Category Archives for "End of Day Analysis"

Get Ready for the Bounce

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 ended a turbulent day exactly where it started. But given the headlines and early losses, a flat close is actually a win. Japanese stocks were gutted 6%, oil plunged 5%, and Europe was down nearly 2%. In the face of these tremendous headwinds, our market held up amazingly well by not succumbing to the global panic. Unfortunately flat might not be good enough.

Typically oversold markets rebound with explosive force. While that bounce might arrive Wednesday, if it doesn’t, that means we have a little more downside remaining. Two-weeks ago I suggested we are on the verge of entering an 1,800ish-1,950ish trading range and so far that is exactly what has happened. We rebounded off the January lows when we ran out of fearful sellers and existing owners were no longer willing to discount their stocks any further. That put a floor under the market and helped stocks rebound to 1,940, but beyond that point those with cash were no longer willing to chase prices higher in the face of this looming uncertainty. The resulting lack of demand pushed us back to the lower end of the trading range. At least to this point, stock owners are once again showing a reluctance to sell at lower prices and is why we found support the last two days. This confidence is keeping a lid on supply and propping up prices. No matter what the global headlines say, when few are willing to sell, prices remain resilient.

While it is easy to say this is little more than a normal and routine trading range, it sure doesn’t that way. But the thing to remember is nothing ever feels routine in the market. By rule every move has to be dramatic. If it didn’t, no one would sell. And when no one sells, we don’t go down. Therefore every time we go down, it must feel real. This is circular logic, but it happens every, single, time. The only time a market looks easy is when we are reviewing a chart months after the fact. And to this point, I have little doubt that two-months from now it will seem painfully obvious what we should do. But without the benefit of hindsight, making a trading decision today is anything but easy.

If we don’t bounce Wednesday, that tells us we haven’t found the capitulation bottom. As I stated earlier, rebounds from oversold levels are decisive and meandering around this level for three-days is anything but decisive. The ideal capitulation bottom is a relentless intraday selloff that slices through January’s lows and breaches 1,800. But just when it looks like we are going over the waterfall, we run out of sellers and bounce. That will be our buy signal to buy and hold a return to the upper end of this trading range. But in this instance it is better to be a little late than a lot early. Wait for the bounce to ensure we are not in fact plunging off a gigantic waterfall.

Jani

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The Trading Range is Here

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 failed to hold Friday’s gains and we challenged 1,900 support Tuesday. But regular readers of this blog expected last week’s rebound and this week’s retrenchment. A week ago I told them to prepare for a 1,820ish to 1,940ish trading range to develop and to this point the market is acting like it should. January’s 10%+ pullback did a little too much damage to put in a v-bottom, meaning we should expect a sideways consolidation and trading range to develop in the near-term. While most of us come to the market with a bullish or bearish bias, we need to resist the temptation to overreact these swings. Instead of buying the breakout or selling the breakdown, anticipate these reversals and trade against them. Take profits when the crowd is rushing in and buy when they are giving away stocks at steep discounts.

Trading ranges develop when both sides are entrenched and unwilling to yield. If a stock owner didn’t sell last August’s China meltdown and this year’s oil collapse, what are the chances they will bailout due to a recycling of these same headlines? The is also true on the other side. Recent sellers abandoned the market because they are convinced things are only going to get worse. A modest bounce is unlikely to convince them to buy stocks with reckless abandon anytime soon. With such strong and opposing viewpoints, we settle into a trading range until something new shakes up the status quo.

Jani

What Does History Tell Us?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 opened with strong gains Tuesday morning following overnight stability in China, Europe, and the oil markets. But the comfort of a rebound was short-lived as we slid more than 30-points from the early highs. Only a late surge prevented us from closing deep in the red.

While a lot that could be said about Tuesday’s price-action, it has already been superseded by plunging S&P500 futures in Asia’s Wednesday morning trade. We don’t have to look far to find the usual suspect; oil slipped another 2.5% and is now under $28 for February delivery.

Counting this overnight weakness, we find ourselves down nearly 14% from last year’s highs. While this feels terrifying, where does this rate historically? Over the last 65-years the S&P500 has fallen more than 10% twenty-times, or about once every three-years. Losses of more than 15% occurred eleven-times, meaning nearly half of all 10% selloffs never made it past 15%. But if we pass 15%, things don’t look as rosy because nine-times we shot straight through 20%.

What does this historical data tell us? That selloffs between 10% and 15% tend to bounce while those that exceed 15% tend to keep going. While at first this phenomena seems perplexing, it actually makes sense when we look at the makeup of market participants.

We can segment stock owners into two groups, those that follow the market closely and those that don’t. Sentiment measures that include AAII, Stocktwits, option buyers and sellers, newsletter writers, and all the other popularly quoted sources tell us the opinions of active participants. These people tend to trade more frequently and drive daily market moves. A 10% selloff will push the sentiment of the active owners into the cellar where more often than not capitulation selling results in a rebound. But occasionally the panic and fear mongering achieves such intensity that Wall Street’s dirty laundry reaches Main Street. Losses above 15% is when we start waking up a whole new segment of owners and this larger supply allows the oversold condition to intensify. Currently we find ourselves just above this inflection point. Drop a few more percent and we risk Main Street joining in this circle-jerk selloff.

Does this mean current owners should get out now while they still have a chance? Not necessarily. It all depends on timeframe. Nimble day-traders and swing-traders who are good at spotting capitulation can profit from near-term weakness and the inevitable rebound, but most everyone else should be thinking about buying this dip, not selling it. The other thing that history tells us is only three of the nine 20%+ selloffs were under 20% for more than a few weeks or months. While we sliced through 20%, we bounced back nearly as quickly six out of the nine-times. The odds are clearly more in favor of buying these discounts than selling them.

But what about those other three-times? I suppose each of us must decide of this oil weakness is a one-in-twenty selloff that completely trashes our financial system. We saw prolonged losses from the 1970’s stagflation and oil embargo. Then there was the grossly overheated tech bubble that came crashing down. And lastly the housing bubble where the most valuable asset people owned plunged in value. If you think a slowing China and falling oil prices ranks up there with the worst financial calamities of the last 65-years, then you should be selling. But if you have a less fatalistic view of the world and our economy, then this is just another buyable dip on our way higher.

While it is never easy to hold through volatility, the time to sell was when the first cracks started forming, not now that we are approaching a capitulation. I told my subscribers on January 4th that the price-action was deteriorating and I moved to cash. Now a couple of weeks later I’m on the verge of buying this weakness. If people want to sell me stock at a steep discount, I’m more than happy to oblige them. Their loss is my gain.

Jani

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How to Trade This Weakness

By Jani Ziedins | End of Day Analysis

End of Day Update:

Thursday was a good day for the S&P500 as it recovered a big chunk of Wednesday’s bloodbath. While we are still struggling to make headway, this was the third up-day out of the last four. How you interpret this price-action largely depends on your biases, but it is a notable change from last week’s relentless selling. This also marks the seventh consecutive day of above average volume. Thursday’s trade reached the highest levels since December’s options expiration and September’s option expiration before that. Clearly a lot of people were paying attention and trading this volatile session.

The weekly AAII sentiment survey revealed optimism is at the lowest levels in over a decade while pessimism reached multi-year highs. In this historically bullish survey, bears outnumber bulls by whopping 250%. Anyone claiming the market is overly bullish is delusional with confirmation bias because they clearly don’t see everyone running around with their hair on fire. While we might not be at the bottom yet, this dramatic swing in sentiment and huge volume means we are getting close. The last time we saw this much volume was back when August’s selloff was bottoming.

The only thing moving this market is the price of oil. Does this make sense? No, but this is how the crowd is thinking and thus the only thing that matters. But with each passing day and tic lower, we are shedding owners who fear falling oil and replacing them with buyers who don’t mind cheap oil. Maybe these calm buyers realize oil production represents less than 1% of U.S. GDP. Maybe they are experienced investors who know these stories always come and go. Remember the Bird Flu pandemic? No? What about the Fiscal Cliff? Sequester? Taper? US debt downgrade? This tells you just how big of a deal most of these things turn out to be.

But oil isn’t the only thing scaring investors. We have a strong dollar and slowing global growth that will allegedly crush our exporters. But the thing is all our exports together only represent 13% of GDP and only 5% of that demand comes from Asia. While knocking off a few percentage points won’t help our sluggish recovery, it certainly won’t cripple our largely self-centered, service and consumption based economy either.

But the market never lets common sense get in the way of a good stampede for the exits. There are two ways to trade the stock market. Buy at a premium and sell at a discount. Or buy the discounts and sell them later at a premium. Just like any successful business, buy at wholesale and sell at retail. Just think about that when you are tempted to join the emotional sellers. There has never been a dip in the history of the stock market that wasn’t buyable and this one is no different.

Jani

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Running Out of Sellers

By Jani Ziedins | End of Day Analysis

S&P500

End of Day Update:

The S&P500 managed to finish in the green for the second day following last week’s brutal kickoff to 2016. In just over a week we erased 150-points as a struggling China and plunging oil reignited fears of a global slowdown and financial contagion. Similar headlines triggered August’s 10% correction and the sequel proved nearly as damaging. The question on everyone’s mind is if this is the capitulation bottom or just a dead-cat bounce on our way lower.

Oil briefly slipped under $30 Tuesday for the first time in over a decade. Only a few months ago predictions of $30 oil were met with skepticism and ridicule, but the market has a nasty habit of pushing us to the “obscene number” before the crowd capitulates. Thirty-dollars was that obscene number and we finally tagged it following a nearly two-week free fall. But just when it seems like there is no end in sight, we run out of sellers and bounce. That happen today when the market rebounded almost immediately after flirting with the high $20s. This modest rebound in oil was enough to lift the S&P500 off the intraday lows, allowing us to finish just under 1,940. And the party is continuing in the overnight futures markets with the S&P500 up another 15-points in Asia.

At the very least we should expect a few day bounce as the market recovers from a near-term oversold condition. Expect this scramble to push us back to 2,000 resistance. From there we will see if short-squeezing and chasing transitions to real buying. Or if we stall continue the global slowdown selloff. The key to surviving this market is trading proactively. Take profits often and don’t get married to a position because it will likely reverse days later. Be pragmatic, not dogmatic.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

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Focus on What Matters

By Jani Ziedins | End of Day Analysis

S&P500

End of Day Update:

It’s been a brutal week for the S&P500 as we experienced one of the worst starts to a year in market history. We’ve fallen 140-points from last week’s highs as traders continue to be terrorized by Chinese uncertainty. We’re down five out of the last six sessions while Chinese regulators have suspended trade twice this week due to selloffs exceeding 7%. Given this turmoil it is no surprise to see AAII’s sentiment survey approach historic levels of pessimism. If we take trading cues from the crowd, clearly this is the best time to panic and dump stocks at steep discounts before the selloff gets worse. But since I make money trading against the crowd, I am looking at this move in a far different way.

We’ve only closed under 1,950 a handful of times since 2014. If we view risk as a function of height, buying and owning stocks here is one of the least risky times to be invested in over a year. While it certainly doesn’t feel safe, I’m sure most would agree buying and holding stocks today is a far better idea than buying and holding them last week. Everyone knows we are supposed to buy when people are fearful and sell when they are greedy, but that is far harder to do. When the crowd is running scared and our trading screen is filled with red, it is way too easy to succumb to the crowd’s seduction.

In Friday morning trade the Chinese stock market is holding up relatively well after their government unwound some the currency moves that unnerved markets. This bumped their market and halted what could have been another day of relentless selling. They also abandoned the ill-conceived 7% percent circuit breaker that exacerbated recent volatility. Together these have been enough to at least temporarily delay another wave of panic driven selling. As a result US and European futures are higher in sympathy.

Assuming China can hold it together for the rest of the trading day, the next big event is the US monthly employment report. Normally this is a headline event, but it has been forced to the back pages as global volatility dominated the financial media’s attention. The most important thing to remember is the S&P500 responds to US corporate sales and earnings, not Chinese. If our recovery continues to chug along despite Chinese weakness, our stock market do the same.

China has been slowing for over a year and no one believes the overly optimistic economic growth numbers the communist government is putting out. If China weakness was going to take us down, it would have happened by now. The US is largely a self-centered, consumer and services based economy. Our vulnerability to a Chinese slowdown is far more limited than an export dependent economy like Germany. And the proof will be in the pudding. Another strong US employment report Friday morning will show these Chinese and oil fears are overblown. Soon traders will shift their focus from these global-macro distractions to the actual performance of our economy as demonstrated by employment and fourth quarter earnings. While it’s been a lot of fun following the Chinese and oil markets the last few weeks, it is time to get down to business and focus on the things that really matter when determining stock prices.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

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Looking Ahead to 2016

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Analysis:

Santa was a little late this year, but better late than never. Tuesday the S&P500 finally reclaimed both the 50 and 200 day moving averages and is only three-percent from all-time highs. While it isn’t appropriate to draw long-term conclusions from this week’s light holiday trade, it is encouraging to see the path of least resistance is higher despite the relentless onslaught of ominous headlines. In a year where we’ve been given every excuse to sell off, this market has stubbornly hung in there.

Since this will be my last post of 2015, I will share the 2016 outlook I wrote for Investing.com.

What does 2016 hold for us? The best place to start looking for answers is in our past. Over the last 50-years the S&P 500 finished higher 78% of the time with a median gain of 18%. But what about those pesky off-years? The remaining 22% of the time we finished in the red, but with a more modest 10% median loss. These phenomenally favorable odds explain why the S&P 500 is up a staggering 10,800% over the last 50-years. Without anything else to go on, clearly the smart move is sticking with the market.

But everyone wants to know if 2016 will be a typical year. Even though the S&P 500 is within a few percent of all-time highs, bearishness remains unusually elevated in most sentiment surveys. It seems the crowd is far more concerned about this six-year-old bull market than excited to embrace it. And who can blame them? Looking at the last 12-months of headlines, it is far easier to recall bearish stories because there were so many of them.

But as a contrarian, the crowd’s cynical outlook is constructive because it means a lot of negative sentiment is already priced in. I fear markets that stop going up on good news, not ones that fail to sell off on bad news. Inevitably the news cycle will shift and we will stumble into a wave of positive headlines. The S&P 500 that struggled to move beyond 2,100 throughout 2015 will explode higher when these cynics are transformed into believers.

While it is impossible to predict the surprises we will encounter over the next 366 days, given this sentiment skew and the fact we ran out of owners willing to sell bad news, the odds of a good year for US markets are even more favorable than the historical averages suggest.

Happy New Year!
Jani

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Better Than It Seems

By Jani Ziedins | End of Day Analysis

End of Day Update:

It was another good day for the S&P500 as it continued Monday’s rebound from 2,000 support. In typical fashion volume is trailing off as we approach the Christmas holiday. Since so many institutional money managers are on vacation over the next two-weeks, we cannot read too much into these daily gyrations because they are driven by “home gamers” overreacting to every move as if it is the next breakout/breakdown. It won’t be until January when we have the full force of the market giving us more meaningful data to interpret.

That being said, it is constructive to see last week’s selloff stall and bounce at support. That reaffirms the lack of owners willing to emotionally react to every spooky headline or drop in price. No matter what the “experts” think we should do, if owners don’t sell, it is difficult to kickoff the much-anticipated correction. The longer this market refuses to breakdown, the more likely it is the next leg will be higher.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

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Don’t Worry, Be Happy!

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It’s been a volatile week as three strong up-days were followed by Thursday’s sharp decline that unwound all of Wednesday’s Fed pop. Volume has been consistently above average as plenty of traders are participating in this pre-year-end tug-of-war.

Between robust employment gains, rate hikes, falling oil, and a strong dollar, the market cannot decide on a direction. This leads to choppy trade where every apparent breakout/breakdown fizzles and reverses days later.

The biggest driver of recent weakness is plunging oil prices that cannot find a bottom. Fears of a decimated energy sector and the resulting bond defaults are making equity traders nervous. But as spooky as the headlines feel, the stock market is far less bothered by these developments than the analysts and talking heads. While oil has been cut in half from its 52-week high, the S&P500 is down a far more palatable 4%. Even though it feels like we are in the middle of a protracted bear market, the actual evidence is far less convincing.

This year we endured a near Grexit, Russian aggression, multiple acts of terrorism, Chinese stock market crash, global slowing, plunging oil, and a surging dollar. Looking only at the headlines, it’s been a horrible year. But somehow the equity market is down a modest 4% from all-time highs. Hardly the doom-and-gloom that most traders feel. Bears have been calling for a major selloff all year, but with only a couple of weeks left in 2015, they are starting to look more like Chicken Littles than insightful and savvy speculators.

The biggest thing working against bears at this point is everyone is well aware of their investment thesis. That means anyone who agrees with them has been given plenty of time to sell and as a result, the current crop of owners are not bothered by these prognostications of doom-and-gloom. No matter what the market is “supposed to do”, when no one sells the news, it is really hard to trigger a major selloff. In fact as a contrarian I take the opposite view. If these dire headlines cannot dent this market, just imagine what will happen when it actually stumbles across the inevitable piece of good news? Disagree with this market at your peril.

Jani

Thankful for Irrational Traders

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

Thursday was the first up-day this week as the S&P500 struggles to resist oil’s slide to multi-year lows. But “up-day” is a relative term since we only finished four-points to the positive following three-days of losses that shed more than 40-points. Today’s volume was the weakest since we topped a couple of weeks ago. But even more ominous was the lethargic intraday trade over the last-two sessions where early strength fizzled and we closed near the lows. If this market was oversold and poised to launch higher, early strength would have sent us on our way. It is hard to be constructive when every rebound is overwhelmed by another wave of selling.

Oil has been in a nearly one-way selloff since early October. While everyone has largely been aware of the low oil prices, concern didn’t get acute until Monday when we broke under $40 for the first time in seven-years. This development moved oil prices from the commodity page to the front-page.

In Tuesday night’s post I wrote about how nonsensical it was for the market to lose its mind as oil went from down 60% to down 63%. Really? We can handle a $60 drop, but $63 is just too much for the market to bear? How much more damage can another $5 or $10 fall do when we already shed $60 over the last year and some?

Previously there was a legitimate argument that falling oil prices was due to a weakening economy and dropping demand. While there is a nugget of truth here as the global economy slows, it is becoming increasingly obvious that oil’s biggest problem is supply, not demand. The lower oil prices fall, the more producers are forced to pump to compensate for the lower prices. This isn’t a consumption problem, it is a structural problem for an industry with high capital expenditures and low operating costs. With pumping prices around $20 per barrel, producers are incentivized to pump as much as they can even at $37 per barrel. And this line of thought played out at last week’s OPEC meeting where the group failed to agree to production limits to prop up prices.

All of this means equities tight correlation to oil prices this week is total B.S. If financial contagion, multiple acts of terror, a plunging Chinese stock market, and all the other bearish headlines we survived this year, should we really fear another $5 dip in oil? But this is the logical argument and it often takes the market time to come around to the obvious answer. Given the awful way we traded this week, that appears to be the case. There is no merit to this selloff, but that doesn’t stop reactive and emotional sellers from joining the herd. But I cannot complain too loudly because without the crowd’s irrational trading decisions, it would be far harder to make money. If people want to sell me perfectly good stocks at a discount, who am I to argue with them?

While this dip is buyable, we are not quite there yet. Wednesday’s and Thursday’s weak trade tells me there is a little more downside before we reach a capitulation bottom. We are hovering so close to recent lows that a dip under these levels is almost inevitable. If we break support and rebound sharply on high volume, that will be our sign the fever has broken and we can jump back in.

Of course the next major headline is the Fed meeting next week, but I’ll save that analysis for next time.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

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What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
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Does $3 Really Matter?

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 dropped another dozen-points Tuesday as obsession over weak oil prices continued for a second day. Volume was above average on this fourth-downday out of the last five-trading sessions. But as much red as we’ve seen, we remain within a few percent of all-time highs. Clearly there is a disconnect here, but who is getting it wrong, the bulls or the bears?

Oil fell $3 over the last two-days and is under $40 for the first time in seven-years. We’ve been hearing for months how a strong dollar and weak energy prices would crush this market and over the last two-days that is exactly what happened. But was this weakness just the start of something far larger, or a feeble knee-jerk reaction to a headline?

While it is impossible to come to the market without a bias, let’s try to put them aside for a moment and look at the facts. Many people are currently predicting a large selloff in the broad market following this $3 drop in oil. Does this outlook stand up to the facts? If we take a step back and review a two-year chart, we will see oil has fallen more than $60 over that time. The bulk occurring in 2014 when the stock market notched a 13% gain. If a $60 plunge in oil failed to crush the equity market, what are the chances this $3 selloff will do it?

Clearly the market is in a half-full mood at is obsesses over everything that is wrong. Weak oil prices mean plunging energy sector profits. The strong dollar is crushing US exporters. That is the story we hear repeated day in and day out. What no one is talking about is the benefits of low oil and a strong dollar. For every loser there is a winner and this situation is no different. Two-dollar gasoline is the same thing as sending a $2,000 stimulus check to the average family. (2 cars x $2 per gal x 12,000 mi / 25 mpg = $1,920) The strong dollar? While that hurts domestic exporters, it is a boon to companies that rely on foreign inputs. Anyone that buys products, parts, and materials from overseas is going to see those discounts flow straight to the bottom-line. Where are all the people talking about the positives of weak commodity prices and a strong dollar? Back in the booming 90’s oil was $15/bbl and 80-cents could buy a Euro. Last time I checked, the 90s were a pretty darn good time to own stocks.

While this fear of weak commodities and a strong dollar is clearly misguided, as traders we have to trade the market we are given. It is foolish to sell these headlines, but that doesn’t prevent the emotional and impulsive from making poor trading decisions. And to be brutally honest, all our profits come from these people so we cannot be too quick to criticize them. But even when we are right, we can still get run over by the crowd so we have to be careful here. The market continues making higher-lows as it recovers from the Fall correction. While this is constructive, we need to be wary of a drop under last week’s lows. That could trigger a wave of stop-loss and reactive selling, pushing us back down to 2,000 support. But if we hold these levels, expect this nervousness to evaporate and position yourself for the Santa Claus rally.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

If you want more check, out our premium subscription that delivers this analysis every day during market hours.

What’s a good trade worth to you? How about avoiding a loss?
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Is It Time to Panic?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It was another brutal day for the market. The S&P500 extended Wednesday’s selloff, erasing well over 50-points across these two sessions. Volume was the highest we’ve seen since we were stuck in the throws of November’s pullback.

Yesterday Janet Yellen rained on the bull’s parade. Today it was Mario Draghi’s turn. While the European Central Bank expanded its easy money policy, it didn’t go as far as many traders were hoping. That sent European markets plunging over 3%. The sour mood quickly spread to US markets where we embarked on a relentless sympathy selloff that eroded prices throughout the day. Given the dreadful headlines and all-consuming uncertainty, we found ourselves with an oversupply of nervous owners desperate to get out, but few buyers willing to step in front of this mess. The nearly nonexistent demand meant sellers had to continue offering lower and lower prices to attract buyers. But in a vicious cycle, those discounts convinced even more owners that they needed to get out. This downward spiral didn’t stop until the closing bell saved us.

Today most sellers embraced a “sell first, ask questions later” risk management strategy. The reason I know this is because nothing changed economically between today and last week. We find ourselves inside a frustratingly slow economic recovery with repressed energy prices, a strong dollar, and a looming Fed rate hikes. Just like last week, and last month.

If the fundamentals didn’t change traders’ outlook, then it had to be something else. Few things are more contagious than fear. When confident owners watched the value of their account drain as everyone else hit the sell button, they lost their nerve and joined the herd. The unfortunate thing is the market has a nasty habit of humiliating reactive traders. It almost has a sixth-sense for knowing exactly where our pressure points are and pushes us one inch beyond them. Rather than reward a reactive seller by allowing him to escape a far larger selloff, most often the market adds insult to injury by rebounding as soon as the emotional seller finishes giving away his stock at steep discount.

The looming fear is what if Friday’s Jobs Report adds more fuel to the selloff. While that is a real possibility, successfully trading is a game of playing odds. We know the vast majority of stock owners are indifferent to these minor gyrations. They are the blissfully ignorant 401k investor or the large institution that is so ginormous they cannot dance around these daily price swings. That means most of this daily volatility is driven by the small segment of active traders. The thing about active traders is while they throw their weight around with great effect, they don’t have a lot of ammunition. Once they jump from one side of the market to the other, they used up the only vote they get and it takes a new trader to keep a move going. As awful as today feels, lets not forget we are only 4% from all-time highs. This is still a long way from waking up the oblivious masses who rarely look at their brokerage statements. If today’s selloff is just another hysterical move driven by overly active traders, it will stall and reverse as quickly as every other “fearful” selloff we’ve endured this year. The scarier it feels, the closer we are to the bottom.

Jani

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Why Did This Happen?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 finally climbed through 2,100 resistance Tuesday on below average volume. The last time we found ourselves this high, the rebound stalled the next day and we tumbled back to the low 2,000s. Will this time be any different?

It was hard to identify a bullish catalyst that fueled these gains. The biggest headline was a disappointing manufacturing report showing the first contraction since 2012. If we put our “inverse-logic” hat on, maybe traders were hopeful this revelation would further delay the Fed’s impending rate-hike. But that wishfulness is a stretch since the Fed already recognized a stronger dollar and slowing global growth would pressure exports. If traders were buying this headline, they were grasping at straws.

The most likely explanation is the one I’ve been talking about for weeks. It is getting harder and harder to find owners willing to sell their stocks regardless of the headlines. If terrorism and a NATO nation doing a Russian jet won’t spook stock owners, are one or two points on a manufacturing report going to make a difference? Given today’s price-action, apparently not.

While we have countless reasons to sell-off, it is far more insightful to look at the market’s response to these bearish headlines. Rather than argue with the market and demand it go lower, we should acknowledge this uncanny strength in spite of the bad news. If we are open-minded enough to listen, the market is telling us it isn’t bothered by these widely known issues because they are already priced in. While a stubborn trader refuses to believe bad-news could be priced in near all-time highs, what he is failing to account for is where we would be without these economic and political headwinds. 2015 has largely been a bust because we are trading at the same levels the year started at. This is in comparison to the nearly 20% yearly gains we’ve averaged over the last six-years. If we continued to receive positive economic news throughout the year, there is every reason to expect we would trading near 2,500. That means slowing global growth, a strong dollar, slumping energy prices, and a sluggish US recovery have already taken 400-points out of our market.

It’s been a bumpy ride this Fall as we digested these headlines. Over the last four-months, nervous traders have been given plenty of excuses and opportunities to bail out. If the headlines didn’t scare them out, then no doubt the plunging prices did. But just as things looked their worst, we bounced. This recovery wasn’t driven by good news, it came from running out of sellers. Anyone who wanted to get out sold their stock at a steep discount to a far more courageous dip-buyer who demonstrated a clear willingness to hold these risks. Flushing out weak owners and replacing them with confident ones is what solid bases are built on. These new owners bought when the hysteria was at its worst, so it shouldn’t surprise us when they shrug off far more trivial headlines. As long as they remain confident, supply stays tight and prices continue defying “logic”. Don’t think about what the market should do, figure out what other traders are thinking and trade the resulting supply and demand. Strength in the face of bad news is extraordinarily bullish and only a fool would argue with this market.

Jani

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What Just Happened?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It was a dramatic day for the S&P500 in this holiday shortened week. A NATO nation intentionally shot down a Russian fighter jet and fears of a military escalation sent traders scrambling for cover. European markets plunged 2% on the news and the selling spilled over to US markets when we opened. But by midmorning the reactive selling stalled and we found support at 2,070. Not only did the market find a bottom, but by the close we recovered all the losses and finished in the green. Without a doubt this counterintuitive price-action left a lot of bears scratching their heads.

Russia is clearly upset about what happened and the world is anxious to see what happens next. Realistically Putin only has two options, retaliate or complain. While a military escalation between Russia and the West is terrifying to contemplate, Russia would suffer tremendously if he chose this route. Putin is most definitely a bully, but he is not a madman. He has little to gain from a direct confrontation with NATO and everything to lose. Inflammatory rhetoric is the only sensible tool for him to wield because he cannot afford to do any more. Maybe he could withhold oil and natural gas, but even that is cutting off his nose to spite his face because this would do far more damage to the Russian economy than Europe. Traders waking up to this realization is what allowed us to recover from those early, reactive losses.

Since this is a holiday week, most big-money, institutional investors are on vacation. Without their guiding hand, we often see increased volatility as smaller and more impulsive traders take over. Had these events occurred during a more typical week, most likely we would not have fallen as far since cool-headed money managers would have snapped up the irrationally discounted stocks. Without big money’s help this morning, the only thing that saved us was running out of sellers. The thing that kept these losses relatively modest was the fact that we’ve seen a tremendous amount of turnover through the last few months. August’s plunge purged most of the weak-kneed owners and replaced them with far more confident dip-buyers. Anyone who bought the fear and uncertainty over the last few months clearly has thick skin and they demonstrated that again today by not reacting to this mornings headlines. While most people are confused by the market’s reaction today, if you understand the underlying factors, this modest dip and decisive rebound make perfect sense.

As for how to trade this, it is hard to get more bullish than this type of response to bad news. If we won’t sell off on falling energy prices, slowing global growth, a surging dollar, disappointing earnings, rate-hikes, terrorism, and now military conflict with Russia, it is hard to imagine a scenario that will scare these confident owners into selling. Bearish headlines don’t matter if no one sells them. Given this environment, plan on another Santa Claus rally this December.

Jani

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Who Bought the Dip?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Wednesday produced the second 1.5% up-day this week as the S&P500 launched through 200dma resistance. The headline catalyst was Fed releasing their monthly meeting minutes. While the crowd assumed the market needs never ending easy money to keep this rally rolling, today we surged on the strongest hints yet of an imminent rate hike. Has the market lost its mind? Or is the crowd looking at this the wrong way?

Something that trips up a lot of traders is they assume there must be a reason behind every price move. Why did we drop last week? What made us go up today? The financial media lives off of this hunger for explanations. And just like everyone else in the market, rather than admit they don’t know the answer, journalists will gladly make something up. We expect them to give us reasons, not say “I don’t know”. They claim we rallied today because of the Fed meeting minutes. Had we sold off instead, no doubt they would have just as effortlessly spun the same data into a bearish tale. I’m not being critical of journalists because they are giving us what we ask of them. Filling our needs isn’t their fault. The problem lies with us and always needing a reason.

Armed with this “information”, traders further compound the problem by assuming every small move is the start of something larger. We like to draw long trend lines from small data sets. Last week’s 90-point pullback was the start of a 300-point plunge through 2015’s lows. At least that is what it felt like Friday. But that’s not what happened. Instead we find ourselves up nearly 70-points and the week is barely half over. What happened?

Everyone knows markets go up and down. They know we take a step-back for every two-steps forward. We all know it is better to buy stocks when they are cheap and sell them when they are expensive. Anyone can look at the middle of a chart and identify the obvious tops and buy-points. But once our eyes drift to the far right edge of the page, we forget everything we know. All of a sudden a very routine and buyable dip transforms into a terrifying cliff. Or a big runup feels like safe and comfortable place to buy instead of a what it really is, the last chance to take cover before the storm.

While I had no idea what the headlines would be, in my November 5th blog post I warned readers that we were setting up for a very normal and healthy pullback following a 200-point rebound from the October lows. Then in my November 12th blog post I said this was the pullback we were waiting for so instead of run scared, take advantage of the discounts. After the fact these seem like brilliant calls, but that is grossly overstating the amount of brain power it takes to see these moves for what they are, simple swings in supply and demand. We sell when the crowd is buying and buy when the crowd is selling. It doesn’t get much easier than that. Rather than get freaked out by the headlines and the far right edge of the chart, remember what you already know. It only takes a moment to find the obvious answer if we clear our mind of all the noise.

Jani

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Who is the Next Buyer?

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 slipped modestly Thursday, but this was mostly a placeholder day ahead of Friday’s monthly employment report. October’s breathtaking 200-point rally kicked into overdrive following September’s big employment miss. Will October’s employment launch a similarly impressive move?

I cannot begin to guess what the jobs number will be. Maybe we have another big miss. Or maybe economists lowered their expectations so much that it will be an easy beat. But the truth is even if I knew the number ahead of time, I’d still be clueless about how the market will react to it. We vacillate so frequently between ‘good is good’ and ‘good is bad’ that it is challenging to simply figure out which way is up. But rather than guess what the number will be or how the market will react to it, there is a better way.

Everything always comes back to supply and demand. It makes no difference why people are buying, only that they are buying. Same goes for selling. This means we no longer need to worry ourselves over whether ‘good’ is good or bad. The only thing we care about is if people are buying or selling the news. So the question of the day is, “Who is the next buyer?” Find that answer and we unlock the market’s next big move.

To figure out where we’re going, we start with where we came from. Two-hundred points over four-weeks tells us there was a lot of desperate buying in October. Buyers were forced to offer higher and higher prices in order to persuade reluctant owners to sell. Value buying, dip-buying, short-covering, breakout buying, and good old fashioned chasing, we saw it all in October. And that’s what launched us from the lowest levels of the year to near record highs almost overnight. As for what comes next, we need to identify that next enthusiastic buyer.

Near record highs, we can cross value buyers off the list. Same goes for dip-buyers. If there are any shorts left in the market following a 200-point beating, clearly they don’t feel pain and any further gains are just as unlikely to convince them to cover. We smashed through almost every resistance level and moving average on our way higher. The only meaningful level we haven’t crossed is all-time highs above 2,130. But again, if a breakout buyer didn’t buy the previous key levels, is 2,130 really going to get them off the couch?

The one plausible category left is the chaser and given all the selling we saw in September, there are plenty of regretful sellers afraid of being left behind. But while a retail trader might buy after a 200-point rebound, institutional investors are far more stubborn. They are experienced enough to know a pullback is just around the corner and will patiently wait for a hot market to cool off.

And so here we are. I have no idea what the employment number will be or how the market will react to it. But I know that no matter what the knee-jerk reaction is, it is going to be really hard to find new buyers to keep these sharp price gains going. Keep that in mind as you try to figure out how to trade Friday’s employment report.

Jani

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Fear of Heights

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Good is Good Again

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 continues to defy the skeptics as it surged to 2,090 by Wednesday’s close. October’s breathtaking rebound leaves us 2% from all-time highs, something unimaginable only a few weeks ago. I was a member of the buy-the-dip camp, but even this recovery caught me by surprise.

Wednesday’s headline event was the Fed’s policy statement that held interest rates at current levels, but left the door wide open for rate hike in December. The market initially sold off on the prospect of near-term tightening, but it quickly found its footing and rallied decisively into the close. Volume registered at the highest levels since the last Fed meeting.

It appears the market is slowing moving back to a more traditional mindset where good news is good and bad news is bad. For several years we went through a period where the market cheered bad news because that meant a continuation of easy money. But we’ve seen the opposite reaction in recent months. September’s selloff followed the Fed’s no-hike decision, while this afternoon’s rally came after strong hints of an imminent rate hike. This suggests stock prices are no longer dependent on the Fed’s generosity. Instead traders are responding more appropriately to September’s global growth concerns and this month’s relief that the situation turned out less bad than initially feared.

While it is nice to find ourselves in the green for the year, we must be cognizant of where we came from. Two-hundred points over a few week period is a stunning move, but everyone knows the market moves in waves. Without a doubt these two-giant leaps forward will be followed by a step-back at some point. Will we run out of buyers at 2,100? Are traders ready to chase the market above all-time highs? Lets not forget that the reasons for August’s plunge are still as real and present as they were two months ago. It won’t take much to stoke those fears again. While I am happy to see the market recover from an emotional and irrational selloff, it feels like this buying frenzy is just as questionable.

Like always, long-term holders can continue holding. Those with cash should resist the temptation to chase after such a huge move. While momentum is clearly higher and will likely challenge 2,100 resistance, we know a step-back is coming. The patient trader will wait for the inevitable vacuum of demand that follows every panicked buying frenzy.

Jani

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Levels to Watch

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 slipped under 2,020 support Wednesday, reversing from early gains. Volume was below average, telling us that not a lot of owners were worried by this 0.6% loss. That can be a good or bad thing depending on how you choose to read it. The bullish interpretation is confident owners create a solid foundation when their stubborn resolve keeps supply tight. However bears will remind us that capitulation reversals happens on high volume. The last couple of days of light volume means we haven’t shaken the tree very hard. A fair number of weak owners are still hanging on and could easily turn into nervous sellers if we slip any further.

This was only the fifth downday since late September. Over that breathtaking stretch, we surged nearly 150-points and recovered more than half of August’s selloff. Seeing a little red on Tuesday and Wednesday is not unexpected or a bad thing. Everyone knows healthy markets take periodic steps back and is most likely what this is. The only questions are when, how long, and how much.

Technicians often spot 38% and 62% retracements of the prior move (Fibonacci). Applied to our 150-point move, that would be a 57 or 93 point pullback. Currently we’re only 20-points from the recent highs, meaning there is plenty of additional room to fall. Unfortunately the 38% and 62% values are only valid from the top of the move and we won’t know until after the pullback where the actual top was. While this method cannot tell us when the market will peak, it gives us an idea of the magnitude of pullback we should expect. A 20-point dip doesn’t come close, so either we haven’t finished sliding, or 2,040 isn’t the top. In a few days we will have our answer when we keep slipping, or bounce and continue higher.

We are quickly moving into earnings season and that is taking the focus away from Asian and European markets. While there isn’t a lot to get excited about by our sluggish earnings, at least we are no longer being held hostage by overseas stock markets. The challenge with interpreting earnings is anticipating the market’s reaction. It was fairly comical when Wednesday morning’s headlines told us stocks were up on encouraging earnings, while later in the afternoon the same financial journalists blamed the selloff on disappointing earnings.

With so many companies reporting, traders can find plenty of evidence to prove whatever bias they harbor. If they are looking for an excuse to sell, they will find it. If they are looking for a reason to buy, there will be plenty of justifications. This means the mood of the market is far more important than the actual results. After such a strong run, it seems like those with cash are taking a half-full view of the situation. The last few days we’ve run into resistance every time the market pushed up against 2,040. This shouldn’t be a surprise since this provided support through most of 2015. What is support often turns into resistance that appears to be the case here. Real or self-fulfilling, those with cash don’t want to chase stocks higher than 2,040 and that lack of demand is keeping a lid on prices.

What does this all mean? If earnings come in as expected, then a pullback to the 50dma would be healthy and represent a good buying opportunity. On the other hand, if key earnings start missing badly, then the global selloff will flare up and we could easily undercut recent lows. Finally, if we blow past 2,040 resistance, there isn’t a reason to chase the breakout since we know a 60-point pullback coming. Let the market peak and then come back to you.

Jani

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Should We Believe in this Rebound?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 slipped modestly Tuesday, but there is nothing unusual about pausing and catching our breath after a two-day, 90-point rebound. Volume was near average, showing few were concerned about this sideways churn.

Friday morning U.S. stocks were punished when employment missed expectations, but moments after that weak open prices launched an explosive rally that pushed us back to the upper end of the trading range. At this point it is hard to say if traders bought the dip because bad news is still good, if the bad news was less bad than feared, or if people were following the herd and buying because everyone else was buying. The difference is critical because knowing who was buying and why they were buying tells us how sustainable this rebound is.

Chasing and short-squeezing are two of the least sustainable forms buying because these are a short-lived phenomena. These buyers don’t believe in what they are buying, they are simply reacting to what everyone else is doing. And as soon as the wind shifts, so will their trading. On the other hand, buyers who were excited about bad news delaying the Fed’s rate-hike are also misguided. We are deep into the region of diminishing returns where additional easy money will have little impact on prices. We need real economic gains to fuel the next rally leg. Delaying a 0.25% rate increase by a few weeks isn’t going to help corporate earnings or the economy. We already saw this realization when the Fed’s “no hike” decision lead to the most recent 100-point selloff.

The last possibility is less bad than feared. This 10% correction was driven by fear of a global slowdown taking us with it. The logic assumes a strong dollar and weak overseas demand would crush our export economy. But so far the data isn’t supporting this correlation.  Europe and Asia have been slowing for quite a while, but have yet to make a serious dent in our recovery. Without a doubt these are headwinds we have to fight against, but they haven’t been substantial enough to reverse our growth or hiring gains. The latest data points continue showing growth and hiring, meaning maybe things are not as bad as feared.

The first two reasons to buy this rebound are deeply flawed, but the last one is the real deal. While it is hard to get in traders’ heads, how the market acts in coming days will tell us who bought and why they bought. Chasing, short-squeezing, and buying bad news are all flawed trading decisions and if this bounce was built on that type of foundation, it will crumble within days. On the other hand, if traders are growing increasingly confident in our economy as they realize the fallout from a global slowing isn’t as bad as they initially feared, they will start buying with increasing conviction. That will show up in stable, supportive prices near 2,000.

The most constructive behavior we could see over the next couple of weeks is overseas selloffs that are met with a shrug when they reach our shores. No longer reacting to foreign weakness tells us this story is priced in and we can stop worrying about it. That will be our sign to jump in and ride the year-end rally back toward recent highs. But if we cannot hold recent gains, then we’re not ready yet and undercutting August’s lows is a very real possibility. But not to fret, this is just another opportunity to buy stocks at cheaper prices as we form a double-bottom.

Jani

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