Category Archives for "End of Day Analysis"

Predicting the market is easy

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Thursday the S&P500 closed nearly unchanged for a second day in a row. Not bad considering the week started with one of the biggest selloffs in over a year. Volume has been above average, telling us traders are clearly paying attention.

2017 was a great year for stocks, but even it couldn’t compare to the way 2018 kicked off. But as I’ve been writing over recent weeks, the rate of gains was clearly unsustainable and running out of steam was inevitable. This isn’t rocket science and knowing what is going to happen is the easy part because the same thing always happens. The challenge is knowing exactly when it will happen. Never forget, we are paid for getting the timing right, not predicting what will happen.

To be honest, I didn’t expect this to go as high as it did, but I was smart enough to know it was powerful and wasn’t about to get in its way. But I also didn’t need to be apart of it either. Unsustainable moves are unsustainable. If you miss it, or get out too early, don’t worry about it, there is no need to chase because there will be another opportunity to get in when the risks are lower.

As I wrote Tuesday, we didn’t need to fear this dip because it wasn’t driven by a spooky headline. Instead we tumbled because we went a little too far, too quickly. Fear mongering headlines trigger large moves. Imbalances in supply and demand lead to relatively modest price swings. Rather than overreact to Monday and Tuesday’s weakness, the lack of a headline catalyst told us the move wouldn’t be all that big and there was no reason to sell fearfully or short aggressively. This is a normal gyration and we should respond in kind.

If we close above 2,820 Friday, then Monday and Tuesday’s selloff is done. That doesn’t mean we cannot selloff next week, but any further weakness will need a new catalysts. Crashes are frighteningly quick and holding 2,820 support for four days is anything but frighteningly quick.

I would love to see us dip a little further and create a more attractive dip buying opportunity, but the flat trade the last couple of days tells us confident owners are still confident and their lack of selling is keeping supply tight. If this selloff had greater potential, we would have felt it by now. Unfortunately this dip leaves us in no-man’s land. Not deep enough to become oversold and create a safe entry point, but so shallow that there is still risk underneath us. There is no reason to bailout of our favorite buy-and-hold positions and there is not enough potential to make a short-term swing trade worthwhile. And so we keep waiting for something more interesting to come along.

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As I wrote on Tuesday, Bitcoin’s inability to escape $10k support meant lower prices were coming. And today’s selloff knocked another $1k off the price as we find ourselves at the lowest levels in months. Anyone who bought December’s parabolic rise higher is sitting on losses, as is anyone who was brave enough to buy the dip.

Last month’s greed has quickly turned into this month’s fear. The thing to remember is major selloffs take a long time to play out. We are already more than six weeks into this and we won’t find the real bottom for several more months. It will be a very choppy ride lower and that means lots of big bounces along the way. I expect prices will fall under $8k real soon, but we will rebound as high as $10k. But remember, this is a pattern of lower highs and lower lows. Buy the dips and sell the rips.

For the “hodl” crowd (aka hold for those of born in the last century), they better be prepared for much larger losses. In 2013 BTC fell nearly 80% from the highs. If history repeats itself, which it looks like it is doing, I wouldn’t expect to find a bottom until we slip under $4k sometime this summer. Every bounce continues to be a selling opportunity because the worst is still ahead of us.

Enjoy the ride, but stay paranoid

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 treaded water Thursday, but given Wednesday’s negative price-action, doing nothing was actually a win for bulls.

On Wednesday an early surge to record highs fizzled and we tumbled into the red. Normally a reversal from record highs signals a lack of demand and is a great short entry. Unfortunately this isn’t a normal market and we cannot rely on traditional trading signals.

Ever since Trump’s election, confident owners have refused to sell every negative headline and any bearish price-action. Conventional wisdom tells us complacent markets are vulnerable to a collapse. What conventional wisdom fails to mention is periods of complacency often last far longer than even the bulls expect. Confident owners don’t sell and that keeps supply tight. It is hard to get a selloff started without sellers and is why it has been ages since any dip went more than a handful of points lower.

This is most definitely not a normal market and Wednesday’s negative price-action should have been ignored. Thursday’s flat trade confirmed Wednesday’s selloff was yet another false alarm. In one-way markets we keep doing what is working and here that is sticking with our favorite buy-and-hold positions.

That said, this is the riskiest period for stocks in nine years. Risk if a function of height and these record highs mean the risks have never been greater. Everyone loves a market that goes up, but this buy-and-hold-no-matter-what attitude is going to backfire spectacularly at some point over the next 6 to 24 months. Hold all the way up, hold all the way down is the way this works for most investors. But for those of us paying attention, it doesn’t have to end this way. Enjoy this rally higher over the near-term, but stay alert and keep close to the exits. This market has never been closer to topping. Trading is most definitely not easy and without a doubt the market will remind everyone when they least expect it.

Currently the stock market is cheering the falling dollar because it makes domestic producers more competitive. What the market is ignoring is the U.S. is a net importer and consumer based economy. A falling dollar means prices in Walmart will go up and that erodes household purchasing power. There is most definitely a half-empty side to a weak dollar and the surge in oil prices is just the start. Add in the Fed’s expected rate hikes and that very well could be the recipe for our next recession. It will take a while for these macro-economic effects to be felt, but it is most definitely something worth paying attention to.

While everything feels great, the thing to remember is the top of every bull market always feels great. Over the near-term the market is acting well enough to stick with it. But to key to surviving the next downturn is seeing it before everyone else does.

Jani

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The Higher We Climb, The Harder We Fall

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Tuesday the S&P500 finished higher for the 12th time this year out of 15 trading sessions. And honestly, two of those down-days hardly count since the losses were barely more than -0.1%. Clearly the crowd is in a buying mood and few are showing any fear of these heights.

The market surged Monday when the Senate agreed to a temporary extension that reopened the government, but there is little reason to think a handful of days will patch the divide between Republicans and Democrats. But this style of all-or-nothing standoffs is typical of political negotiations and eventually a compromise will be reached. The market knows this and is why its reaction to the government shutdown was almost nonexistent.

The bigger question is how many more up-days can we string together? Markets go up and markets go down. Except this one. We just set the record for the longest stretch in market history without a 5% pullback. Extended runs occur all the time. Unfortunately most good stretches are inevitably followed by extended moves in the other direction. Only a person who thinks the stock market has forever changed believes this period of prosperity will continue indefinitely.

The funny thing about investing is the more expensive something becomes, the more excited people are to buy it. Rather than wait for Black Friday sales, investors cheer Christmas markups. And the recent surge in prices is making the crowd even more excited to buy stocks. This market makes experienced investors nervous, but investing novices are diving in head-first because they are more afraid of missing out than losing money. While the good times last far longer than anyone expects, they almost always end in tears. Enjoy the ride higher, but stay close to the exits. The more greedy other people become, the more fearful we should be.

For the time being everything still looks good and this market clearly wants to go higher. We are well past the point of a normal and routine pullback because buyers insist on chasing prices higher. We are long overdue for a dip, but since owners are keeping supply tight by stubbornly holding for higher prices, it will take a fairly shocking headline to dampen the market’s mood. And as we just witnessed, it needs to be a heck of a lot bigger than a government shutdown. Until then, the path of least resistance is higher. But always keep in mind, the higher we climb, the harder we fall.

Jani

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How frothy is too frothy?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 closed higher for the 6th day in a row and extends 2018’s breakout. Volume was average and tells us most traders are back at work following the holiday layoff. There were no clear headlines driving today’s price-action and this is simply a continuation of the positive feelings that fueled this week’s breakout and last year’s rally.

No matter which sentiment measure you look at, bullishness is at extreme levels. The latest AAII survey is 60% bullish versus 16% bearish. Stocktwits’ $SPY stream it 78% bullish. Put/Call ratios and newsletter writers are all at frothy levels. Yet prices keep going higher.

The thing to remember about sentiment is it is a secondary indicator, meaning that while useful, it cannot be used by itself to time trades. It tells us when to be careful or aggressive, but it doesn’t tell us when to trade. What this means is the stock market can keep going higher over the near-term, but these extreme bullish sentiment levels are warning us to be extremely careful.

The problem with most “overly bullish” markets is all the bulls are already fully invested. Once they dump all of their savings into the market, from that point forward they lost the ability to push the market higher. The best they can do is convince their friends, relatives, neighbors, and coworkers to dump all their savings into the market too. Attracting new investors how bullish levels can stay elevated for extended periods of time while the market continues to rally. Everyone in the market is fully invested, but non-investors keep streaming into the market and are the fuel that keeps pushing prices higher. This new money is why these extreme bullishness levels have not resulted in a more typical dip back to support.

As long as bulls are able to convince everyone they know to invest in the stock market, prices will continue climbing. The problems is these investing rookies typically get to the party just before it ends. They show up just as smart money starts leaving.

Over the near-term the market looks great and momentum will likely keep us drifting higher. But the market has been far too easy for way too long and that makes me nervous. Something will come along at some point that will remind everyone the stock market is most definitely not easy. No one knows what that will be and when it will happen, but it is a virtual certainty that something will upset this apple cart. Those of us that are paying attention will be able to collect our profits and get out of the way just before bullishness turns ugly.

Keep doing what has been working, and that is sticking with your favorite buy-and-hold stocks. But stay close to the door. The question isn’t if, but when.

Jani

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What to expect the last week of 2017

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 finished modestly lower on the first day back from the Christmas holiday. No real news to speak of and we should expect more of the same as we finish off 2017.

Now that Tax Reform is law, there isn’t much for traders to talk about or look forward to. And without big ideas to latch onto, the market has been treading water these last few weeks. Unfortunately for bulls the window for a Tax Reform pop has already closed. If it was going to happen, it would have happened by now. Gains over the last several months priced in tax cuts and there was no one left to buy the news. Now that Tax Reform is old news, we need turn our gaze to what comes next.

Strong earnings reports next month could extend this rally, while any bad news could trigger a dip back to 2,600. High probability of small gains versus a low probability of bigger losses. The problem for bulls is everything needs to go right to beat these already lofty expectations. Bears only need one thing to go wrong. Perfection versus the messiness that is the real world. Markets move in waves and it’s been a while since we cooled off. I don’t know what will trigger the next dip, but I do know it is coming. The only question is when.

Most likely momentum will keep us drifting higher over the near-term, but it is only time before the next problem crops up and we fall into a long overdue dip and consolidation. 2017 was a great year for stocks, but unfortunately the rarest thing is for two years to be exactly the same. If 2017 was a gentile ride higher, that tells us 2018 will be anything but easy. No don’t get me wrong, I’m not bearish. I just expect the market to consolidate recent gains and that means we will have to work for our profits in 2018.

Jani

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Struggling to rally on good news

By Jani Ziedins | End of Day Analysis

End of Day Update:

Thursday was another indecisive session for the S&P500 as early gains fizzled into the close. This was the fourth day in a row stocks finished at the lower end of the intraday range. Under normal circumstances weak closes are a concern, but these are anything but normal times.

On Wednesday Republicans cleared the last major hurdle on the way to Tax Reform. The revised tax bill sailed through Congress and is now waiting for Trump’s signature. There is some discussion on if that will happen this month or early next month, but the day doesn’t matter much since the cuts take effect January 1st regardless.

These were the tax cuts everyone has been waiting and hoping for since Trump won the election over a year ago. And what did the market do when Republicans cleared the last hurdle? It gave up early gains and finished ever so slightly in the red. Quite the underwhelming performance given how significant this Tax Reform package is. But that is how the market works. It is always looking ahead and this tax bill was already old news.

The other complication is we are quickly approaching the Christmas and New Year’s holiday dead zone where volumes drop off dramatically. When big money leaves for vacation, it gives smaller and less rational traders control of the market. While volatility might pick up over the next several sessions, small traders run out of money quickly and most of these moves reverse within hours or days. Don’t pay much attention to the price-action when big money isn’t participating.

The market is generally feeling optimistic. Stock are near all-time highs and Tax Reform just passed. The weekly AAII sentiment survey reveals bulls out number bears by 25-points, and on Stocktwit’s $SPY stream bullishness was at 72% a few days ago. While nothing says these levels cannot get even more bullish, we are approaching extreme levels and one has to wonder where the next buyer will come from.

And that is exactly what happened Wednesday when the market failed to rally following the Tax Reform vote. Everyone who wanted to buy tax cuts had already bought, meaning there was no one left to buy the news. Momentum is definitely higher and anything can happen during this holiday lull, but bulls need to be careful. Markets move in waves and it has been a nice ride to this point. The question is if this wave is running out of steam and we are approaching a normal and healthy consolidation. Few things make me more nervous than a market that cannot go higher on good news. That is the market’s way of telling us it is ready to take a break.

Jani

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Struggling to go higher on good news

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 stumbled on Tuesday as Congress moved closer to approving Tax Reform. The joint tax bill sailed through the House with plenty of room to spare, but a technicality means they will need to re-vote on Wednesday. The Senate is voting as I write this and it will most likely be approved by the time you read this.

If everything is going so well, why did stocks slip 0.3% and break a two-day winning streak just when everything was looking so good? It appears expectations have built up to the point the crowd now assumes Tax Reform is a done deal. Few skeptics remain and those that wanted to buy the Tax Reform pop have already jumped in. If everyone buys before the event, who is left to buy when it finally happens?

“Buy the rumor, sell the news” is a popular stock market saying and it appears like that is what is happening here. Everyone bought the rumor and the closer we get to the news, the fewer new buyers there are left to keep pushing prices higher. At this point Republicans have the votes and the rest is a formality. That’s why each new milestone is met with such apathy. If a person wanted to buy the Tax Reform pop, they missed their opportunity by several weeks. The time to buy is when the outcome is uncertain. By the time everyone knows what is going to happen, the profit opportunity has passed.

While we might get a reflexive, knee-jerk pop when both the Senate and House approve the combined bill, more interesting will be what happens after that. If the early strength fizzles and reverses, that will be a sign Tax Reform is fully priced in and the market needs to consolidate recent gains. Few things make me more nervous than a market that fails to go up on good news. That tells us the rally is exhausted.

This market has been propped up by hopes of tax cuts since Trump won the presidency 13 months ago. Once this becomes law, traders will no longer have this big thing to look forward to. The last year has been remarkably calm because minor bumps along the way didn’t bother owners who knew bigger things were coming. But now that those things have come and gone, what are traders going to fixate on? That is the million dollar question. It’s been a nice ride to this point but there are definitely warning signs this rally needs to rest. I’m not bearish by any stretch, but I’ve been doing this long enough to know that every bit of up is followed by a bit of down. At the very least we should expect a minor exhale as the market digests the last 13 months of gains.

Jani

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Is the Tax Rally running out of steam?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 started the day with modest gains, but a midday slide pushed us into the red when cracks formed in the GOP’s tax plan. A couple of Senators are withholding their support unless additional benefits are passed down to the poor. That said, the “selloff” was only 0.4% and shows the market is not all that concerned about these headlines.

The market finished pricing in Tax Cuts last week after the Senate approved its version. Rather than rally on the good news, the market actually finished lower. Going down on good news tells us most of the upside has been realized. And the same happened this Wednesday when the Senate and House agreed in principle on a compromise bill. The market gave up early gains and finished essentially flat. If anyone is waiting to buy the Tax Reform pop, they are several months too late.

The bigger risk is this turning into a sell the news event. We’ve been rallying since Trump’s election in anticipation of these regulatory relaxations and tax cuts. Now that we are only days away from realizing these pieces of good news, what does the market have to look forward to? The market ignored every piece of bad news this year because nothing could dampen the hope and anticipation of tax cuts. But soon those things are going to slip into the rearview mirror. What happens when we don’t have those overriding things to look forward to? Will bad news start mattering again? That is the million dollar question.

Markets are skeptical by nature and often fear the worst. The last 12-months of optimism has been a welcome reprieve from the typical cynicism. But as soon as the crowd gets used to the market’s mood, it changes. 2017 was a good year for stocks, but if there is one thing we can cross off the list of possibilities next year, it is a repeat of this year. Bulls can hope the rate of gains accelerate, which is a real possibility. But for that to happen the economy would need to ramp up and right now that doesn’t look like it will happen. More likely is we stumble into some bad news. Maybe some economic reports miss expectations and the R word starts getting thrown around. Or something happens in Europe. Or China stumbles. Or oil, bitcoin, or Trump. Any one of those catalysts could kick off the next correction. To keep going higher, everything needs to be perfect. To tumble, we only need one thing to unnerve traders.

For the time being things still look good, but the market is most definitely not easy and I don’t expect this gentle climb higher to continue indefinitely. The market has a nasty habit of smacking us when we least expect it and there are a lot of fat, dumb, and happy investors. But as a trader, a little uncertainty isn’t a bad thing. I make the most money when the market overreacts emotionally. This year all we had was a 3% dip on the North Korean war of words. Here’s to hoping 2018 brings us more volatility and profit opportunities.

Jani

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Struggling to go higher on good news?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 finally broke a string of four down days and put together a respectable gain. While four down-days sounds bad, the losses were relatively modest, only giving back a portion of last week’s breakout.

Tax Reform is marching ahead, but the market is struggling to keep up. The lack of further price increases suggests the Tax Reform rally is running out of steam. We can continue creeping higher over the near-term but anything much above 2,700 seems like a stretch. If there was a lot of upside potential left in the market we would still be racing higher. Instead the breakout stalled and even dipped after the Senate approved their version of Tax Reform. Few things make me more nervous than a market that stops going up on good news.

News gets priced in quickly, that’s how markets works. Once the crowd started assuming Tax Reform was going to happen, the bulk of the upside had already been realized. If someone is still waiting to buy the headlines, they will be late to the party. At this point it looks like the actual signing of the bill will be anticlimactic and could even trigger a sell-the-news dip.

The path of least resistance is still higher and I expect the glide higher will continue over the near-term, but we are definitely approaching the end of the Tax Reform rally. Hope over tax cuts fueled the Trump rally over the last 12-months, but to keep marching higher we need to find a new standard-bearer. At this point I don’t know what it will be. Maybe blow-out earnings reports next month. But whatever it is it needs to be big to keep beating these ever higher expectations.

Switching gears to bitcoin, it shocking how high this has gone over the last few days. Last week we broke through $10k for the first time. Tonight we hit $17k. Two months ago we were under $4k. If anyone still believes this is not a bubble, clearly they don’t have any experience with bubbles. Without a doubt this thing will continue higher, but we are in the frantic part of the climb and the crash is not far away.

The problem BTC will run into is a lot of people are following this surge in price with a trailing stop. BTC passes $10k, they move their stop up to $8k. We surge past $14k and they move it up to $12k. That is actually a very sound strategy, unfortunately it doesn’t work when everyone else is doing the same thing. Without a doubt the price gains over the last few weeks are littered with countless automatic stop-losses. Once BTC starts dipping, sell orders are going to get triggered, which further pressures prices, which triggers even more sell orders. It won’t take long for a tidal wave of sell orders to overwhelm the dip buyers.

The scary part is the these things go down so much faster than they go up. $7k in gains over a week will be undone in an hour. I won’t pretend like I can call the top in BTC and this thing can easily continue past $25k and $35k over the next few days or weeks, but this rate of gains is most definitely not sustainable and it will come crashing down soon. If a person is planning on selling, get out on the way up because you will not be able to find a buyer once this thing starts going down.

Jani

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Searching for direction

By Jani Ziedins | End of Day Analysis

End of Day Update:

It’s been four trading days since my last free blog post and what a ride it’s been. Volatility has come back with a vengeance as breakouts fizzle and breakdowns rebound. The S&P500 continues hovering near all-time highs, but the market is anything but certain about what it wants to do next.

Republicans are marching toward the most significant Tax Reform in decades. At this point it is more a question of when, not if it will happen. There is a lot of agreement between the Senate and House bills and it is simply a matter of resolving those minor differences.

The reason the market has not reacted strongly to Republicans making further progress toward tax cuts is by this point most traders have started assuming this is going to happen. When the crowd believes something will happen, then it becomes priced in even if the event hasn’t occurred yet. Those who wanted to buy the Tax Reform pop have already bought and anyone waiting for the news to becomes official will be too late.

That said, the market has become increasingly volatilite over recent days. Last week we surged to record highs. Then Friday’s intraday price-action produced some epic gyrations, briefly erasing the entire week’s gains. And then Monday’s surge to record highs fizzled and reversed. The closer we get to Tax Reform, the more uncertain the market becomes about what comes next.

A big chunk of this rally has been built on hopes of Tax Reform. Now that is about to become a reality, what is the market going to hang its hat on? What do we have to look forward to? Some market pundits speculate corporate tax cuts will lead to a surge of reinvestment and hiring. That argument claims economic growth will pay for the tax cuts, but I’m suspicious. Over the last few years we have seen record amounts of corporate profits given back to shareholders in the form of dividends and stock buybacks. If these companies already have more money than they need for reinvestment, giving them even more isn’t going to change anything. Of course new dividends and stock buybacks will boost the stock market and as stock traders, that is what we care about. But as far as stimulating economic growth, I wouldn’t count on it.

At this point it seems like most of the Tax Reform upside has already been priced in. We will see a pop when the final deal is struck between the House and Senate, but we are talking about a handful of percent, not tens of percent of upside. And maybe a lot less if recent weakness devolves into a sell-the-news event. Risk is a function of height and at these record highs, the market has never been riskier. Tread carefully.

Jani

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Easy come, easy go

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Thursday the S&P500 surged higher and extended its breakout above 2,600. John McCain endorsed the Senate’s Tax Reform bill and that put traders in a buying mood. McCain’s objection derailed Healthcare Reform earlier in the year, so his support this time around is seen as a big deal. That leaves five undecided Senators remaining and Republicans need to persuade at least three more.

Of course a lot changes in a few hours. Not long after the market closed, Tax Reform took a serious hit when deficit hawks failed to get the debt triggers they are insisting on. With only two votes to spare, it doesn’t take much to put the entire bill in jeopardy. This latest wrinkle was weighing on overnight S&P500 futures, which already gave back half of Thursday’s gains. Easy come, easy go.

It will be interesting to see how the market responds to these headlines during Friday’s regular-hours trade. Even though futures are lower, the broad market has largely given Republicans a pass every time they ran into a problem. There have been several other stumbles along the way, but stocks remained stubbornly near all-time highs. As long as traders keep giving the benefit of doubt to Republicans, we shouldn’t expect too large of a reaction on Friday.

These are the type of disagreements I’ve been expecting from our politicians, but thus far the market hasn’t worried about it. If the market doesn’t care, then we don’t need to care. We are coming to the final weeks of 2017 and underweight money managers are being pressured to chase prices into year-end. Their buying combined with confident owners keeping supply tight will help the market continue drifting higher over the next few weeks. The only thing that matters is Tax Reform and the only thing that can dent this optimistic market is Tax Reform failing. Anything short of an outright failure and the market will continue with its half-full outlook.

This is definitely a buy-and-hold market and long-term investors should stick with their favorite positions. Things are a little more challenging for traders because the lack of volatility limits swing-trading opportunities. But that’s the way it goes. Sometimes buy-and-hold works better, other times trading in and out of the market is the way to go. This is why I have my money diversified between long-term investments and a trading account. One works great when the other struggles and vice-versa. That means I always have something that is working.

I’m leaving my long-term investments alone, but my trading account is sitting in cash. I could buy-and-hold in my trading account too, but that defeats the purpose of having a trading account. Instead, I’m leaving it in cash so that I am able to jump on the next trading opportunity that comes along. We can only buy the dip if we have cash. The most interesting opportunity would be if this Republican infighting spooks the market and gives us a larger tradable dip. Until then I will enjoy the drift higher while waiting for a better trade.

Jani

Looks good…….for now

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Tuesday the S&P500 surged to record highs in the biggest up-day in several months. As strong as the price gains were, volume was barely average. But light trade isn’t a huge surprise since we just returned from the Thanksgiving holiday.

A big chunk of Tuesday’s enthusiasm stemmed from a Senate committee clearing the way for a vote on a revised Tax bill. Progress is encouraging and that put traders in a buying mood. These gains were especially significant since this was the first material breakout in months. Previous attempts were met with apathy and momentum fizzled within hours. This time buying lasted all day and even withstood another North Korean missile test.

Today’s gains keep this market creeping higher. As I’ve been saying for weeks, if this market was going to crumble, it would have happened by now. Confident owners are keeping supply extremely tight as they refuse to sell any negative headlines or bearish price-action. The resulting tight supply makes it easy for even modest demand to keep pushing prices higher.

Underweight money managers have been patiently waiting for a pullback that is refusing to materialize. With year-end just weeks away, many of these managers are being pressured to chase prices higher or else they risk looking foolish when they report to their investors. Their desperate buying will likely keep a bid under this market and keep pushing us higher in the final weeks of the year.

Even though the path of least resistance is clearly higher, this is still a risky place to be adding new positions. Risk is a function of height, making this the riskiest time in months to be adding new money. Confident owners are demanding premium prices and that leaves new buyers with little margin for error. Even though Tax Reform is making progress through Congress, politics is an ugly process and without a doubt there will be bumps and roadblocks along the way. These near-term gyrations will give recent buyers heartburn when prices dip under their buy-points.

2017 has most definitely been a buy-and-hold year. The largest dips barely registered more than a few percent. This lack of volatility has made it a very challenging year for traders. But that is just the way this goes. Traders do well in sideways and down years, investors do well in steady climbs higher. This is why everyone should diversify their market exposure across both short-term trading and long-term investments. One will do well when the other is struggling.

While this has been a great year for buy-and-hold, chances are volatility will return in 2018. Just when the crowd gets used to the market’s mood, it changes. Once tax reform passes, the market’s attention will shift to whatever comes next. Given all the good news that has been priced in over the last 12-months, it is inevitable we will come across something that doesn’t go as well as expected. Markets go up and markets go down, that’s what they do. The higher we go over the near-term, the closer we get to the top. Remember, markets top when the outlook is the most bullish. I’m not predicting anything imminent, but I’m certain 2018 won’t be as easy for investors as 2017.

Jani

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Don’t let this market trick you into poorly timed trades

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500’s whipsaw continues as Wednesday’s crash turned into Thursday’s rip. Even though prices rebounded decisively, volume was conspicuously absent and Thursday’s turnover was the lowest in nearly a month. The light volume tells us this rebound was driven more by a lack of selling than a surge of buying. This isn’t a surprise given how stubbornly confident owners have been. No matter what the headlines and price-action have been, confident owners don’t care and refuse to sell. No matter what the bears think, when owners don’t sell, headlines stop mattering.

Unfortunately demand near the highs continues to be a problem. While confident owners don’t care about the headlines, prospective buyers with cash do. Valuations are stretched and most would-be buyers want more clarity before they are willing to chase prices even higher. Little selling and little buying means we will remain range bound over the near-term.

This volatility is doing a good job of humiliating reactive traders. Anyone who sold Wednesday’s dip is suffering from regret as they watched Thursday’s rebound from the sidelines. The only people more upset by this strength are the bears who shorted Wednesday’s weakness. Breakout buying and breakdown shorting are great strategies in directional markets. Unfortunately they are costly mistakes in sideways markets like this.

The thing to remember about range-bound markets is that includes moves to the extreme edges of the range. There is still downside left in the recent dip and we will likely test 2,550 and the 50dma before this is all said and done. And not only that, expect us to also poke our head above 2,600. Keep this in mind when planning your next trade. Just like how Wednesday’s weakness was a good buying opportunity, Thursday’s strength is an interesting selling/shorting point. In range bound markets we trade against the price-action and that means buying weakness and selling strength.

Tax Reform continues to dominate financial headlines. On the half-full side, the House passed its version of Tax Reform with several votes to spare. On the half-empty side, a Republican Senator announced his intention to vote against the Senate’s version. That leaves the GOP with only a single vote to spare. But this isn’t unusual. Threatening to blow everything up unless you get your way is a how modern politics works and this is simply a negotiating tactic.

If the market cared about infighting within the Republican Party, it would have shown up in the price-action already. For the time being most owners are giving the GOP the benefit of doubt and are not worried about these interim speed bumps. If the market doesn’t care, then neither should we.

That said, I still think this market hinges on the outcome of Tax Reform. Pass something worthwhile and the rally continues. If Republicans crash and burn again, the market will follow. Until then I expect the market to remain range bound. If I’m not getting paid to hold risk, then I’d rather watch safely from the sidelines. Long-term investors should stick with their favorite positions, but traders are better served waiting for a more attractive opportunity.

Jani

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What to expect over the near-term

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Tuesday the S&P500 stumbled for the fourth time out of the last six sessions. In midmorning trade the index undercut 2,570, but selling stalled and prices rebounded shortly thereafter. Despite multiple down-days, prices have been resilient so far are still within 1% of all-time highs.

Tax Reform continues to be the only thing that matters. Last month we kept inching higher despite the dark clouds forming around the tax debate. Not a lot has changed to the fundamental story since then, but traders are taking a less optimistic view of those same headlines as this story drags on. Previously Trump was hopeful a deal could be struck before Thanksgiving. Now it appears like we will be lucky if we have something by yearend.

A few weeks ago I told readers this was a better place to be taking profits than adding new positions. Given this recent bout of weakness, anyone who chased prices higher in November is currently sitting on losses and wondering if they should get out before things get worse. Buying when everything looks and feels good rarely works out. These reactive buyers are typically late to the party and more often than not, the last buyers before the up-wave crests and the next consolidation starts.

That said, this market has been remarkably resilient. Confident owners refuse to sell any bearish headline and negative price-action. That means these dips stall and bounce within hours. If this market was fragile and vulnerable, we would have crashed by now. As I said last month, markets consolidate one of two ways. The fastest is a pullback to support. That scares out the weak and clears the way for the next move higher. The other way is a sideways grind that bores everyone out the market as we patiently wait for the moving averages to catch up.

If this market was going to pullback to 2,500 support, it would have happened by now. There have been more than enough reasons for owners to dump stocks. But their stubborn confidence is keeping supply tight and putting a floor under prices. This means the most likely outcome is an extended trading range as the Tax debate drags on.

The thing to remember about trading ranges is they include moves to the upper and lower edges of the range. In this case that means dips under 2,560 and surges above 2,600. Because we are range bound, those “breakouts”/”breakdowns” will be false signals and should be traded against. For the nimblest of traders, that means buying weakness and selling strength.

Since the only thing that matters to this market is Tax Reform, that is also the only thing that will get us out of this range. Until this thing comes together or blows up, expect the market to remain range bound. Personally I don’t like owning sideways markets because that means I am holding risk and not getting paid for it. Long-term investors should stick with their favorite positions, but traders should wait for a better opportunity.

Jani

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What Thursday’s choppy trade tells us

By Jani Ziedins | End of Day Analysis

End of Day Update:

Thursday was the ugliest session in weeks. A one-way selloff pushed the S&P500 down more than 1% by lunchtime. But not long after undercutting 2,570, supply dried up and we recovered more than half of those early losses. Ugly, but it could have been worse.

Before Thursday’s open, Trump appeared to abandon the House’s version of Tax Reform and threw his weight behind the Senate’s yet to be released proposal. Even more unnerving is he claimed the Senate’s version would be a lot more Democrat friendly. The market’s disappointment seems to indicate it is afraid the Senate’s version will be more watered down and populist oriented. Early leaks also tell us the corporate tax cuts will be delayed until 2019, not something the market was happy to hear.

Even though prices has been drifting higher over the last few months, including a record close on Wednesday, volatility has definitely been picking up. This was the fourth whipsaw session in as many weeks. While most of these dips bounced within hours, it reveals a growing struggle over where the market is headed next. Thus far we have been drifting higher as defeated bears were steamrolled by confident bulls. But this volatility tells us the Bulls are losing their grip is and Bears are putting up a better fight.

And it shouldn’t come as a surprise. Everyone knows the market moves in waves and there is only so much up we can do before stumbling into a bout of down. The last meaningful dip was nearly three-months ago. While momentum is definitely still higher, without a doubt that next dip is coming. Today’s whipsaw session tells us the battle is heating up and it will likely get even choppier over coming weeks.

The saving grace is most owners are blissfully complacent and confident. No matter what the cynics claim should happen, if confident owners don’t sell, supply stays tight and it is easy to prop up the market. While today’s selloff was dramatic, almost all owners were still sitting on piles of profits and the only ones feeling the squeeze were recent buyers. Once those recent buyers fled, there was no one left to sell and we rebounded.

The real question is where do we head from here? I’ve been cautious the last few weeks. I know the market cannot go up in a straight line and the rate of gains since the August bottom were bound to slow down. That is why have been telling readers this is a better place to be taking profits than adding new money. And that analysis has been spot on. Even though we continue creeping higher, the gains have been far slower and the choppiness has definitely picked up. The easy gains are long behind us and the road ahead is a lot more difficult.

That said, prices have been holding up amazingly well. Extended markets heal themselves one of two ways. Either the slip back to support and key moving averages, or they trade sideways long enough to allow the moving averages to catch up. While we are still a good ways above the 50dma, the slower rate of gains over the last few weeks is allowing it to catch up.

Today’s whipsaw session was the fourth bout of volatility we’ve seen recently. And just like the other times, Thursday recovered a big chunk of those early losses within hours. Confident owners are simply not interested in selling no matter what the headlines say or the price-action is. Their determination is keeping a solid floor under our feet.

Previously I was wary of a dip back to support, but the market has held near the highs amazingly well. If we were vulnerable to a pullback, it would have happened by now. That said, this is still a challenging place to own stocks. Volatility will continue to haunt us over the near-term as traders reconcile the flurry of encouraging and disappointing Tax Reform headlines. The rate of gains is definitely slowing down and traders trying to sit through this sideways stretch better buckle in.

Everyone knows picking a top is a fool’s game. As traders that means we must decide if we prefer selling too early, or too late. Personally I like selling too early because it means I get to skip all the heartburn that comes from trying to decide if days like today should be held or sold. Sideways stretches are the worst because you hold all the risk, but you don’t get paid for it. Personally I like watching this choppiness from the sidelines so I am fresh and ready to go when the next opportunity presents itself. It is hard to profit from a dip when you are already fully invested.

Jani

Finding the right risk/reward

By Jani Ziedins | End of Day Analysis

End of Day Update:

After a little up and a little down, the S&P500 ended Tuesday right where it started. Early strength gave way to midday selling, which was followed by a late surge back to breakeven. As dramatic as that sounds, the price swings barely got larger than one or two tenths of a percent. For all practical purposes, nothing much happened on this largely indecisive and irrelevant day.

That said, spending another day at or near all-time highs shows there is still good support behind this market. There is very little chasing going on since breakouts to record highs stall within hours, but confident owners have zero interest in selling no matter what the headlines and price-action are. Their refusal to sell keeps supply tight and makes it easy to hold these levels.

As I wrote last week, if this market was going to tumble on disagreements within the Republican party, it would have happened by now. I viewed this as the biggest headline risk to this extended rally, but so far the market doesn’t care. If the market doesn’t care, then neither should we. It is tempting to get stubborn and argue with the market in these situations, but that only leads to bigger losses. Right or wrong, the market is bigger than we are and it will run over us if we get in its way.

Even though the path of least resistance continues to be higher, only two kinds of traders are making money these days. Buy-and-hold investors who ignore all the noise. And the most nimble of day-traders. For the rest of us, these ultra-small daily fluctuations don’t give us much to trade. When confident owners don’t sell, dips don’t happen. When people don’t sell the dips, there is no one scrambling to get back in during the rebound. Without emotion on either side, volatility shrunk to a level where most days moves are measured in single tenths of a percent. Buying a 0.1% dip in anticipation of a 0.1% rebound doesn’t make a lot of sense for me and my style of trading.

My favorite trades occur when fear and uncertainty consume the crowd. That is when sellers offer steep discounts so they can “get out before things get worse.” Unfortunately for those emotional and reactive sellers, the dip ends not long after they bailout. Fortunately for me, their pain is my gain. (God, I miss those days.) Now we find ourselves at the opposite end of the spectrum. Confident owners refuse to sell for any reason and the few that are willing to deal demand steep price premiums. The path of least resistance is clearly higher, but there is not much margin for error when paying premium prices.

Everyone knows the market moves in waves. Unfortunately most forget that just as the latest wave is cresting. While I’m not calling a top here, I know we’ve done a lot of up without much down. The last meaningful dip was nearly three months ago. The next one is coming, the only thing we don’t know is if it will happen this week, next week, or next month. But with each passing day, it is closer than it has ever been.

Anyone can get lucky and make money on a single trade. But success over the long-term depends on buying when the risks and rewards are in our favor. Given how small the near-term upside is and how much air there is underneath us, it is hard to claim buying at these levels presents a trader with a good risk/reward. Long-term investors should ignore the noise and stick with their favorite stocks, but short-term traders should wait for a better risk/reward.

The biggest upside catalyst is Republicans reaching an agreement on Tax Reform. Given how far apart the views are, Trump’s Thanksgiving deadline seems highly unlikely. Even Christmas would be a stretch and require a lot of things falling into place. Until then, at best the market keeps inching higher. At worst traders get spooked and we test support. Small reward, large risk. You decide how to trade that.

Jani

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So far, so good

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 finished Thursday flat after spending most of the day in the red. Republicans unveiled their Tax Reform proposal and traders chose to sell the news. But “sell” is an over-statement since we were only down a fraction of a percent in midday trade. The tax plan was everything the leaks told us it would be, so there was little to get excited or disappointed over. Exactly as expected resulted in a mostly flat day.

I’ve been wary of this market for a few weeks, but it held up surprisingly well. My biggest concern was how traders would react to infighting within the Republican party. But so far the market has tolerated criticism from Trump and 21 Republicans voting against the budget. If infighting was going to spook the market, it would have shown up in the price-action already. Without a doubt volatility has picked up, but the slow climb higher is still on track.

A few weeks ago I said this was a better place to be selling stocks than buying them. And I stand by that statement. Just because the market continued creeping higher doesn’t mean betting on the continues rally was the smart trade. Long-term success is about managing risk and sticking with high-probability, high-reward trades. Trades will always go against us, that is simply the nature of this game. It is no different than inventory expense for a retailer. But just because a trade lost money doesn’t mean it was a bad trade, and just because a trade makes money doesn’t mean it was a good trade. Success isn’t measured over how this trade or the next trade does, but how all of our trade so.

My reluctance to trust this market was largely built on the the size of the rally since August’s lows and the looming battle over Tax Reform. So far my concerns have been unnecessary. If we were going to pullback because of Tax Reform infighting, it would have happened by now. If the market isn’t worried about infighting, then we don’t have to worry about it.

That said, the risks are still elevated and buying up here is definitely not a low-risk, high-reward trade. The market will likely keep creeping higher over coming weeks, but creeping higher is not a great reward given the risk underneath us. Long-term investors should keep holding, but traders can wait for a better risk/reward. The higher this market goes without resting, the harder we fall when it eventually happens.

Jani

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It won’t be pretty and it won’t be fast

By Jani Ziedins | End of Day Analysis

End of Day Update

The S&P500 inched higher Thursday, but for all practical purposes this was another flat session. We smashed through 2,540 earlier this month, but have been struggling to add to those gains ever since.

Volatility has been picking up over the last several days, producing the largest intraday swings since Trump’s war of words with North Korea. Most of these gyrations have reversed within hours, but the transition from calm, one-way moves higher is a material change in behavior.

Previously the Bulls were firmly in control and Bears were helpless to stop them. But this uptick in volatility tells us Bulls are losing their grip and Bears are growing stronger. Volatility often increases just before a reversal in direction. We saw that during the North Korean lows and could be witnessing the same thing now as the latest rally runs out of steam. Markets go up and markets go down, that’s what they do. There is nothing wrong with a healthy and normal pullback to support there.

After Thursday’s close, GOOGL, AMZN, and MSFT put up strong results. Without a doubt parts of the tech sector are doing very well. But this strength doesn’t seem to be carrying over to the broad market as overnight futures are only up a tenth of a percent. If tech earnings were poised to launch us higher, we would see a larger reaction in the futures.

But this isn’t a surprise. There is only one thing that matters to this market and that is Tax Reform. The House passed the Senate’s budget. Last Friday the market surged to record highs when the Senate passed their budget, but today market was much cooler to the House doing the same thing. That’s because 20 Republicans voted against the budget in protest over cuts to state income tax deductions.

Everyone loves tax cuts and the market has been rallying on that positive sentiment. But now we are transitioning to the debate over what taxes will be raised in order to pay for all those lovely tax cuts. Interest expense, 401k, and state income tax deductions all find themselves on the chopping block. On Thursday twenty Representatives demonstrated their displeasure with the proposed changes. Trump already said he was opposed to cutting  401ks. And let’s not forget our president is a real estate mogul. Anyone think he will sign a bill that eliminates interest deductions for his business and real estate loans? Yeah, me neither.

November 1st is when we are supposed to see this widely anticipated bill for the first time. If the healthcare debate is anything to go by, there is a good chance this bill will be delayed coming out of committee. Once it finally sees the light of day, it will get shredded by special interests. If there was one thing Republicans could agree on, it was their disdain for Obamacare. Yet even with that unity driving them, they still couldn’t repeal it. What is going to happen populist moderates, fiscal conservatives, and pro-business Republicans duke it out? It won’t be pretty and it won’t be fast.

Expect the hope of Tax Reform to give way to despair over political infighting. There is a good chance Republicans will pass something…..eventually. But it definitely won’t be as grand as many are hoping for. In the meantime, expect the stock market to give back a chunk of recent gains as it consolidates and allows the 50dma to catch up. This is definitely a better place to be taking profits than adding new money.

Jani

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Remember, dips are normal and healthy

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Tuesday the S&P500 tried to recover Monday’s selloff, unfortunately the follow through never materialized and we finished well off the intraday highs. Traders still seemed more inclined to take profits than buy the dip.

If this market was poised to rip higher, this was the bulls’ opportunity. The lackluster buying suggests this weakness will likely extend past Monday’s dip. But this isn’t a bad thing. The recent runup leaves us 70-points above the 50dma and a check back is long overdue. The only question is if we dip back down to this key moving average, or trade sideways and allow it to catch up.

Falls from unsustainable levels typically happen quickly, so the longer we hold current levels, the more likely a sideways consolidation becomes. But we need a few more days because two-days definitely doesn’t qualify as solid support.

Last Friday we broke out to record highs when the Senate finally agreed on a budget. That clears the way for more significant Tax Reform. Unfortunately those fuzzy feelings didn’t last long and rifts within the Republican party started showing as Trump and key Senators started throwing barbs at each other. Trump definitely has a more antagonistic leadership style and that will likely lead to more tension during the Tax Reform debate. The market hates uncertainty and this conflict will likely erase a big chunk of the hope that lifted us to these levels.

I’m most definitely not a bear and still think the path of least resistance over the medium-term is higher. But I have also been doing this long enough to know the market doesn’t move in straight lines. After a period of nice gains, it is perfectly normal for the market to consolidate the runup. This is part of the healthy process of moving higher. In fact I would be more concerned about the sustainability of this rally if we didn’t consolidate recent gains. The higher we go, the harder we fall when the inevitable consolidation eventually happens.

All of this means this is definitely a better place to be taking profits than initiating new positions. But just like how we shouldn’t overreact to recent strength, the same level-headed thinking will be required if we dip further over the next several days. Additional weakness is creating a buying opportunity, not an excuse to reactively abandon an otherwise healthy market. Remember, smart money trades proactively by selling strength and buying weakness. Reactive traders bleed themselves dry by doing the opposite they buy high and sell low. Don’t be a reactive trader.

Jani

Why smart money will sell the Senate’s budget

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 fell out of bed Thursday morning when it started the day with the biggest losses in over a month. But within an hour supply dried up and dip buyers rushed to our rescue. Not only did we finish off the early lows, we actually managed to close in the green. That said, volume was unremarkable given how dramatic the price-action was.

This was an impressive reversal and it leaves us wondering what it means. Decisive reversals are often strong buy signals when they follow multi-day selloffs and the rebound occurs following yet another piece of bad news. Selling capitulates when then the crowd is most uncertain and fearful. That is when the last of the nervous sellers bail out and moments later prices rebound when there is no one left to sell. Unfortunately that setup looks nothing like today’s dip and rebound.

Things got more interesting late Thursday evening when the Senate passed a budget. While it was nice to finally see something not crash and burn in the Senate, the budget is largely a procedural matter and really doesn’t count for anything. The only significant thing is it allows Republicans to avoid a Democrat filibuster when voting on their yet to be announced Tax Reform Bill. Overnight futures popped 0.3% on the encouraging developments.

So what is a trader to do on Friday? Thursday’s intraday rebound appears constructive. Then you have the good news coming out of the Senate. Most likely the best plan is to sell the news. There are a couple of reasons why.

The easiest to explain is politics. If anyone believes our leaders will have constructive dialogues, quickly arrive at consensus, and pass a great Tax Reform Bill clearly isn’t paying attention. Politics is messy and I have no doubt Tax Reform will stumble countless times before it has a chance of passing.

There are two key rules every politician learns when they get to Washington:
A) Throw a fit until you get what you want.
B) If you don’t get what you want, blow everything up.

That is how Healthcare Reform went down and if anyone thinks Tax Reform will be any different, there is a medical term for that, it’s called insanity.

There are several opposing forces in the Republican party that will make any compromise difficult. First are the pro-business Republicans who want aggressive business tax cuts to stimulate growth. Second are the fiscal conservatives who bristle at the thought of adding to the deficit. And third are the moderates who want to see most of the tax cuts benefit the middle class. Three very different factions whose ideas are in direct conflict with each other. Without a doubt we will see someone throw a fit and refuse to support the first draft of the bill. Get three of those someones and the whole thing goes down in flames.

There is a good chance a compromise will eventually be reached, but politics is ugly and most likely this process will teeter on the verge of collapse moments before it is salvaged at the last possible second. Expect a lot of bad news between now and then.

Next comes the market’s price-action. As I’ve been writing about for the last two-weeks, the market is extended and needs to consolidate recent gains. Everyone knows markets move in waves and we are near the upper end of the latest wave. I’m definitely not predicting a crash, but catching our breath is a normal and healthy thing to do following a 100-point move from last month’s lows.

The market is fatigued and this is easily seen in the lethargic breakouts to record highs. Gains of 0.18%, 0.07%, 0.07%, and 0.03% over the previous four days show how little interest there is in buying the record highs. If there was explosive upside left in this rally, we would have raced higher by now. Instead these insignificant “breakouts” tell us demand is drying up.

Don’t get me wrong, I’m not bearish, just realistically cautious. Consolidations are a normal and healthy part of moving higher. The quickest way to refresh a market is pulling back to support. The longer way is drifting sideways for an extended period and allowing the trend lines and moving averages to catch up. Either one will work for this market and only time will tell which one we get.

I’m most definitely not calling a top here, just warning that the upside is more limited than the downside. Long-term investors should stick with their favorite positions, but shorter-term traders need to think about locking-in profits and waiting for better prices.

Jani