Category Archives for "End of Day Analysis"

The Inevitable Breakout

By Jani Ziedins | End of Day Analysis

End of Day Update:

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

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

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

Jani

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Common Sense

By Jani Ziedins | End of Day Analysis

End of Day Update:

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

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

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

Jani

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Fizzled Breakout

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

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

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

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

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

Jani

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Don’t overthink this market

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

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

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

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

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

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

Jani

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Sell the news? Not so fast.

By Jani Ziedins | End of Day Analysis

End of Day Update:

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

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

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

Jani

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A Bullish Loss

By Jani Ziedins | End of Day Analysis

End of Day Analysis

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

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

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

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

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

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

Jani

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Don’t Read Too Much Into The Price-Action

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 started Tuesday with modest losses, rebounded decisively into the green by lunchtime, but ultimately was unable to hold those midday gains and finished flat. While it looked like a lot was going on and it gave the financial press something to talk about, the mistake is reading too much into what is truthfully little more than random noise.

We have been stuck inside a tight trading range since early December. The market only briefly ventured outside of 2,250-2,280 and even that departure lasted little more than a day. If we assume the market is driven by fundamentals, it is hard to fathom four-weeks of alternating bullish and bearish news so perfectly balanced that we danced on this fine line. That’s akin to flipping a quarter twenty-times and having it come up heads every time. Possible, but not likely. Instead of being driven by headlines and fundamentals, this market is responding to the simple laws of supply and demand.

Trump’s surprise win put stock owners in a good mood as they anticipate bullish policies that will drive stocks even higher. When owners are patiently holding for higher prices, supply stays tight and that props up prices. But on the other side, those with cash have been far less convinced. While there was a brief flurry of short covering and breakout buying following the election, further gains have stalled because buyers are scarce near these record highs. No matter what the headlines have been trumpeting over the last several weeks, owners don’t want to sell and those with cash that don’t want to buy.  The result is this trading range.

The biggest risk in flat markets is most traders arrive with a bullish or bearish bias. That means they assume every story or price gyration will lead to the next directional move. Bulls rush to buy every apparent breakout and bears pile on the breakdowns. But because there is no substance behind these random moves, each breakout or breakdown fizzles within days and these overactive traders get washed out for a loss when prices reverse. Often the best trade is to not trade and that has definitely been the case recently.

Stocks tumble from unsustainable levels quickly and it is encouraging we’ve held the upper end of the trading range for five-days. Even though today’s intraday price-action was pathetic, the market is acting like it wants to test the psychologically significant 2,300 level. At the same time the Dow will have finally broken 20,000 and once we get these round numbers out of the way, we can finally get on with business. Many traders will use the exuberance around these milestones as an excuse to take profits and we are more likely to stumble from these highs than stage a decisive breakout. Lack of demand continues to be a major obstacle and it unlikely to be rectified anytime soon.

Assume we will continue trading sideways until something unexpected happens. That means buying weakness and selling strength.

Jani

Buy the Breakout, or Settle into the Trading Range

By Jani Ziedins | End of Day Analysis

End of Day Analysis

The S&P 500 added modest gains Tuesday, extending Monday’s rebound for a second day. That leaves us a couple of points from all-time highs. Volume was average, but not bad for this lull between Thanksgiving and Christmas.

In last Wednesday’s free blog post, I warned readers to be wary of the market’s pathetic afternoon fizzles.

“Today’s bullish news was more than enough to unleash a flood of buying when we opened near record highs. If the market was a coiled spring ready to explode higher, this would have triggered that move. Instead we hit our head on the ceiling and fell into tail-spin. There are few things more ominous than a market that cannot rally on good news because it tells us we are running out of new buyers.”

“Don’t get me wrong, not ready to call the bull market dead, but this week’s poor price-action says we are not ready to extend the breakout into record highs just yet. The market was getting a tad frothy following the straight-up move from the November lows. A step-back here would be a healthy part of building a sustainable foundation for the next leg higher. A high-volume dip to 2,180 would flush a lot of excess enthusiasm from the market. If prices bounce and reclaim 2,200 not long after, that tells us bulls are still in control.”

And that is exactly what happened.

While it was nice to call that move, attaboys don’t pay the bills. The more pressing question is what happens now that we returned to all-time highs. Do we resume the prior uptrend, or are we getting sucked into another sideways trading range? This is a critical distinction because it is the difference between buying the breakout, or selling the top of a trading range.

If last week’s selloff was driven by bad news and we recovered those losses this quickly, that would be a strong buy signal. Shrugging off bad news so easily tells us the market is ready to fly. But that’s not what happened. In fact the opposite happened. We fizzled on bullish news. Private payroll numbers were strong and oil prices popped when OPEC finally agreed to production caps. Even though everyone was cheering the news, the market couldn’t make any more headway because everyone was already fully invested. Unfortunately it takes more than a two-day dip to fix supply-and-demand problems like that. Tuesday’s smaller gains suggest this week’s rebound is slowing down, not getting ready to take flight.

That said, we need to be careful we don’t read too much into what could be an innocent gyration. Was last week’s fizzle telling us the November rally is running out of steam? Or was it a normal step-back on our way higher. Lucky for us the market will give us the answer over the next couple of days. If we hit our head again, supply is a serious problem and we will trade sideways into year-end. On the other hand, if we break 2,220 and don’t look back, last week was little more than an anomaly and the chase higher into year-end is on. Trade accordingly.

Last week’s fizzle makes it feel like we are falling into a trading range to close the year and is how I’m positioned, but the trader in me hopes we resume the breakout because it is more profitable to ride a wave higher.

Jani

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The market is telling us to be careful

By Jani Ziedins | End of Day Analysis

End of Day Analysis

Wednesday morning the S&P500 rallied to all-time highs shortly after the open. Oil popped 10% when OPEC finally agreed to cap production and the ADP payroll number came in far stronger than expected. But the enthusiasm was short-lived and the market retreated from those highs in a relentless selloff that saw us close under the psychologically important 2,200 level. Volume was off the chart and only exceeded in recent months by the two-trading days following Trump’s unexpected election.

While November had a heck of run from the pre-election lows, this week’s poor price-action has been far less confidence inspiring. We rallied to record highs during the low-volume Thanksgiving week, but the market has been behaving poorly ever since. The last three-days has seen significant givebacks in the final hours of trading. That tells us big-money investors are far more inclined to take profits near all-time highs than they are to add new money and chase prices higher.

I’ve been quite bullish and expected the market to rally into year-end. We’ve been consolidating since mid-summer and the market refused multiple invitations to breakdown. When the market doesn’t go down on bad news, look out above. But this morning’s pathetic price-action forced me to reevaluate that outlook. Today’s bullish news was more than enough to unleash a flood of buying when we opened near record highs. If the market was a coiled spring ready to explode higher, this would have triggered that move. Instead we hit our head on the ceiling and fell into tail-spin. There are few things more ominous than a market that cannot rally on good news because it tells us we are running out of new buyers.

It looks like we’re stuck in a market that won’t break down on bearish news and won’t rally on bullish news. Owners are stubbornly clinging to their stocks and won’t sell negative headlines and price-action while those with cash have zero interest in chasing prices near record highs no matter how “safe” the market feels. Entrenched views like this are what trading ranges are made of. The longer we stay inside the range, the more stubborn both sides become. But this building pressure also means when the dam finally breaks, the resulting move will be swift and decisive.

Don’t get me wrong, not ready to call the bull market dead, but this week’s poor price-action says we are not ready to extend the breakout into record highs just yet. The market was getting a tad frothy following the straight-up move from the November lows. A step-back here would be a healthy part of building a sustainable foundation for the next leg higher. A high-volume dip to 2,180 would flush a lot of excess enthusiasm from the market. If prices bounce and reclaim 2,200 not long after, that tells us bulls are still in control. On the other hand, if the losses accelerate through 2,180 and we cannot find a bottom, the 200-dma and 2,100 are very much in play. Right now the pressure is on Bulls to prove they are still in control and that is what we need to watch over the next few trading days.

I took profits defensively this morning when we couldn’t add to the early gains, but I am more than ready to jump on the next trade when it shows itself. The price-action over the next couple of days will tell me if that is shorting this weakness or buying the dip.

Jani

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Why this breakout is the real deal.

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 poked its head above 2,200 for the first time in history. This is a level we’ve been flirting with since mid-summer and while it took nearly half a year, we finally did it. Now that we’re here, question is if this rally through the upper end of the trading range is the real deal, or if it will fizzle like every other failed breakout over the last six-months.

The GOP takeover continues to be the fuel propelling this 100-point rebound. While there was pre-election apprehension over what a Trump presidency would look like, so far investors are clearly excited about the prospects of a business friendly administration. This is a significant and unexpected development that has the makings to be the catalyst that drives us out of this trading range.

While this week’s price-action has been constructive, we have to remember this is a holiday shortened week. Big institutions know volume is typically light and they cannot move big blocks of shares, meaning they made most of their important trades last week. Most of the trading going on this week comes from smaller and less meaningful traders. Without big money’s guiding hand, these little guys throw their weight around and can boost volatility, but their limited size means they don’t have the money to drive directional moves. And so while I like this week’s price-action, we won’t know the market’s true intentions until next week.

That said, it was encouraging to see how the market responded Tuesday on an intraday basis. We opened above 2,200 but cynical profit-taking quickly pushed us under this psychologically important level. But rather than trigger a wave of follow-on selling, supply dried up and we rebounded back to the opening highs. That tells us most owners are more inclined to continue holding than take profits. Their patience and conviction is keeping supply tight and propping up prices. We’ve seen a lot of churn during this half-year consolidation with nervous and pessimistic owners being replaced by buyers expecting higher prices. This core group of owners has ignored every excuse to breakdown all year and it was inevitable we would make a run to all-time highs. Now that we’re here, there is little reason to think they will give up now. Smart traders keep doing what is working and right now that is betting on the market.

Jani

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Is this the real deal?

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 closed within a few points of all-time highs Thursday as the post-election rebound continues. We survived a lot of bearish headlines this year and no matter what they cynics claim, the market isn’t listening. While there is a chance we could kiss all-time highs and tumble back into the heart of the trading range, the more likely outcome is breaking out and continue higher.

The market enjoys humiliating the largest number of traders at any given juncture. Stumbling from here means patient bulls with piles of profits will give a small portion back. That doesn’t sound very humiliating to me. On the other hand, smashing all-time highs will send bears scrambling for cover. Shorts will be forced to cover and anyone out of the market will start second-guessing their decision as they watch everyone around them raking in profits. It’s pretty obvious which side has more to lose here.

We’ve been flirting with 2,200 for nearly half a year. The longer we hold near this level, the more likely it is we will break through. Unsustainable levels are by definition unsustainable. If we were going to crash in a hopeless ball of flames, it would have happened by now. This resilience tells us there is a lot of support behind these prices. If all of the headlines we encountered in 2016 couldn’t break this bull, it is really hard to imagine something coming along in the final weeks of the year that will break it. The smart money is clearly betting on this bull, not against it.

Right or wrong, when confident owners don’t sell, supply stays tight and prices remain firm. Bears can argue until they are blue in the face, but it all matters for naught if they cannot convince owners to sell. I’m not sure what 2017 holds, but things look good for the market going into year-end. Fight it at your peril.

Jani

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Are we ready to breakout?

By Jani Ziedins | End of Day Analysis

End of Day Update:

It’s been a week since Trump was elected president and the market is holding up amazingly well. Today’s gains puts the S&P500 within striking distance of all-time highs.

Reality turns out to be a long way from the pre-election consensus that a surprise Trump win would roil global markets. I’m not criticising because I also assumed Trump’s win would unnerve investors. Everyone assumed it was Hillary’s election to lose and markets hate surprises. Overnight stock futures traded that way when they cratered 5% as Trump captured key swing-states, but by the time we opened Wednesday morning most of those losses vanished and we quickly traded in the green.

While Trump’s win was largely unexpected, the market likes the GOP’s more business friendly approach to governing and is why stocks reacted positively in the aftermath. One of the most powerful signals in trading is when the market does the opposite of what everyone expects. Rather than sell Trump’s surprise win, the market told us this was a buying opportunity. And the last few days of support has confirmed that signal. The question is what happens now that we are pushing up against the upper end of the summer’s trading range.

We’ve been trading sideways for months because nothing new was happening. The GOP capturing all three branches of government is definitely something new. Reforming corporate taxes is on the GOP’s agenda as is a tax holiday so corporations can repatriate their overseas cash. Both of these will boost profits and dividends, and thus stock prices. At least that is why people are in a buying mood.

We are coming up on significant resistance near 2,190 as we approach all-time highs. If we break through, expect us to keep going into year-end as underweight money managers are forced to chase. If the market cannot attract new buyers at all-time highs, demand is becoming a serious problem and that doesn’t bode well for next year. At this point I give the edge to bulls because countless headlines have been unable to break this market. When owners refuse to sell, it doesn’t matter what the headlines are.

Jani

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Should we sell ahead of the election?

By Jani Ziedins | End of Day Analysis

End of Day Analysis

It’s taken awhile, but the stock market is finally doing something! We’ve been mostly range bound since mid-summer, but traders are finally getting pre-election jitters and that nervousness lead to eight consecutive down days for the S&P500. What was previously viewed as a slam dunk win for Hillary is turning into a much closer race than most expected. It is still Hillary’s election to lose, but Trump is giving her a run for her money.

Last Friday’s FBI revelations are finally showing up in the polling data. Battleground states like Nevada, North Carolina, and Florida that were leaning toward Hillary last week have shifted ever so slightly in Trump’s direction.

While momentum is always a good thing, the Electoral College math still favors Hillary. In addition to taking the above mentioned states, Trump also needs to steal one of Hillary’s “firewall” states; New Hampshire, Colorado, Pennsylvania, or Michigan. Without one of those, the math simply doesn’t work for Trump no matter what is going on in FL, NV, and OH. At the moment, New Hampshire is Hillary’s most vulnerable firewall state and is more important to the outcome than the much talked about FL, NV, and OH.

While we can dissect the polling data a million different ways, the more important question is can we believe it? The biggest challenge in polling is counting the right people. Obviously we don’t want to ask a 12-year old who she will vote for. But what about a 34-year old male? Surely his opinion counts, right? Would we feel the same way if we knew he has never voted? So maybe we shouldn’t count him. But what if we find out he drove 5-hours to attend a Trump rally. Does that make a difference?

Voter intent is the hardest, yet most important thing to measure. This is especially critical in a historically unpopular election. We will have people who have voted in every presidential election since the 1970s skip this one because they find both candidates so deplorable. We will also have middle-aged, blue-collar workers vote for the first time because they are so passionate about Trump. Countless polling results are being thrown at us, but if they are using a flawed measure of voter intent, the polls everyone is taking for fact could be way off the mark.

Right now Trump has a one-in-three chance of winning. That means if we held three elections under similar circumstances, the favorite would win twice and the underdog once. This has nothing to do with the candidates and a last-minute surge, but reflects the errors that naturally arise anytime a small sample is used to predict the characteristics of a larger group. If we’re not asking the right people the right questions, our poll won’t accurately reflect the opinions of the larger group.

As we discussed previously, a Trump win would unnerve the market because he is the least understood major party candidate in modern history. While he is using this outsider status to his advantage to attract disgruntled voters, markets hate uncertainty and no one really knows what a Trump presidency will look like. Even though many people don’t like Hillary, the market prefers her because at least we know what we are getting. The market always prefers a damaged status quo over a wildcard. And if anyone doubts that, the market’s current bout of weakness largely coincided with Trump’s improving chances.

While all that Electoral College and Statistics stuff is interesting, what we really want to know is how to trade this. The simple answer is those that are in the market should stay in, and those that are out should stay out.

The time to sell defensively was weeks ago when everyone was comfortable. Reacting emotionally to a selloff rarely results in a smart trading decision. If someone has long-term positions, stick with them and ignore this near-term volatility. Contrary to popular opinion, the president has little influence over the economy and stock market. While we could see some volatility after the election as supporters of the losing side reflexively dump their stocks at a discount, that will be a better buying opportunity than time to get defensive.

If someone has cash, stay calm and continue watching. Prices might get even more attractive over coming days. But rather than fear impending doom-and-gloom, we should be greedily rubbing our hands together as emotional owners start giving money away. Risk is a factor of height and we are at the lowest levels in months. While no one can pick the exact bottom, it is less risky to buy today’s selloff than it was to hold last week’s benign sideways drift.

The widely expected Hillary win will be a relief to the market. While we might see Trump supporters dump their stocks in disgust on Wednesday, the relief of a conclusive outcome will no doubt keep any post-election weakness brief. A Trump win on the other hand will be a surprise and not something that is currently priced in. Fear of the unknown could lead to an extended selloff. But like I said, the president isn’t as important as most people think, especially one that has a strained relationship with Congress. Within two-weeks the market will go back to business as usual, which up until this week was hovering near all-time highs. If people want to give us stocks at a discount, it would be foolish not to take them.

Jani

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What the election means for the market

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 tumbled for a 6th straight day as it undercut 2,120 support and closed at the lowest levels since early July. While there wasn’t a decisive headline driving the 1% midday selloff, most people chalked it up to pre-election jitters. The encouraging thing is we bounced off 2,100 support after briefly violating it. Rather than trigger a tidal-wave of defensive selling, buyers rushed in and we closed well off the midday lows.

This is the largest directional move we’ve seen since September’s rate-hike tantrum and is the longest losing streak in over a year. Is this forewarning us of much worse to come, or did we just pass through the worst of it?

Up to this point, most assumed Hillary would walk away with the election, but last Friday’s reopening of the FBI investigation into Hillary’s email servers gave Trump a small boost over the weekend. While he still faces long odds, closing the gap made people reconsider the prospects of a Trump presidency.

The market prefers Hillary because she is the establishment candidate. We know what we are getting with her and it won’t be much different from what we’ve had over the last eight-years. The market hates uncertainty over all else and it favors Hillary because she is a known quantity.

While we spend a lot of time debating the merits of each candidate, most people give the president way too much credit for influencing the economy and stock market. Four-years ago we went through a multi-week selloff following Obama’s reelection because emotional Romney supporters were dumping their stocks at steep discounts. We bottomed at 1,350 and with the benefit of hindsight, anyone who sold those lows was clearly an idiot. There is no reason to think this time will be any different. Sore losers dump stocks and savvy buyers snap up the discounts.

A big part of what pulled us down over the last six-sessions is the risk premium associated with an uncertain outcome next week. No matter who wins, that risk evaporates Wednesday morning once the result is conclusive. Removing that risk is bullish, but that is only one component of what will affect prices Wednesday.

A Hillary win is largely priced in and will produce a relatively modest reaction. A Trump win is definitely not priced in and will cause larger reaction. Today’s selloff definitely tells us which direction it will be. But even that will get priced in relatively quickly and the market will go about its business just like it did after both of Obama’s elections and every other election before that.

Many stock owners will trade emotionally next Wednesday and there will be a lot of profits waiting for those who keep their composure. Prices will bounce pretty quickly following a Hillary win because that is the expected outcome. If Trump wins, wait a few more days for the emotional selling to subside before buying the dip.

Jani

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What’s Next?

By Jani Ziedins | End of Day Analysis

End of Day Update:

Stocks dropped 10-points at the open due to what the financial media claimed was weak earnings. But rather than rattle nerves, a sharp reversal erased those losses before lunchtime. While we continued to bounce around in the afternoon session, we finished the day well off those morning lows.

Once upon a time price-action like this was insightful. Running out of sellers so quickly after an unsettling open is often a strong buy-signal. But in our current market, we have to assume this is just more random noise and cannot base a trade off it. If anything, I’m more inclined to trade against this signal than with it given how quickly this market reverses.

We remain inside the recent trading range and until the market shows us something new, we have to assume we are still playing by the same rules that have governed us since mid-summer. That means expecting directional moves to fizzle and reverse.

The thing to remember about stock market “rules” is they are only rules half the time. Sometimes we buy the breakout, other times we sell overhead resistance. A bearish lower-low looks just like a bullish double-bottom. Knowing what rule to apply when is the art of trading.

The first job of the trader is paying attention to the mood of the market. Are we in a buying mood? A selling mood? An indifferent mood? With this critical piece of information, we know which set of rules to apply. Currently we’re in an indifferent mood and that means ignoring traditional buy and sell signals.

It usually takes something significant to trigger a change in mood. Many times it is a dramatic and unsettling headline. Other times it is as simple as a change in the calendar as we transition from one quarter to the next.

I hoped going from the summer doldrums to the higher-volume fall trade would liven up our market and give us something to trade. Unfortunately that didn’t happen and now we need to look ahead for the next big thing to wake traders up. We are already a good chunk into the 4th quarter and 3rd quarters have not moved the needle. The election is the next big thing on the horizon and less than two-weeks away. Following that is the Fed’s largely expected rate-hike in November or December and institutional money managers repositioning for year-end. Hopefully one of these wild cards will pull us out of the trading range doldrums.

I will be shocked if the market trades lifelessly for the rest of the year, but the market has a nasty habit of giving us the thing we least expect. All we can do is wait and see.

Jani

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How to trade this weakness

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 steadied itself Wednesday following Tuesday’s crash through 2,40 support. While this price stability ended Tuesday’s emotional wave of selling, the muted rebound was hardly confidence inspiring. The calm didn’t last long because as I write this, overnight futures are down more than half-a-percent. Is this a sign of worse things to come? Or is it simply another routine bounce off the lower end of the trading range?

There wasn’t a clear headline driving Tuesday’s selloff. The best the media could come up with was disappointing earnings. We fear selloffs without a reason if it means the market knows something we don’t. But we ignore ones when the market is simply humiliating nervous and impulsive owners by convincing them to dump their stocks right before the next rebound. Which is this? That’s what we have to figure out.

New and unexpected headlines drive large directional moves. That’s because new information causes traders to change their outlook, and as a result, adjust their portfolios. This wave of buying or selling fuels the big moves. On the other hand, recycled headlines produce fleeting gyrations and quickly reverse because everyone already knows about these problems and they are factored into their outlook. If traders expect something, they don’t adjust their portfolio when those headline pop up again. The million dollar question is if the driving force behind Tuesday’s selloff is truly new and unexpected, or if it is simply recycled headlines we have been talking about for months.

Wednesday’s Fed meeting minutes gave us the strongest hints a rate-hike is just around the corner. Rather than extend Tuesday’s selloff, stocks hardly budged. That’s the clearest indication we have that the next quarter-percent increase is already priced in. We can cross that one off our list.

The next big bogie is third-quarter earnings. Expectations are relatively muted and it is hard to find anyone excited about our economic growth. Many even claim we are in an earnings recession. Given that less than enthused outlook, earnings have a very low bar to clear. While things could certainly could come in worse that this, they have to be be worse than the widely expected sluggish. Since front-line managers continue to see more demand than their current staffing levels can handle, we shouldn’t expect a large falloff in earnings. It will be another lackluster quarter, but the sky is not falling.

Assuming the overnight futures hold these losses into tomorrow morning, expect another wave of reactive selling to hit the market as nervous owners bailout before “things get worse”. But without any real meat to this selloff, this is definitely a better place to be buying than selling. Remember, risk is a function of height. By that measure, this is the least risky place to own stocks since June. Unless earnings over the next few days come in far worse than expected, a bounce off 2,100 support makes for an attractive entry point. When yet another selloff fizzles and bounces, expect underweight money managers to start feeling pressure to chase this market into year-end.

Jani

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Why the market remains rangebound.

By Jani Ziedins | End of Day Analysis

The S&P500 slipped for a second day as it continues to struggle with 2,160 resistance and the 50dma. Volume was above average, but average is relative since it is calculated using the last 50-days of painfully slow summer trade.

The market crashed under the 50dma in early September as traders woke from their summer slumber just as the Fed started hyping the prospects of a rate-hike. While it was a brutal 2.5% selloff, bears haven’t been able to do much since. Volatility has definitely picked up, but we remain stuck in a sideways market.

Directional moves happen when people change their mind. When bulls become less bullish and start selling, or bears become less bearish and start buying. The reason we remain range bound is bulls are stubbornly bullish and bears are stubbornly bearish. The Brexit bears haven’t been able to do anything with those headlines, while the no-rate-hike bulls haven’t been able to move the needle either.

The high levels of intraday volatility come from a small group of traders that overreact to every headline and gyration. While they bounce back and forth like a ping-pong ball, no one else is interested in joining them. The vast majority of the market is content with their positions and over-caffeinated talking heads and sharp price moves are not changing that.

Supply and demand are fairly balanced because sentiment is similarly balanced. When the crowd gets overly bullish or bearish, we setup for a snap-back. Reversals from unsustainable levels are quick and decisive. But the trade over the last several months has been anything but quick or decisive. That tells us prices are sustainable and not overbought even though we are within shouting distance of all-time highs.

While the market suffers from a serious lack of demand every time prices move to the upper end of the 2,100s, I still give the edge to the bulls. There have been more than enough spooky headlines to send us tumbling into the abyss. Instead owners shrug off every bearish headline. Whether rational or not, when owners don’t sell, supply remains tight and prices firm. As long as owners are confident, expect selloffs to stall and bounce like they have all summer.

The next big bogie on the horizon is third-quarter earnings. While this is a multi-month event, over the next couple of weeks we will know if there are any systemic problems hiding under the surface. Even with as few as 10% of the companies reporting, we will have a good sample of the overall economic conditions. If there are serious problems, we will know by then.

If third-quarter earnings don’t kill us, expect the stable trade to seduce underweight money managers to start chasing stock prices into year-end. September’s 2.5% selloff priced in the inevitable rate-hike, so we no longer need to fear that. Anytime the market slips to the lower half of the 2,100s, treat that as a buying opportunity. If we were vulnerable to a crash, it would have happened by now.

Of course the significant disclaimer is as long as nothing new and unexpected happens, like a surprise Trump victory. If that happens, all bets are off and we need to reevaluate. Most likely that will be another dip buying opportunity, but the key is figuring out how low we go first.

Jani

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How to Trade the Fed Decision

By Jani Ziedins | End of Day Analysis

While volatility has definitely picked up in recent weeks, the S&P500’s propensity to trade sideways remains the same. This summer we were stuck in a tight range between 2,170 and 2,190. Now we find ourselves marooned between 2,120 and 2,150. The more things change, the more they stay the same.

The last couple of days have been low-volume throwaways as most traders sit on their hands ahead of the Fed’s interest rate decision due Wednesday. The brief September swoon was fueled by fear of an impending rate-hike, but the reactionary selling was short-lived as the consensus quickly determined the Fed doesn’t have the courage to bump interest rates this month. In less than 24-hours we will know if the crowd got this one right.

I side with the consensus and think the Fed will hold off until the final months of the year. But just because the Fed remains stationary doesn’t mean stocks will rally. If the crowd expects no change, then that decision is already priced in. We could very well see a brief pop as uncertainty and risk evaporates following a no-change policy statement, but after that we are more likely to see a sell-the-news than a runaway rally. Delaying the first rate-hike by a few weeks isn’t going to change anything and the market is likely to see it the same way Wednesday afternoon.

While I remain bullish and expect stocks to finish the year strong, three-months is a long time and a lot can happen between now and then. Clearly the September selloff lost momentum as we keep bouncing off 2,120 support. Gone is the anxiety and fear as owners feel more comfortable following a rebound off of the recent lows. But the thing that concerns me is our inability to break out of this consolidation. If we were truly oversold, we would have bounced higher and not looked back. That means we are not oversold yet.

The longer we hold near support, the more likely we are to violate it. If we cannot escape this trading range by the end of the week, expect the next move to be lower. Breaking 2,120 support will launch another wave of reactionary selling as we trigger all the stop-losses under this widely followed technical level. That will be followed by another wave of reactive “sell before things get worse”. But not long after that, expect the supply to dry up like it did on September 9th. Most owners know a 0.25% bump in interest rates doesn’t change much and will continue to confidently hold their stocks, just like they did through the Brexit, the last rate-hike, and all the other bearish headlines that came across the wire this year. No matter what the “experts” think should happen, when confident owners don’t sell, supply remains tight and prices firm.

If we pop following a no-hike decision Wednesday, I wouldn’t chase it because we will likely run out of buyers near 2,180 like we have so many other times this year. But if we crash under 2,120 support in a sell-the-news reaction, stay calm and let other people dump good stocks for steep discounts. The most ambitious of us take advantage of the opportunity and buy the bounce off of 2,100 support. If the selloff is sharp and volume extremely high, that will finally be the capitulatory bottom we’ve been waiting for.

Jani

The Next Big Move is Coming

By Jani Ziedins | End of Day Analysis

It’s been a painfully slow summer. The last time I blogged was 26-days ago when the S&P500 finished at 2,164. Today we find ourselves 12-points higher at 2,176. Holding nearly three-weeks of market risk netted owners an average of 0.02% profit per day.

This year the market gapped lower 20-points or more at the open on multiple occasions. This means owners have been risking a 20-point loss for a measly 0.5-point per day gain. Over this period the potential downside has been at least forty-times the gain! All risk and almost no reward makes this a very poor time to be invested. Big money knows this and is why they have largely been absent as noted by the extremely low trading volumes. They haven’t been wasting their time on this mindless chop and neither should we. Stay in, stay out, but don’t try to trade this.

While the market netted a measly 12-points, we witnessed far more intraday volatility. Ten, fifteen, twenty-point intraday moves and reversals have been common. Even though the market gained 12-points over three-weeks, very few active traders made that much because they have been faked out by these phony breakouts and breakdowns. Trading mindless chop makes it way too tempting to buy high when things look good and sell low when second-thoughts creep in. That’s why I’ve been in cash for the last several weeks. The hardest thing for a trader to do is not trade, but that’s been the right call.

But that was then and this is now. We are quickly approaching the market’s next directional move. Big money managers will return from summer vacation after Labor Day. With just a few months left in the year, they will start positioning their portfolios for year-end. That either means chasing these record highs even higher, or cashing in and taking profits. Since big money hasn’t been active the last several weeks, we don’t have enough information to discern if they are more inclined to chase, or alternately are in the mood to take profits. By mid-September we will have more data and a better indication of their intentions.

Over the near-term, since the market has stubbornly held near record highs in the face of falling oil prices and the threat of rate-hikes, that shows most owners are confidently holding for higher prices. If we were over-bought and vulnerable, we would have fallen by now. That means the market wants to test the psychologically significant 2,200. Expect this slow, choppy grind higher to continue for the next couple of weeks. But what happens after that is anyone’s guess. That is when underweight big money will get desperate and start chasing prices higher. Or they will get cautious and start taking profits.

The most likely outcome? Both! Four-months in the market is an eternity and plenty of time to have crisis in confidence, dip to 2,100 support, and rebound to all-time highs before year-end. Or maybe it happens the other way, desperate traders chase the 2,200 breakout up to 2,300 where we run out of demand and slip into year-end.

The great thing about being a little fish is we are nimble enough that we can wait for more information. If the market does something unexpected, we can cash-in, evaluate, and adjust. While this mindless summer trade is putting us to sleep, this is the time to wake up and start looking for the next big trade because it is just around the corner.

Jani

Trading Outlook for Wednesday, July 20th

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 slipped a negligible amount Tuesday in one of the lowest volume sessions of the year. To this point stocks are holding the recent breakout as they trade in a tight range between 2,155 and 2,170. Quite a reversal in fortune from the turmoil and uncertainty we faced earlier in the year. The biggest question on everyone’s mind is if these record highs are the real deal, or these are the last gasps before the crash.

Last year many bull market skeptics claimed they would have a lot more confidence in this rally if we pulled back and refreshed. Many were quoting how many months it’s been since we had an X% pullback. Since then we’ve had two dramatic selloffs, the first occurring last fall and an even more dramatic one this winter. Now that we checked that box and reset the clock, have we won over the skeptics? No of course not. But now they have to be more creative when coming up with a reason to disbelieve this strength.

For years I’ve been firmly in the secular bull camp. Over the last 100-years, “lost decades” have been followed by monstrous secular bull markets lasting a dozen or more years. That makes this seven-year old bull market relatively young in comparison. That said, secular bull markets contain brutal and terrifying selloffs. The infamous Monday in 1987 where stocks lost over 20% in one day was inside a phenomenally profitable, two-decade long bull market. This bull market will die like every one that has come before it, just don’t expect it to rollover any time soon.

But that is the big picture and mostly applicable to long-term, buy and hold investors. Those of us with shorter timeframes can look at this 150-point rebound from the Brexit lows with a more cynical eye. Even in powerful up-trends, we experience the inevitable (and healthy) step-backs.  Having moved as far as we have over the last few weeks, it is little surprise we ran out of buyers willing to chase prices higher. But even though we are struggling to find new buyers, stock owners are confidently hanging on for higher prices. Even without strong demand, prices are holding up well because so few owners are selling stocks. When supply is tight, it doesn’t take much demand to keep us levitating near record highs.

At this point it seems many traders are watching 2,155 and 2,170 levels and waiting for prices to breach either of these benchmarks before making their next move. A wave of profit taking will hit us if we slip under 2,155 and jumping above 2,170 will trigger the next round of chasing. But since we remain in the low-volume summer months, we shouldn’t expect either of these moves to get too carried away. The breakout will likely stall near 2,200 while a dip would most likely bounce before testing 2,100 support.

Even though we broke out to all-time highs, for short-term traders we are better off trading against these moves. That means buying weakness and selling strength. The sustainable buying won’t officially begin until big money managers return from their summer vacations this fall.

Jani

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