six months, every bounce has been getting lower. First, we bounced to $17k. Then it was $12k. $10k came next. After that $8.5k. Earlier this month it was $7.5k and this weekend we stalled $6.8k. At this point, it is only a matter of time before we tumble under $6k support. As long as owners are more inclined to sell the bounces than buying them, prices will keep getting lower. It is only a matter of time before owners are kicking themselves for not selling when prices were above $6k.

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A market that refuses to go down…..

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 surged to fresh highs as investors chose to ignore trade war headlines and instead embraced optimistic third-quarter forecasts.

Fortunately, readers of this blog saw today’s breakout coming from a mile away. I wrote the following two weeks ago when the market was threatening to tumble under 2,870 support:

“The economy continues to hum along and that is the only thing that matters to the stock market. As long as the economic numbers look good, expect prices to keep drifting higher. Institutional money managers that were hoping for a pullback will soon be pressured to chase prices higher or else risk being left even further behind.Their buying will propel us higher through year-end. Unfortunately that doesn’t mean the ride between here and December 31st will be smooth and uneventful. Expect volatility to persist, but unless something new and unexpected happens, every dip will be another buying opportunity.”

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While it is easy to say the market doesn’t care about Trump’s trade war after we surged to record highs. It wasn’t nearly as obvious three weeks ago when a lot of owners were selling the fear and uncertainty, causing prices to fall four days in a row, and five out of six trading sessions. We get paid for seeing these things before everyone else, not after it is obvious to the crowd.

Nothing has been resolved between the US, China, Europe, and Canada and no doubt things will get worse before they get better. But our market has been telling us all summer it doesn’t care. These events haven’t put a noticeable dent in our economy or corporate profits, so most investors are ignoring the noise.

So far Trump’s trade war went from $15 billion in steel and aluminum tariffs to now we are taxing more than 50% of everything that comes from China, and they are taxing 85% of everything we send their way. The way both sides are going, a further escalation is inevitable, That means we are not far away from both sides taxing everything. But if the market doesn’t care about 50%, bumping it up to 100% won’t make much of a difference.

Without a doubt, we are living in a “half-full” environment where most traders assume things will turn out for the best. That’s why owners overlook negative trade headlines so quickly.

This is a typical trait of an aging bull market. Five years ago traders were afraid of their own shadow and panic-sold every bump in the road. The catastrophic injuries suffered during the 2008 financial crisis were fresh in most investors’ minds, and they lived in fear of a repeat. But here we are nearly ten years later and every defensive sale proved to be a costly mistake. After years of getting burned selling prematurely, most traders learned to stop reacting defensively. That’s how we ended up in this situation where the market refuses to sell off no matter what the headlines are.

While conventional wisdom tells us complacency precedes the fall, what conventional wisdom fails to mention is periods of complacency last far longer than anyone thinks possible. No doubt this bull market will die like all the others that preceded it, but it will not be dying anytime soon and we should enjoy the ride higher.

There is nothing to do with our longer-term investments expect to hang on and enjoy the ride. Things are a little more challenging with our short-term money. We are left with a choice of either staying in cash and waiting for the next buyable dip. (Cannot buy the dip if we don’t have cash!) Or shifting our time horizon and sticking with a medium-term buy-and-hold. Neither choice is wrong; it largely depends on a person’s trading philosophy and risk tolerance.

The next significant milestone is 3,000 and at this rate, it is only a few weeks away. Bad news won’t take us down and good news will push us higher. These record highs are scary, but a market that refuses to go down will eventually go up.

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Jani

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The Chinese retaliation that would crush the US economy

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 popped Tuesday and reclaimed the psychologically significant 2,900 level as trade war rhetoric escalated. As it stands, the US will start applying tariffs to 50% of all Chinese imports and China will retaliate by taxing 85% of our China-bound goods. As bad as that sounds, the market doesn’t care.

But this reaction from the market is not a surprise for readers of this blog. Last week I wrote:

“Confident stock owners made it abundantly clear this summer that trade war headlines and White House scandals don’t matter. If nothing can take us down, it is only a matter of time before we go up.”

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Some pundits claim the market rallied because these headlines “were less bad than feared.” But that’s hogwash. Trump’s trade war keeps escalating, and it doesn’t look like it will stop until both sides are taxing everything. I’m not sure how a full-on trade war is “less bad than feared,” especially when it is crushing Chinese growth.

No, the real reason the market doesn’t care is a lot simpler than that. We didn’t dip today because everyone who fears Trump’s trade war sold months ago and were replaced by confident dip buyers who don’t mind holding these risks. When there is no one left to sell the news, it stops mattering.

Conventional wisdom tells us complacent markets are ripe for a pullback. But what conventional wisdom fails to mention is periods of complacency last far longer than even the bulls expect. When confident owners refuse to sell, it doesn’t take much demand to prop prices up, and that is exactly what is happening here.

As far as these events being less bad than feared, things could definitely take a turn for the worse. While Trump believes he has China backed into a corner, they still have the nuclear option. They could most definitely wreak total havoc on our economy, and many of Xi’s advisors are pushing him to use it.

While tariffs on imported Chinese goods are most definitely inconvenient and will affect corporate profits and consumer discretionary spending, that is far better than the alternative. Some Chinese advisors want to prevent Chinese companies from selling critical components to US manufacturers. Nearly overnight that would bring our manufacturing sector to a grinding halt. Ford, Chevy, Chrysler, Boeing, Caterpillar, and nearly every other manufacturer uses at least a few components made in China. Take those away, and our manufacturers would be forced to shut down for weeks and even months as they scramble to adjust. The temporary layoffs and inability to sell finished products would trigger a nearly instantaneous recession. “Less bad than feared” could quickly turn into “oh my god, what just happened?”

China’s nuclear option definitely qualifies as Mutually Assured Destruction because it would be equally crippling to the Chinese economy. But just the threat of such a move could send our markets tumbling and force Trump to reconsider his threats. While Trump might have China backed into a corner when it comes to tariffs, you never know what a cornered animal capable of.

I certainly don’t expect the above scenario to play out, but it would be incredibly painful if it did. The market isn’t even considering this, and its “half-full” outlook assume everything will work out in the end. But fear is contagious this is definitely something we need to keep an eye on.

Baring the above scenario, the market is acting exceptionally well. A market that refuses to go down will eventually go up, and we are setting up nicely for a rally into year-end. Assuming Trump and China come to a reasonable compromise, that will be the catalyst for the next leg higher. But if things get ugly and fear starts to spread, get out before things get worse.

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Jani

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Small dips lead to small rebounds

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Thursday morning the S&P 500 popped above 2,900 resistance after China said it was willing to talk with the U.S. This strength put last week’s dip in the rearview mirror and last week’s nervousness is turning into this week’s hope.

Even though the market fell five out of six sessions last week, the losses were modest and contained. As I wrote on Tuesday:

“I didn’t expect much out of this dip and that is exactly what it gave us. Since the market likes symmetry, we shouldn’t expect much out of this rebound either. The next move is most likely trading sideways near the psychologically significant 2,900 level. It will take time for those with cash to become comfortable buying these levels before we will start marching higher again.”

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Two days later the market inched its way above 2,900, but rather than trigger a surge of breakout buying and short-covering, the rally stalled and we traded sideways the rest of the day. Small dips lead to small rebounds, exactly as expected.

While there is solid support behind these prices, this market still struggles to find new buyers. There was almost no follow-on buying this morning when we broke through 2,900 resistance. Most of that breakout buying and short covering happened two weeks ago when we first crossed this line. That meant there were fewer people to buy today’s breakout. The slow summer months are winding down, but volume is still pathetically low and it will still take time before those with cash feel comfortable chasing prices higher.

Confident stock owners made it abundantly clear this summer that trade war headlines and White House scandals don’t matter. If nothing can take us down, it is only a matter of time before we go up. The biggest near-term catalyst is the U.S. reaching trade compromises with Canada, Europe, and China. That news will push through 3,000. Unfortunately, politics is a slow and dirty process and it will be a while before we can put this episode behind us.

This market is resting and refreshing following last month’s rally to all-time highs. This is a normal, healthy, and sustainable thing to do. But since we are not refreshing through a bigger dip, that means we should expect a prolonged sideways period. When the market doesn’t scare us out, it bores us out. Things still look great for a year-end rally, but we need to be patient and let those profits come to us. This is a slow-money trade and we will have to wait a while before the next fast-money trade comes our way.

FB is flirting with recent lows as it struggles to overcome the fear of government regulations limiting its ability to make money. But as I wrote the other day, these limitations won’t be as draconian as feared and the stock will recover once these headlines are behind us. Even though prices could slip further over the near-term, this is a buying opportunity, not an excuse to sell a good stock at a steep discount.

NFLX is doing a better job than FB in recovering from last month’s earnings fueled selloff. As expected, last month’s weakness was a buying opportunity and no doubt reactive sellers are already kicking themselves for being so weak.

AAPL is already recovering from Wednesday’s sell-the-news reaction to their new phone lineup. Nothing unexpected or exciting was announced, it was simply more of the same. But more of the same is a good thing because that is what pushed AAPL over a $1 trillion market cap a few weeks ago.

AMZN is recovering from last week’s dip, but this looks more like a consolidation than the start of the next surge higher. We came a long way over the last few months and sideways consolidations are a normal and healthy part of every sustainable move higher. Things still look good for further gains later this year as desperate money managers will be forced chase the biggest winners into year-end.

Bitcoin climbed to the mid-$6k level, but the total lack of demand continues to be a problem. Last month’s bounce to $7.5k fizzled and no doubt the same thing will happen here. We could drift up to $7k resistance over the next few days, but the downtrend is still very much intact. Nothing gets interesting until we recover the previous highs near $8.5k. Unless that happens, expect lower-lows to keep piling up.

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Another failed selloff:

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Tuesday the S&P 500 slipped at the open after China filed a petition with the WTO to retaliate against US tariffs. But that opening weakness was as bad as it got and we quickly bounced into the green. This was the fourth day the market respected 2,870 support at the old highs. Traders are definitely more inclined to buy this dip than sell the weakness. As long as confident owners refuse to sell, supply stays tight and prices remain resilient.

But this strength doesn’t surprise regular readers. Last week I wrote the following:

“…this latest round of weakness will only be a modest dip, not the start of a bigger crash. We fear what we don’t know, not what everyone is talking about. If we were going to crash because of trade war headlines, it would have happened many months ago. The fact we keep holding up so well tells us this is a strong market, not a weak one.”

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Trade war headlines were priced in months ago and we don’t need to worry about them. Owners who feared these headlines bailed out months ago and there is no one left to sell this recycling of the news. When no one sells the news, it stops mattering.

The economy continues to hum along and that is the only thing that matters to the stock market. As long as the economic numbers look good, expect prices to keep drifting higher. Institutional money managers that were hoping for a pullback will soon be pressured to chase prices higher or else risk being left even further behind. Their buying will propel us higher through year-end. Unfortunately that doesn’t mean the ride between here and December 31st will be smooth and uneventful. Expect volatility to persist, but unless something new and unexpected happens, every dip will be another buying opportunity.

Buying this 2,870 dip was better than chasing last week’s 2,920 highs, but it is too bad the market didn’t slip further and give us a more attractive entry point. I didn’t expect much out of this dip and that is exactly what it gave us. Since the market likes symmetry, we shouldn’t expect much out of this rebound either. The next move is most likely trading sideways near the psychologically significant 2,900 level. It will take time for those with cash to become comfortable buying these levels before we will start marching higher again.

It’s been a rough few days for the FAANG stocks, but they bounced back Tuesday. AMZN and AAPL took a much-needed break following their breathtaking climb higher. Pauses and dips are a healthy part of every sustainable move higher and there is nothing unusual about their price-action.

FB and NFLX continue consolidating following their tumble after second-quarter earnings. But there is also nothing alarming or unusual about their behavior here. Those were big losses and it will take a while before the market starts trusting these stocks again. Months ago traders who missed this trade were begging for a dip so they could jump in. Hopefully those traders are taking advantage of these discounts.

Bitcoin keeps slipping and is barely holding $6k support. Last week’s rebound to $7.4k is dead and gave us another lower-high since we failed to match the previous $8.4k bounce. Lower-highs tells us the next lower-low is just around the corner. Since most owners refuse to sell, supply is scarce and we are getting into the grinding part of the selloff where each dip takes weeks and months to play out. The trend is most definitely lower, but we will continue seeing these short, tradable bounces higher. But each bounce is still a selling opportunity. The worst is still ahead of us.

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Hope turns to disappointment

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Tuesday the S&P 500 got off to a rocky start following the Labor Day weekend. Trump and Canada couldn’t come to terms on a new NAFTA and that let air out of last week’s hope-filled rally to all-time highs.

Tuesday’s weak price-action fits perfectly with what I wrote last week:

If the best trade is buying weakness and selling strength, no matter how safe 2,900 feels, this is definitely the wrong time to be buying. Resist the temptation to chase these prices higher because recent gains make this a far riskier place to be adding new money. The risk/reward shifted away from us because a big chunk of the upside has already been realized, while the risks of a normal and healthy dip increase with every point higher. In fact, if the best trade is buying weakness and selling strength, this is actually a darn good time to start thinking about locking-in profits. Remember, we only make money when we sell our winners and it is impossible to buy the next dip if we don’t have cash.

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It is little surprise Canada didn’t roll over for Trump and Friday’s arbitrary deadline came and went without a deal. Both sides threw barbs at each other in the press over the weekend, but this is little more than grandstanding for the cameras that accompanies all political negotiations.

Even though we didn’t get a deal this weekend, there is no reason we shouldn’t expect one over the next few weeks. Canadian and American businesses are far too reliant on NAFTA and it would be incredibly disruptive to both economies to throw it out. Even the president of the powerful AFL-CIO union came out strongly against excluding Canada. If the unions are against it, you know it must be really bad for business.

While the market dipped Tuesday, the losses were modest and we are still at levels that were all-time highs last week. This is more of an exhale following a strong run than the start of a bigger correction. This is an incredibly resilient market and owners have refused to sell far more dire headlines this spring and summer. There is no reason to think anything changed this week.

As I wrote last week, there are plenty of good reasons to take profits at these highs, but selling because Canada didn’t jump aboard Trump’s ‘new and improved’ NAFTA deal by an artificially imposed Friday deadline is not one of those reasons.

We take profits because it’s been a nice run. We take profits because we are running into resistance. We take profits because we buy weakness and sell strength. We take profits because we need cash to buy the next dip. But we definitely don’t sell because we are afraid of Canada collapsing this market.

Personally, I would love it if this selling spiraled out of control so that we could jump in at much lower levels. Unfortunately, I doubt we get that lucky. Instead, I expect this dip to bounce quickly. Support at the old highs near 2,870 is as far as this goes, and most likely we won’t even get that far. This is simply an exhale after a nice run and we shouldn’t read too much into this normal, healthy, and periodic gyration.

Until further notice, keep doing what has been working. That means buying weakness and selling strength in our short-term trading account and sitting on our favorite stocks with our longer-term investments.

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It took a while, but 2,900 finally happened

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Tuesday morning the S&P 500 poked its head above 2,900 for the first time in history. The market continues basking in the after-glow of Trump’s Mexican deal that triggered Monday’s breakout to all-time highs. Unfortunately Mexico is only one piece in a much larger puzzle. Canada’s, Europe’s, and China’s trade deals remain elusive. All the work ahead of us is why the celebration was shortlived and we slipped under the psychologically significant 2,900 level in late-morning trade.

That said, 2,900 is a major milestone no matter how you cut it. This strength is impressive and caught a lot of people off guard. Not long ago the crowd was overrun by doom and gloom and predictions of the market’s collapse were everywhere. Between trade wars, rate hikes, rising interest rates, Turkey, Italy, Iran, and all the other drama thrown our way this year, it is no surprise traders were so negative.

Luckily regular readers of this blog knew better. Four months ago when the market was teetering on the edge of collapse and on the verge of making new lows for the year, I wrote the following:

Predicting the market isn’t hard if you know what to look for because the same thing keeps happening over and over. But just because we know what is going to happen doesn’t make trading easy. Far and away the hardest part is getting the timing right. That is where experience and confidence comes in. Several months ago investors were begging for a pullback so they could jump aboard this raging bull market. But now that prices dipped, rather than embrace the discounts, these same people are running scared. Markets dip and bounce all the time, but we only make money if we time our trades well.

The most important thing to remember is risk is a function of height. The higher we are, the greater the risks. By that measure, Tuesday’s dip near the 2018 lows was actually one of the safest times to buy stocks this year. Did it feel that way? Of course not. But that is why most people lose money in the stock market. If most people were selling Tuesday, and most people lose money, then shouldn’t we have been buying? Given the market’s reaction today, the answer is a pretty resounding yes.

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The S&P 500 is up 10% since I wrote those words back in April. 10% is a great result by itself. It is even better if a person took advantage of leveraged ETFs. But far and away the best trade of the year was profiting from these fantastic swings between optimism and pessimism by buying weakness and selling strength. Buy the dip, sell the rip, and repeat until a good year becomes a great year.

While it is fun to look back at my successful trading calls, what readers really want to know is what comes next. Luckily for us today’s strength doesn’t change anything. The best trade is still buying weakness and selling strength. The problem with today’s hope is it will be replaced by disappointment in a few days. Today we see light, in a few days we come across another stumbling block. And like clockwork, the market continues its swings between hope and despair.

If the best trade is buying weakness and selling strength, no matter how safe 2,900 feels, this is definitely the wrong time to be buying. Resist the temptation to chase these prices higher because recent gains made this a far riskier place to be adding new money. The risk/reward shifted away from us because a big chunk of the upside has already been realized while the risks of a normal and healthy dip increase with every point higher. In fact, if the best trade is buying weakness and selling strength, this is actually a darn good time to start thinking about locking-in profits. Remember, we only make money when we sell our winners and it is impossible to buy the next dip if we don’t have cash.

While I am cautious with my short-term swing-trades, this market is acting well and there is no reason to abandon our favorite medium- and long-term investments. We are still setting up for a strong rally into year-end and the only thing to do is patiently watch the profits pile up in our favorite long-term investments.

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Jani

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Why the market doesn’t care about the growing Trump scandal

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Thursday the S&P 500 finished modestly lower after drifting sideways for most of the day. Headlines continue to be negative for Trump, but as expected, the market doesn’t care.

This is what I wrote Tuesday after the market initially dipped following Michael Cohen’s guilty plea and accusations against Trump:

I don’t expect the market to overreact to these Cohen headlines because anyone who was paying attention saw this coming a mile away. Remember, we fear what we don’t know, not what everyone else is talking about. There are real risks lurking out there, but this is not one of them.

 

The market is a little more vulnerable to these headlines simply because we are at the upper end of the trading range and a cool down was inevitable. If it wasn’t these headlines, it would have been something else. We are still stuck in the slower summer months and we won’t have the firepower to push a large directional move until institutional money managers return from their summer cottages. Until then we should expect these smaller directional moves to fizzle at the edges of the trading range or one reason or another.

The growing Trump scandal isn’t dampening the market’s mood and traders are not concerned about recent developments. These events first came out months ago and if prices were going to tumble, they would have done so back then. The fact we didn’t sell off initially tells us we don’t need to worry about these headlines today. If the market doesn’t care, then neither should we. The market’s benign reaction the last two days confirms that outlook.

It’s been a while since Turkey and trade wars made the headlines and our “no news is good news” market continues hovering near all-time highs. While confident owners have zero interest in selling the news, it is harder to convince those with cash to buy these highs and is why the gains have stalled. We are at the tail end of the slow summer season and it will be a few more weeks before we start seeing more meaningful buying.

Many money managers are underweight stocks because they sold defensively earlier in the year. These managers have been desperately waiting for a pullback so they could jump back in. Unfortunately, the market is not cooperating and this latest round of gains is pressuring them to chase prices higher. Once they give up waiting for the pullback, they are going to be forced to bite the bullet and buy stocks at all-time highs. The breakout is not imminent, but it is coming.

Even though the market is acting well, we are still vulnerable to near-term volatility. Risk is a function of height and it would be normal, even routine for the market to dip modestly here. Prices are responding well to these Trump headlines. That means we are more likely to go higher than lower, but the risks of a small dip are always there. As long as we know what to expect, we are less likely to overreact to a modest bump in the road.

At this point, any dip is a buying opportunity, not an excuse to sell stocks. Remember, we take profits by selling strength, not weakness. If someone is not sure they can sit through a small dip, they should take profits now. Otherwise, there is nothing to do other than patiently watch the profits pile up.

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Jani

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All-time highs! Who knew this was coming?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Tuesday was a doubly significant day for the S&P 500. Not only did we notch a fresh all-time high, this also became the longest bull market in history. Not bad for a market that most were giving up on only a few weeks ago.

Last week stocks stumbled on fears of a Turkish collapse, but I wasn’t worried. If the stock market didn’t care about a trade war between the world’s two largest economies, why would it get spooked by problems in a minor eastern European country with an economy smaller than Netflix’s market cap?

Hindsight bias being what it is, everyone knows now it wasn’t a big deal. But if we want to make money we need to know these things ahead of time. Luckily readers of this blog were ready because I wrote the following last Tuesday before we dipped to 2,800 and bounced decisively off support:

While it already looks like the Turkish selloff is dead, we need to hold this bounce for a few more days to be certain. There is a chance this bounce could fizzle and we continue slipping back to 2,800 support. If that happens, that will be a far more attractive entry point. Until then I will keep watching, waiting, and hoping for that next profitable opportunity.

 

As for our longer-term positions. There is nothing to see here. Stick with what has been working and ignore the noise. The market is still setting up for a strong rally into year-end.

That was simple and profitable advice for both short-term traders and long-term investors. And even better for regular readers of this blog, they had the cash to buy the dip because I recommended locking in profits the week before.

While it is nice to reflect on profitable trades, what people really want to know is what comes next. Even though Tuesday was a record day for the S&P 500, things got a more difficult in the afternoon after Trump’s personal lawyer plead guilty and appears willing to work with prosecutors. If the worst plays out, Trump could be implicated in campaign finance violations. This was a developing story at the close and stocks continued to fall in after-hours trade.

That said, the losses were relatively minor, only falling 0.5% after the close. While this Michael Cohen stuff is making headlines today, it doesn’t really surprise anyone. This scandal has been brewing for months and if the market was truly worried about it, we would have fallen on these headlines a long time ago. If it didn’t matter then, it doesn’t really matter now.

The market is a little more vulnerable to these headlines simply because we are at the upper end of the trading range and a cool down was inevitable. If it wasn’t these headlines, it would have been something else. We are still stuck in the slower summer months and we won’t have the firepower to push a large directional move until institutional money managers return from their summer cottages. Until then we should expect these smaller directional moves to fizzle at the edges of the trading range or one reason or another.

As I said, I don’t expect the market to overreact to these Cohen headlines because anyone who was paying attention saw this coming a mile away. Remember, we fear what we don’t know, not what everyone else is talking about. There are real risks lurking out there, but this is not one of them.

And to editorialize a little here, I actually don’t think the market would mind all that much if Trump was bogged down by a scandal that robbed him of a big chunk of his political capital. The stock market got the regulatory relaxations and tax cuts it was looking for last year. In a perfect world Trump would have gone on a two-year vacation instead of starting fights with our biggest trading partners. At this point there is a good chance the market would actually cheer Trump getting his hands tied so that he couldn’t screw with anything else.

Earnings season is winding down and by all accounts, it was a good one. Trade and politics don’t matter nearly as much as economic growth and profitability. Despite all the negative headlines dominating the financial press over the last six months, companies are doing well and the stock market is rallying on that strength. Nothing else mattered then and it won’t matter now. This is a strong market and we should continue to trade it as such.

For short-term traders, the opportunity to buy was last week as we tested support, not now that we are making new highs. This is a better place to be taking profits than adding new money. Assuming this Cohen thing is short-lived, we should push toward 2,900 resistance over the next week or two. That would be a good place to take short-term trading profits.

For our long-term stocks, there isn’t a lot to do here other than relax and let the profits come to us. We are setting up for a rally into year-end and we should enjoy the ride.

As for the tech trade, it missed the early parts of last week’s bounce off of support, but it has been catching up the last two days. The tech trade will survive as long as the broad market does well and it will continue leading the way. FB and NFLX got hit pretty hard and are consolidating their losses, but the worst is behind us. These are the discounts people were praying for a few months ago. No doubt in a few months those same people will be kicking themselves for not buying these discounts when they had the chance.

If you found this post useful, join the thousands who follow me on Twitter so you don’t miss future updates: Follow @crackedmarket

Jani

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The profit opportunity everyone should have seen coming

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Wednesday the S&P 500 forgot about Turkey and rallied sharply on news the US and China restarted trade negotiations. Those headlines were enough to put traders in a buying mood and pushed us back near all-time highs.

I assured readers on Tuesday that we didn’t need to worry too much about those Turkish headlines because this current crop of confident owners refused to sell far worse news. In fact, I said we would be lucky if prices dipped to 2,800 support because that would give us a great entry point. As luck would have it, we dipped to 2,800 support Wednesday morning before bouncing back to the highs. Savvy traders that understood what was going on were able to make a quick buck at the expense of those that didn’t know any better. (sign up for free email alerts so you don’t miss the next trading opportunity)

Last week Turkey was new and unexpected, something traders hadn’t been talking about previously. But one week and two dips later, it has come a long way and the initial shock is wearing off. Friday will mark a full week for traders to process these developments and execute a response. Traders who fear Turkey have been given plenty of time to sell and is what drove this week’s weakness. But as expected, the majority of confident owners shrugged off the news and continued to stick with their favorite stocks. If they refused to sell an escalating trade war between the two largest economies in the world, did anyone actually expect them to overreact to problems in some minor eastern European country? Turkey is getting priced-in and each subsequent recycling of those headlines will have less and less of an impact.

Wednesday’s dip to support was a great opportunity for anyone that missed the first run to all-time highs to jump aboard this rally. But now that we are back near the highs, chasing becomes riskier. The path of least resistance is still higher and this market is setting up for a strong year-end rally, but over the near-term we should expect a little more choppiness as we consolidate recent gains. That said, any positive developments from the negotiations between the US and China could fuel a swift move up to 2,900. I don’t mind owning stocks here, but anyone that missed Wednesday’s discounts and is trying to buy now should be willing to sit through a little near-term volatility.

And as usual, there was nothing to do with our long-term investments except keep holding them. Prices will keep going higher over the next few months and we want to be there to enjoy the ride.

If you found this post useful, join the thousands who follow me on Twitter so you don’t miss future updates: Follow @crackedmarket

Jani

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How a savvy trader could have missed this Turkey mess

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Tuesday the S&P 500 rebounded from Monday’s fizzle and is recovering from a brief bout of Turkish worries. The names have changed, but the story is the same. A small European country is struggling and threatening to take the rest of Europe down with it. These headlines were the catalysts for last week’s tumble from the highs.

While we are still under last week’s highs, fear of Turkey’s economic collapse has been contained. A one day bounce is far from conclusive, but three days into this selloff and we are down less than 1%. That means most traders are definitely not overreacting to these headlines. This remains a “half-full market” and most owners are willing to give it the benefit of doubt.

While these Turkish headlines are new and impossible to predict, it was still possible for a savvy trader to sidestep this dip. I wrote the following last Thursday when stocks were at record highs and before Turkey hijacked the front page of the financial section:

Even though the market left most of its concerns behind as we climbed to these highs, that actually makes this a more dangerous place buy. Smart traders buy discounts, they don’t chase premium prices. Risk is a function of height and this week’s gains made this one of the riskiest places to buy all year. Now don’t get me wrong, I’m most definitely not calling a top or predicting and imminent collapse. But what I am saying is we rallied up to resistance and it is normal and healthy for the market to pause and even dip a little.

I don’t have a crystal ball so I don’t know if we stall at current levels, or if we break through 2,880 resistance and stall above it. Either way it doesn’t really matter because the risk/reward has shifted against us and this is a better place to be taking profits than adding new money. It is a fool’s errand to try and decide if the peak will be 2,862, 2,875, or 2,892. The point is ‘good enough is good enough’ and that is all that matters. And the thing to remember is we cannot buy the next dip if we don’t have any cash. Buy weakness, sell strength, and repeat until a good year becomes a great year.

But just because we slipped from the highs doesn’t mean we need to run for the hills. As expected, the selling has been limited and we didn’t even fall to 2,800 support. As with every other headline over the last six months, owners are reluctant to sell. After years of selling prematurely and regretting it, most traders have learned to hold no matter what. That has been the smartest way for long-term investors to navigate these dips and it doesn’t look like anything changed yet.

Turkey is a small nation and by itself it cannot take down the global economy. No doubt it could cause a lot of pain for some European banks, but there is no reason to think the ECB won’t come to the rescue this time too. That is why the market’s reaction to these headlines has been so muted.

That said, the danger with the above assumption is it means very little risk has been priced in. If everything works out, the upside is limited because we didn’t dip very far. But this complacency leaves us vulnerable if things do not go as planned. I don’t expect this situation to make much of a dent in the global economy, but we have to monitor it closely because if the situation deteriorates, it will weigh on stocks. Unlike Trump’s trade war, larger Turkish risks have definitely not been priced in.

The trader in me misses the days when headlines like these would lead to widespread predictions of another economic collapse. Unfortunately the days of 10% swings in the indexes are long gone. Now the best we get is a 1% dip. The stability is great for care-free holding of long-term positions, but for trading opportunities, there is a lot to be desired.

The dip to 2,820 and subsequent bounce presented us with a fairly weak risk/reward. Day traders could have profited from this few hour move, but for me I’m waiting for something more worthwhile.

While it already looks like the Turkish selloff is dead, we need to hold this bounce for a few more days to be certain. There is a chance this bounce could fizzle and we continue slipping back to 2,800 support. If that happens, that will be a far more attractive entry point. Until then I will keep watching, waiting, and hoping for that next profitable opportunity.

As for our longer-term positions. There is nothing to see here. Stick with what has been working and ignore the noise. The market is still setting up for a strong rally into year-end.

If you found this post useful, join the thousands who follow me on Twitter so you don’t miss future updates: Follow @crackedmarket

Jani

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What to expect now that we reached the highs

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Thursday the S&P 500 slipped for a second consecutive day, but “slipped” is a bit of an exaggeration since combined both days didn’t even register a 0.2% loss. That leaves us still within 1% of all-time highs as we simply slow down following last week’s impressive bounce off 2,800 support.

Long gone are last month’s trade war and rate-hike fears. Funny how calming rising prices can be. But this isn’t a surprise to anyone who has been reading this blog for a while. Long ago we recognized this market’s strength. While others were waiting for the impending collapse, we saw a market that refused to go down no matter how bad the headlines got. One of the things I learned a long time ago is what the market is not doing is often more insightful than what it is doing.

There are few things more bullish than a market that refuses to go down on bad news. All it took was a break from the negative headlines and this market would surge on “no news is good news”. And that is exactly what happened. Remember, we trade the market, not the headlines. If the market doesn’t care about trade wars and rate-hikes, then neither should we.

That explains this markets assent to all-time highs, but the trader in all of us want to know what comes next so we can profit from it. While I’ve been calling for this move to all-time highs, I’ve also been warning that prices would run into resistance at these levels. We are still stuck in the slower summer months and that means we lack big money’s firepower to drive large directional moves. That won’t come until after Labor day when institutional money managers return from their summer cottages. Until then we should expect the market’s moves to be more measured and breakouts and breakdowns to stall quickly.

Even though the market left most of its concerns behind as we climbed to these highs, that actually makes this a more dangerous place to be buying. Smart traders buy discounts, they don’t chase premium prices. Risk is a function of height and last week’s gains made this one of the riskiest places to buy all year. Now don’t get me wrong, I’m most definitely not calling a top or predicting and imminent collapse. But what I am saying is we rallied up to resistance and it is normal and healthy for the market to pause and even dip a little.

I don’t have a crystal ball so I don’t know if we stall at current levels, or if we break through 2,880 resistance and stall above it. Either way it doesn’t really matter because the risk/reward has shifted against us and this is now a better place to be taking profits than adding new money. It is a fool’s errand to try and decide if the peak will be 2,862, 2,875, or 2,892. This point is good enough for me and that is all that matters. And the thing to remember is we cannot buy the next dip if we don’t have any cash. Buy weakness, sell strength, and repeat until a good year becomes a great year.

From a short-term trading perspective, this is a better place to be taking profits than adding new money. But for our longer-term investments, stick with what is working and that is buying-and-holding our favorite stocks. We might see a little near-term weakness, but this market is strong and the rally into year-end is still on.

Stock crashes are breathtakingly quick, which means NFLX and FB hanging onto current levels for two weeks tells us the post-earnings selloff is largely done. At this point it would take a new round of bad news to launch the next move lower. While it will take a while to recover recent losses, it seems most owners are willing to give their favorite stocks the benefit of doubt and are sticking with them. That means we should expect FB and NFLX to retake their leadership position later this fall. Meanwhile GOOGL, AMZN, and AAPL are either making new all-time highs or are just about to. The best trade of the first half of 2018 is getting ready to be the best trade of the second half.

It didn’t take long for Bitcoin to tumble all the way to $6k support. Long gone are the hopes of retaking $8k and now only a few hundred dollars separates us from another lower-low. This chart is very sick and we still have a way to go before this over.

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Jani

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