Category Archives for "End of Day Analysis"

Employment on Deck

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Stocks closed modestly higher, but it was a respectable performance since we were down 20-points midday. Volume was average as most traders await Friday’s monthly employment report before making their next move.

The tail continues wagging the dog as our early stumble was driven by German weakness. While U.S. and German markets often trade in parallel, it’s because Germany’s export economy is heavily dependent on U.S. consumers. As goes the U.S., so goes Germany. But the opposite is not true. Germany consumes a nominal percent of U.S. output, so a slowdown in the German economy is barely a speed bump for us. That is why it is not appropriate for U.S. equities to be held hostage by German and Chinese markets. These countries need us, but we don’t need them. While a global slowdown is not helpful, it is not fatal to our economic recovery. Without a doubt our markets will break this nonsensical link when traders realize our fortunes are not as tightly tied to the rest of the world as they currently fear. The upcoming employment and earnings season will show just how marginal of a role the slowing global growth story impacts us.

The last few days has given both bulls and bears something to crow about. Today was the third day in a row we rebounded from midday selloffs and finished higher. If stocks were teetering on the edge, these early plunges were more than enough to push us into the abyss. The fact we resisted such an easy excuse to breakdown tells us the market is not as fragile as it feels. However, the daily chart looks horrible and we are clearly in the middle of near- and medium-term downturns. Guilty until proven innocent is the name of the game and until we see real buying push us above 2,000, every bounce should be met with suspicion.

The most interesting setup would be a sharp selloff that shoves us under August’s 1,860 lows on historic volume. But rather than devolve into another steep leg lower, supply dries up and we bounce. This would be the last hopeful holdouts capitulating and the formation of a solid double-bottom reversal pattern. While the market rarely gives us what we want, we can always hope for a great buying opportunity like this. Until we breakout, breakdown, or form a compelling double-bottom, expect prices to remain stuck in the 1,900ish / 2,000ish trading range.

Jani

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Tail Wagging the Dog

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 rebounded sharply, rocketing past 1,900 on the last day of the third quarter. Volume was above average, but suspiciously light given the size of today’s move and the traditional end of quarter repositioning.

It would be great if there was a solid reason behind these gains that we could build a sustainable rally on. Unfortunately this was another example of the U.S. markets taking their cues from overseas traders. Strong gains in Asia and Europe early Wednesday morning lead to our gap higher at the open. While there are plenty of reasons to believe in the U.S. economy, linking our stocks to overseas economies is not healthy. Few believe China and Germany are done falling into their respective holes and if we continue pricing US equities based on how foreign markets trade, today’s rebound will be undone in a matter of days.

The most important thing we need to see is our markets decouple from the rest of the world. Normalcy will return when we start trading on traditional metrics like earnings, revenues, employment, and GDP. There is a good chance this will happen over coming weeks as US employment and third quarter earnings season diverts our attention from how the DAX or Shanghai traded overnight. The first sign the correlation is breaking down will be the end of these wild one and two percent gap openings. Next will be more days where our trade bears little resemblance to the moves in Asia and Europe. No one payed much attention to foreign markets a couple of months ago and it is only time before traders stop looking at their terminals in the middle of the night before deciding to buy or sell US equities.

Without a doubt overseas weakness is a headwind, but a 10%+ correction has done a good job pricing it in. Europe and Asia have been slowing for a while and if they posed a serous threat to our economy, it would have shown up in our numbers already. Resilient third quarter earnings will prove that fears of overseas economies dragging us down are unfounded. When that happens, it will kick off our year-end rally as international traders move their money to the most attractive economy on an ugly block. In the meantime, expect elevated volatility as long as our markets remain linked to overseas trade.

Jani

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What to Look For

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 fell out of bed Thursday morning, dragged down by German markets that are still coming to terms with the Volkswagen emissions scandal. This is just another example of how our stock market is fixated on global-macro trends instead of the more traditional domestic and company specific data. But in an impressive midday reversal, the S&P500 found its footing near 1,910 support and erased most of the early losses. This intraday change in direction looks similar, but in the opposite direction as last Thursday’s “no hike” fizzle that kicked off this week-long, 100-point selloff. Could this price-action signal a dramatic change in direction just like it did last week?

The first thing to cross off the list of stuff to worry about is this Volkswagen emission scandal. While this will destroy a historic level of auto industry shareholder wealth through recalls and government fines, this is a very company specific story. This didn’t expose a weaker than expected economy or consumer, so it won’t have a lasting impact on future earnings for the broader market. The relevant stocks will take a beating to reflect the staggering loss of shareholder wealth, but then everyone moves on.

Last week we stalled above 2,000 because few buyers were willing to chase prices higher. But 100-points lower, the value proposition is dramatically different. On Thursday, value buyers were finding deals they couldn’t refuse and owners were unwilling to discount their stocks any further. Elevated demand and tightening supply put a floor under the market and kept the selling from spiraling out of control.

Most likely this bounce will push us up to 1,950 support/resistance. From there it is anyone’s guess as to what happens next. But the great thing is no one is forcing us to pick sides right now. Instead we can wait for the market to show its hand before we decide which way to trade this move. Stall and stumble? That means August’s 1,860 lows are the next stop as we dig out a double bottom. On the other hand, if fear evaporates and the recent dip priced in the inevitable rate hike, then we could continue higher and this slip is simply a higher-low on our way up. The key is how traders respond to 1,950. Do they buy the strength? Or do they sell before the inevitable fall? While I cannot tell you right now what will happen, the market will let us know soon enough.

Jani

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The Fed Speaks

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The Fed decided to keep rates near zero, citing global economic uncertainty and low domestic inflation as their justifications. This lead to dramatic volatility and the S&P500 traversed nearly 100-points intraday as it tried to figure out what all of this meant. The initial dip gave way to a huge surge higher, but we were unable to hold those gains and closed near the day’s lows.

It is hard to find anything encouraging about Thursday’s price-action. We got the “good” news people were hoping for, but it failed launch a sustainable move higher. No doubt the previous five-day rally priced in a big chunk the “no hike” pop, turning this into a “buy the rumor, sell the news” trade. That’s what happened intraday and we will see if the fizzle continues Friday.

This week’s rally pushed us to the upper end of the recent 1,900-2,000 trading range. The post-Fed pop launched us well above 2,000 resistance, but it didn’t take long for the breakout buying to stall and we tumbled back under 2,000. It seems few were willing to chase prices higher and that lack of demand could be a huge obstacle in coming days. This left us with an ugly intraday reversal on the chart that stands out like a sore thumb. Thursday’s pathetic close could easily make prospective buyers take a step back as they wait to see what happens. If enough people pause and asses, it becomes a self-fulfilling prophecy as prices continue tumbling on weak demand. This downward spiral will continue until it reaches levels so low that dip-buyers can no longer resist the temptation. Since we are near the upper end of the recent consolidation, we have a ways to fall before we will reach those irresistible levels.

While people were relieved the Fed didn’t do anything to threaten the fragile global economy, that relief could very easily turn into anxiety because the global economy is so fragile the Fed worried it might not be able to handle a nominal 0.25% interest rate hike. While the medicine tastes great, maybe we should be worried about why we need it. Between the weak technicals and renewed worries over global growth, we could easily see the market slip back to 1,900 support. If this dip reignites the emotional selling, we could easily undercut last month’s 1,860 lows.

In the near-term we should be prepared for more volatility and weakness, but this is most likely giving us another opportunity to buy stock closer to recent lows. We need to undercut 1,860 to form a double-bottom and while that will feel scary, it will be another great chance to buy stocks even cheaper.

Jani

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Four Ways to Trade the Fed’s Decision

By Jani Ziedins | End of Day Analysis

End of Day Update:

It was another strong day for the S&P500 as we closed at the highest levels since the August correction began. As worried as people have been, we’re up four out of the last five days and that lone down day was only a modest eight point decline. Without a doubt buyers are growing increasingly confident. Is this sustainable, or the highs before we tumble back into the trading range?

It is hard to get away from the Fed’s rate hike since that is the only thing people are talking about. Will they hike or won’t they hike, that is the question on everyone’s mind. As a contrarian, I like to trade against the crowd, but opinion is divided on this issue. Without a consensus to trade against, it is hard to figure out what comes next.

Even if I knew ahead of time what the Fed was going to do, it wouldn’t do me any good because I cannot begin to guess how the market will respond. That’s because with such a divided opinion, it is hard to figure out who has been buying these last couple of weeks. Is this a short-squeeze? Or have we finally run out of fearful sellers and are rebounding on the resulting tight supply? Maybe those that are hopeful the Fed will keep rates artificially low are buying ahead of that expected announcement? Or are people are buying for no other reason than other people are buying? Without a popular opinion driving this move, it is hard to figure out what is behind it.

But all is not lost. While we might not know what the market is thinking right now, it will show us its hand following the Fed’s decision. There are four possible outcomes and four ways to trade it.

Rate hike followed by a rally:
This is a bullish signal because it tells us the market no longer cares about China or rate hikes. Everyone who fears these things sold weeks ago and when there is no one left to sell a headline, it stops mattering.

Rate hike followed by a selloff:
Over the medium-term this is a bullish outcome because the rate-hike debate and uncertainty is finally over. While the knee-jerk reaction was to sell the news, a 0.25% bump in short-term interest rates will not have a material impact on our economy. There will be plenty of value oriented buyers ready to jump in and snap up discount shares from fearful sellers. While we could slip to the lower end of the trading range, even undercutting the 1,860 lows, the Fed hiking rates tells us they believe in this economy and so should we.

No hike followed by a rally:
This is most likely a temporary relief rally that will fizzle. Delaying the rate hike by six or twelve weeks isn’t going to make much of a difference and isn’t something to get excited about. In fact, I would be concerned about the Fed not hiking rates because it tells us they think our economy and stock market are too fragile to handle such a nominal rate hike. If they’re worried, then we should be too.

No hike followed by a selloff:
A bloodbath following good news will be our signal to stay clear of this market. If the Fed doesn’t believe in this market, we could smash through the lows. The situation is further compounded because the cloud of rate hike uncertainty continues indefinitely. The market can handle bad news because it is quantifiable. This not knowing is what drives it crazy.

While it is hard to read the market ahead of time, the way it responds to the Fed’s decision will tell us a lot about what traders are thinking and how they are positioned. This will be interesting!

Jani

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To Hike, or Not to Hike?

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

Tuesday’s 1.3% gain in the S&P500 was one of the best looking day’s we’ve had in a while. We closed at the highest levels in weeks as fear of a bigger selloff continues to dissipate. But there are a lot of flaws in this strength.

Volume was light as few people traded ahead of the Fed’s rate hike decision due later this week. This reduced volume leaves the market vulnerable to larger moves because smaller traders have greater influence. Another concern is Tuesday’s intraday trade was fairly one-direction, suggesting more of a short-squeeze than legitimately fought for and earned gains. This notion is s further reinforced by the lack of a fundamental or headline catalyst behind this move. It felt like a day where people were buying for no other reason than other people were buying. While a legitimate reason can emerge to justify this move, without something substantial to support us, this strength will likely fizzle. And lastly we are approaching the upper end of a recent trading range that we retreated from a couple of times previously. In range bound markets, relief often gives way to fretting. Until we breakout and hold those gains, we should be more inclined to take profits at these levels than continue chasing prices higher.

It is hard to avoid the rate hike chatter. Will they? Won’t they? If our economy is so fragile that its fate rests on the outcome of a 0.25% change in short-term interest rates, then we have far bigger things to worry about.

Personally I think the Fed should raise rates because that is consistent with all the things they’ve been telling us. Markets are far better at dealing with bad news than uncertainty. A 0.25% rate hike now or in six or twelve weeks isn’t going to make much of a difference to anything. But the market is paralyzed by now knowing what is going to happen. Postponing the rate hike will only extend this largely unproductive debate over when the first hike will be.

We saw the same anxiety and fear ahead of Taper, but once the Fed announced Taper and started reducing its bond purchases, the market embraced that certainty and predictability, paradoxically rallying throughout the entire taper process. I have little doubt the same will happen if the Fed lays out a responsible and methodical rate hike plan. That eliminates the uncertainty hanging over us and finally lets the market focus on our steadily improving economy.

In the near-term, I have absolutely no idea how the market will react to either a hike or delay. Give me the Fed statement early and I wouldn’t know how to trade it. Only after the fact will we be able to come up with the “official” explanation for why the market rallied on a hike/delay or plunged on the hike/delay.

While we cannot get ahead of the Fed announcement, the way the market trades afterward will go a long way to telling us its mood and where it wants to go next. Will it embrace the half-full story, or obsess over the half-empty? The ideal bullish setup will be a knee-jerk selloff on a rate hike, but then the selling quickly exhausts itself and we break through 2,000 resistance. That would be the capitulation bottom of the correction. This reversal could play out over hours or weeks, but it would be a strong sign the market will rally into year-end. The harder price action to get behind will be a pop if the Fed keeps rate at zero. That is far more likely to fail since what the Fed is really telling us is they don’t think our economy is strong enough to handle a 0.25% bump in interest rates. Surely not a ringing endorsement of our economy.

Jani

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Building Support

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 exploded higher today, one trading session after plunging lower last Friday. This followed two huge up-days, which was proceeded by a gigantic plunge, that was on the heels of an epic multi-day rally. And so on, and so forth, you get the idea. It’s been a volatile few weeks as we consolidate the recent selloff and build a base between 5% and 10% under recent highs. While these moves have been dramatic and emotional, the non-stop plunge has yet to resume, a good sign prices are stabilizing in the 1,900s.

This volatility has been driven by economic uncertainty in China and the Fed’s looming rate hike. But while it doesn’t feel like it, down nearly 10% makes this one of the safest times to own stock all year. Risk is a factor of heights and this is the lowest we’ve been in quite some time. Common sense tells us the lower we go, the closer we are to the eventual bottom. Rather than fear this market, we should embrace it. While there is still the potential for further downside, no matter how much lower we go, the downside will still be less than the fall experienced by those that bought a couple of months ago. Take advantage of this new-found safety due to lower prices, don’t run from it.

China continues to dominate traders’ thoughts and is the source of most of the market’s anxiety. I have little doubt the situation in China will continue to deteriorate over coming months, but it will matter less and less as the market grow accustomed to the situation and it becomes priced in. Very few US companies rely on the Chinese consumer as a major source for their corporate profits. That’s why a weak Chinese economy will have a limited impact on S&P500 earnings. In fact, since we are an import driven economy, we will actually see a net benefit as companies input costs fall due to weaker Asian currencies. The knee-jerk reaction was to fear a Chinese slowdown, but it won’t take long before traders realize the actual situation is nowhere near as bad as feared.

As for the near-term trade, we are forming a trading range between 1,900 and 2,000. One day’s euphoria gives way to the next day’s stampede for the exits. Closing near 1,970 leaves us near the upper quarter of this range, making us more vulnerable to another overnight hand grenade out of China. This a better level to be locking in profits than chasing the bounce. The safest way to trade this market remains to be either ride out the waves by sticking to a buy-and-hold plan, or stay on the sidelines until there is a little more price stability. The choppiness will likely last for another week or two as the Chinese situation gets priced in and we wait for clarity on our Fed’s rate hike intentions.

Jani

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Where Did the Dip Buyers Go?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It was another dramatic day in the market as the S&P500 gave up a healthy 2% rebound to end the day solidly in the red. Volume was elevated, but well off of Monday’s historic levels.

The market opened sharply higher on the coat-tails of an impressive European relief rally. But our rebound never built momentum and traded sideways under 1,950 for the first half of the day. While it was nice to see the emotion fueled selling take a break, the lack of further progress revealed those with cash were not ready to buy the dip. Without demand to extend the rebound, we started sliding lower midday. The selling picked up speed as fear of regret compelled many to dump their stock at any price. This became a self-fulfilling prophecy that accelerated until we closed near Monday’s lows.

Those that thought they could hold the dip lost their nerve and bailed out this afternoon. While this close looks atrocious technically, it is actually laying the foundation for the inevitable rebound. Weak and fearful owners were selling shares to far more confident dip-buyers willing to hold this volatility. While people try to outsmart the market with fundamental and technical analysis, it trades on nothing more than supply and demand. Once we exhaust the supply of fearful sellers and replace them with confident owners, prices will stop falling regardless of what the headlines and gurus claim it should do.

The hottest topic in the financial press is if the Fed will raise interest rates in September. Many claim there is no way the Fed can raise rates when the stock market is struggling. My question to these people is what changed since the last Fed meeting? Has employment gone up? Has GDP gone down? Outside of the chronically weak energy market, have we seen deflation flare up? I cannot think of anything that materially changed in the U.S. economy since the Fed’s last meeting. The only thing that is different is the Chinese stock market’s bubble that burst, but is this Chinese gambler’s paradise really something our Fed should be making policy decisions on?

Which of the following two scenarios scares you more?

A) The Fed raised interest rates 0.25% today because they are confident the U.S. economy no longer needs artificial support.

B) The Fed chose to keep rates near 0% today because they believe the economy is too fragile to withstand a modest bump in rates at this time.

I don’t know about you but I would be far more fearful if the Fed doesn’t raise interest rates than if they do. And I suspect this will also be the market’s reaction. Expect prices to rally on a modest and sensible rate hike, and fall if the Fed thinks the economy is too weak to withstand a rate hike.

But Fed decision is weeks away and most of you want to know how to trade this market on Wednesday. The most bullish thing this market can do is sell off sharply Wednesday morning and then bounce into the green Wednesday afternoon. That would mark a capitulation bottom. A less compelling bottom would be continuing to consolidate between 1,850 and 1,950. While the consolidation would be volatile and choppy, this is the easier bounce to jump on board because the recovery will be far slower than the capitulation’s vee-bottom. And lastly and most bearish would be another relentless slide that closes on the lows of the day. That tells us there is still further downside and this might not stop until we hit bear market territory.

Jani

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The Only Thing We Have to Fear

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 officially entered correction territory Monday as the index closed down more than 11% from recent highs. Trading volume surged to one of the highest levels in history. It’s hard to put today’s move in context since so few times have we seen such a volatile day where prices jumped multiple percentage points every hour.

Clearly this is one of the most emotionally charged markets this decade. The question before us is if these dramatic moves are warranted based on severely deteriorating fundamentals, or if this is simply an overreaction and the buying opportunity of the year.

The first thing we need to understand is what kind of selloff this is. Selloffs take one of two forms, the insidious grind lower that slips under the radar because few are alerted by slow moving declines. The other is the breathtaking plunge that makes front page headlines around the world. I don’t think anyone needs me to tell them which type we find ourselves in the middle of.

But here’s the thing, the selloffs we fear the most are typically the ones we don’t need to worry about. Sharp moves lower are often followed by sharp rebounds. Last October’s 10% Ebola plunge bounced back within two-weeks. Five-years ago we recovered from 2011’s 20% U.S. Debt downgrade within six-months. While everyone remembers 1987 for the largest single-day selloff in market history, few remember that we actually finished 1987 up 2%. The most similar selloff to our current situation was the 1998 Asian financial crisis that saw us tank over 20%. But you know what, we were making new highs within five-months.

The selloffs we really need to worry about are the slow grinds lower. While most people remember the financial crisis that consumed our markets in October 2008, the market actually topped a year earlier in October 2007. One of the largest selloffs in market history started in the Fall of 2007 when no one was paying attention. While this recent plunge shoved us down nearly 250-points across five trading sessions, in 2007 it took us four months to fall 250-points! The lesson from history is we should fear the selloffs that few pay attention to, not the one the world is fixated on. People are free to disagree with me because “this time is different”, but they’re arguing against history.

To clarify a little confusion that arose from last night’s post. In one breath I said that buy-and-hold investors should stick out this volatility, while in another breath I said I pulled my money out before Friday’s big plunge. Many people were confused by these conflicting statements, so let me clear things up. The difference is timeframe. I’m a reasonably active trader and move in and out of the market one or two times a month. My trading strategy is to take advantage of one, two, and three percentage moves in the index, take my profits and then move on to the next trade. Most savvy active traders would have gotten out of bullish positions last week when the market started moving against them. That is why it is my assumption that anyone still in the market has a longer holding period than I do. If someone makes a couple trades a month, I would suggest they get out of the way of any move lower. But if a person only makes a couple trades a year, holding through dips is part of their game plan. That’s why it is called buy-and-hold, not buy-and-hold-until-you-get-scared. While this move is dramatic, I don’t see a reason for long-term investors to dump their stock at a steep loss. Hold on and in six months or less we’ll be making new highs. As always, keep the comments and questions coming.

Jani

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What To Do Next

By Jani Ziedins | End of Day Analysis

S&P500 weekly

The Week Ahead:

Last week’s nearly 6% plunge in the S&P500 was the largest weekly decline since 2011. As painful as that was, what should we expect next week? The good news: these selloffs typically only last a few days. The bad news: emotion fueled selling can do an awful lot of damage in just a few days.

Unfortunately for many, the days of defensive selling are long gone. The only choice left for someone still in this market is to join the emotional selling, or stick to their original buy-and-hold plan. When stated that way, the right choice is obvious, but sticking to it when everyone around them is running around with their hair on fire is far harder to do.

Without a doubt the selling can and will likely continue next week (overnight futures are already down over 1%). The only question is if we should get out ahead of a much larger decline, or if this is simply another buyable dips on the way higher? Of course there is a third option: both of the above!

The only reason to abandon this market is if we think we are on the verge of another crippling economic contraction. Something that will freeze our capital markets, crush consumer and business spending, and trigger waves of layoffs and spiking unemployment. Most of last week’s fear revolved around slowing global growth. That means we have to figure out how this will impact our economy.

To be perfectly honest, the US economy is extraordinarily self-absorbed. Seventy percent of our GDP is service based and we run a gigantic trade deficit. Does that sound like an economy dependent on global growth? Lower energy and commodity prices, cheaper junk at Walmart; what does that mean for our economy? It means consumers will have more money left to spend on massages, vacations, and bathroom remodels. Should we be worried about our economy? Not really.

Obviously the China story will affect companies like AAPL and TSLA that have huge Chinese growth premiums built into their stock price. But these are the exception in the S&P500, not the rule. While the pessimists are concerned about plunging energy sector profits, we know American consumers are lousy savers and without a doubt the dollars saved on energy will find their way into other sectors of the economy. That’s bad for energy shareholders, but it is a net neutral for our economy since one loss is offset by another gain.

And lastly, every time the stock market had a “lost decade” over the last 100+ years, we pulled out of it with a ten to twenty year secular bull market. The roaring ’20s, nifty ’50s, and ’80s and ’90s tech boom were brilliant times to own stocks. And all three followed a depressing and demoralizing decade of owner ownership. If history repeats itself, this bull market isn’t even halfway done.

I will gladly concede that our economy isn’t very impressive, but where pessimists see weakness, I see opportunity. Protracted bear markets start when economic activity reaches unsustainably high levels. This overshoot results in the inevitable economic contraction and a devastating bear market. At this point in our economic recovery, most bulls and bears will agree our economy has a long way to go before it reaches anything close to overheated levels. That means we are safe from the next major economic contraction. While stock market selloffs happen inside major secular bull markets (1987 occurred in the middle of the greatest bull market in history), corrections in secular bull markets bounce quickly and are great buying opportunities. Keep that in mind when the crowd tries to tempt you into selling your stocks at a steep discount next week.

Jani

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The Ugliest of Days

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

The worst day in four-years capped off the worst week in just as long. It was a brutal, relentless selloff that shoved us down 3% for the day and nearly 6% on the week. Volume exploded to the highest levels in nearly half a year. And if those stats didn’t fully capture the sense of urgency, the VIX saw the biggest weekly percentage gain on record.

While I’ve been writing about the pervasive bearishness seen among active investors that contribute to internet forums and answer investor surveys, today’s selloff broke beyond the financial pages and became front page news. People who don’t regularly follow the stock market heard about today’s plunge. That opens the door to an entirely new population of sellers. While it’s been a great ride from the 2009 lows, today’s weakness could give the average 401k investor flashbacks to 2008’s fear and regret. That creates the very real opportunity for this weakness to spiral out of control.

But before we get too carried away, we survived sharp selloffs in 2011 and 2014, so we know this storm will pass too. The 2011 selloff was nearly 20% and came on the heels of a S&P downgrade of United States debt. That drop did a lot of damage but we were making new highs within six-months. Last year’s nearly 10% Ebola scare rebounded to higher levels within weeks. Without a doubt this selloff’s recovery will fall somewhere inside this range. Armed with that knowledge, we can decide how to trade this.

If we will be back near the highs in less than six-months, would you still be tempted to dump your stocks at a steep discount today? If yes, then sell. If no, then resist the temptation to bail out and stick to your buy-and-hold plan. The worst way to trade the market is buy when it feels safe and sell when it is scary. Remember, risk is a function of heights, meaning this week’s 120-point selloff makes this the safest time to own stocks all year. Think about that for a moment.

But don’t expect the rest of the market to think about the situation this rationally. There is a good chance Monday will be another bloodbath as a portion of the 401k crowd tells their financial planners to “sell everything”. Mutual funds settle at the end of the day and a surge of people placing mutual fund sell orders could show up late Monday. But once those people are out, we’ll probably run out of sellers and be poised to bounce on tight supply. The best profit opportunities come from buying other people’s panic and the pickings are really good right now. Keep your head and you’ll come out on top.

Jani

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Ouch!

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

The S&P500 crashed through support on its way to six-month lows. Again volume was surprising light for the biggest down-day in a year-and-a-half. While some are running around with their hair on fire, the lighter volume tells us most owners resisted the temptation to join the emotional selling.

There are two ways this can play out. The bullish scenario has confident owners standing strong and the resulting tight supply will put a floor under stocks. The bearish storyline plays out if confident owners lose their nerve in the face of further declines and join the emotional selling. That will lead to a surge in volume and end in more traditional capitulation bottom quite a bit lower from here.

As scary as today’s selloff felt, we need to remind ourselves that we are still within 5% of all-time highs. While most of the world has seen double-digit declines, our markets are holding up remarkably well. Either that means we need to catch up to everyone else, or more positively the US markets have become the safe haven for global investors desperately seeking shelter. Between the strong dollar and our resilient market, the US is easily the most attractive place for the world’s wealthy to move their money. This easily explains much of the strength we are seeing in the S&P500.

Over the medium-term I remain bullish on our market and still expect we will finish the year in the green. But how we get from here to there is a little less clear. Today’s weakness was a clear sell signal for shorter-term traders. While I’ve been bullish on this market, this morning’s awful price-action told us the bottom wasn’t in yet. We bounce decisively from oversold levels and retesting the lows today signaled there was more selling left. Friday could get even more ugly since nothing shatters confidence like screens filled with red.

Long-term buy-and-hold investors need to resist the temptation to bail out. This is one of those periodic market gyrations and when they sell years from now, this weakness will be long forgotten. Shorter-viewed traders need to be more cautious. It is probably getting a tad late to be adding new shorts, but those lucky enough to be short can let this play out a little longer. Just be prepared to lock-in profits because when this bounces, it will be fierce. Those with cash should resist the temptation to jump in too quickly and wait for a little more stability. As for the longs that feel stuck, there is nothing wrong with selling defensively, but don’t let a little volatility sour your attitude toward this market. Be ready to jump back in as soon as the selling exhausts itself, which is only days away. While days like this hurt, the trader in us should be excited because buying discounted shares from emotional sellers is the easiest and fastest way to make money in the market.

Jani

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The Chop Continues

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

The S&P500 took us on a wild ride Wednesday, covering nearly 100-points intraday. We’ve seen big moves recently, but today’s volatility takes the cake. As dramatic as the surges and crashes were, volume was barely average. That tells us most traders didn’t change their mind and stuck with the cash and stock positions they started the day with.

If anyone traded well today, it was surely more luck than skill. These violent swings convinced reactive traders to buy and sell at the exact worst moment. The only way to survive chop like this is to resist the urge to trade. That means sticking with the positions you have, or watching from the safety of cash. Reacting to a choppy market is the surest way to blow up a trading account.

This morning’s mindless selling pushed us under the 200dma. The best the financial press could come up with was blaming Chinese stocks, which paradoxically ended the day up 1.2%. Don’t bother trying to understand the logic on that one.

By lunchtime the market found a bottom and started rallying 30-point ahead of the Fed’s meeting minutes. But the euphoria was short-lived as we gave up a big chunk of the rebound by the close.

While we love to assign blame for every move, the simple truth is people were selling because other people were selling. The herd rushes in and the herd rushes out. These daily moves are nothing but head fakes that convince reactive traders to give away all their money, and so far they’ve worked exceptionally well.

I don’t see anything in Wednesday’s trade that suggests this is the start of something worse. The market chopped around all summer and this looks to be much of the same. We had multiple opportunities to breakdown this year and there isn’t anything here that makes these headlines more credible than the ones the market ignored previously.

Contrary to the crowd, I’m eagerly looking forward Fed’s rate hike in September. Without a doubt this will kick off the next rally leg when they announce a 0.25% hike followed by similar hikes every three-months. That gives us clarity and predictability as well as two more years of historically low interest rates. The Fed laid out a similar plan with Taper and paradoxically the end of Quantitative Easing lead to a 10% rally in equities. We will see the same thing here because it will finally let us stop worrying about when the first rate hike will happen.

Jani

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What Comes Next

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Tuesday the S&P500 slipped back under 2,100 support/resistance in an otherwise quiet and uneventful day. Trade resembled a typical, slow summer session, a welcome departure from last week’s dramatic swings.

The most noteworthy thing is how modest the loss was considering the Chinese stock market plunged 6% overnight. That easily could have triggered another emotional rout if this rebound was fragile or unsustainable. The fact our market yawned at those developments tells us anyone who fears China is already out of the market and current owners are not interested in selling that story again. Right or wrong, when no one sells a headline, it stops mattering. Prices move on supply and demand, not headlines or fundamentals. Successful traders take their cues from what matters and ignore what doesn’t.

We find ourselves within a couple percent of all-time highs for the umpteenth time this year as we extend the longest and tightest trading range in 65-years. There are two ways to interpret this range-bound market. The half-full analyst says if were going to breakdown, it would have happened already. The half-empty outlook counters with if we were ready to go higher, it would have happened by now. Both opinions are valid, but only one is right. The question is which one.

Depending on the way a technician looks at the data, it is just as easy to come up with a bullish interpretation of our situation as a bearish one. That means we need additional information to figure out what comes next. The tiebreaker is sentiment. The mood and outlook of the market tells us if this is stalling or pausing.

For various reasons that we can cover in another article, the market will move in the opposite direction of the market’s mood. If we are flat while everyone is excited about the future, that means we are running out of new buyers and stalling. On the other hand, if the sideways trade happens under dark clouds and widespread pessimism, then we are pausing and refreshing before the next leg higher. This is standard and widely accepted contrarian theory. To figure out what comes next, all we need to do is look at what the crowd thinks and take the opposite side.

Over the last few months headlines have been dominated by Grexit, strong dollar, plunging energy sector, Chinese stock market bubbles, rate hikes, lowered revenue and earnings forecasts, anemic domestic growth, stagnant wages, and a host of other ominous stories. Given this backdrop, it’s little wonder most sentiment measures are in the toilet. But as contrarians, all the negativity tells us this sideways trade is a refreshing bullish consolidation and it is clearing the way for the next leg higher.

Taking it one step further, these bearish headlines also assure us this is one of the safest times to own stocks. While most will disagree with me, if all the above bearish stories failed to break this market, it is hard to imagine something that will dent it. Limited downside and healthy upside create a very favorable risk/reward, making this a great time to own stocks. By the time it feels safe, it will be too late.

Jani

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Which Side I’m On

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

On Thursday the S&P500 ended down a modest 0.1% following Wednesday’s gigantic reversal. Thursday started weak, but we quickly found support at 2,080, effectively extinguishing the emotional trade that dominated Wednesday. If the market was vulnerable to a collapse, sellers would have piled on this morning’s weakness and the downward spiral of emotional selling would have resumed. Instead, supply dried up and we traded sideways the rest of the day.

It’s cliché to say “don’t fight the tape”, but fighting this market has practically become a national pastime. Sentiment remains in the toilet by almost every measure. Stocktwits $SPY sentiment had bears outnumbering bulls by 2-to-1. The historically bullish AAII sentiment survey also shows bears beating bulls by a healthy margin. Identical trends are evident in put/call ratios and short interest. And anecdotally it is hard to get away from the bearish hecklers in my blog’s comments and Twitter feed. Everyone loves hating on this “overvalued” market, yet here we stand less than three-percent from all-time highs. When the crowd and the market don’t agree, my money is always on the market.

Jani

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Finally New News

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Tuesday was a tough day for the S&P500 as it gave back most of Monday’s gains. We fell back under the 50dma and 2,100 support, but managed to hold the 200dma. Volume was slightly above average, but relatively constrained given the size of the decline.

The Chinese government surprised everyone with an unprecedented yuan devaluation. This sent investors the world over scrambling for cover. While there is a direct impact from a weaker yuan and stronger dollar, that pales in comparison to the inflamed fears of a slowing Chinese economy.

The market can quantify and digest currency moves in a day or two. This is a negative for export dependent economies like Germany, but a weaker yuan actually helps net importers like the United States since it lower input costs for many of our companies. That’s why stocks like WMT were higher when everything else was down.

Reacting to the currency move alone, the response in US markets seemed overblown. But it wasn’t the currency move that spooked traders. They feared the reasons the Chinese government felt compelled to act so brashly. Between slowing Chinese growth, a crashing Chinese stock market, and now this, traders are starting to fear worse than expected weakness in the world’s second largest economy.

This situation leaves the market in a precarious position. Prices defied countless bearish headlines this year from Grexit to rate hikes, but those were largely recycled stories that we’ve lived with for years. China weakness on the other hand is something new and unexpected. Investors that weren’t bothered by a Grexit or 0.25% rate hike are rightfully concerned by these Chinese headlines. While there is a good chance this is just another blip on our way higher, this is the most serious situation we faced all year.

Things are too uncertain at the moment to predict which direction the market will go next, but I’m confident whatever happens, it will be dramatic. Maybe this is what finally breaks the camel’s back and triggers the long-awaited correction. However, if a crumbling Chinese economy cannot bring down this market, then nothing will and all we can do is hang on and enjoy the ride. The next couple of days will give us good insight into the market’s psyche. Either selling intensifies and we plunge to levels not seen in years. Or the emotional selling exhausts itself and we rebound to new highs like we have so many other times.

Jani

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The Sky is Falling

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

The S&P500 sliced through 2,100 support and fell all the way to the 200dma before mounting a feeble bounce into the close. Traders clearly took notice as volume surged to the highest level in over a month.

Today’s selloff clearly rattled nerves and has many fearing worse things to come. Money managers, gurus, and journalists all smell blood in the water. And they’re not the only ones. The Stocktwits $SPY sentiment gauge swelled to 63% bearish. Bullishness on AAII’s sentiment survey is hovering near five-year lows. The CBOE Put/Call ratio spiked today to levels only seen a few times in the last five-years. And Investor Intelligence reports 58% of investment advisors are bearish. It seems everyone lost confidence in this market.

Given how bearish these indicators are, you’d think we are in the middle of a long and deep correction. The funny thing is we are only 2.4% from all-time highs. The most plausible explanation is a highly insightful crowd and savvy pundits see the storm clouds brewing and are getting out ahead of the long-awaited correction. That is of course if you think pundits and the crowd are good at identifying important turning points.

As a devout contrarian, if the crowd get this right, I’ll eat my hat. I really don’t want to eat my hat because I really like it, but I don’t have anything to worry about. It’s not because the crowd and gurus are stupid. Intelligence has nothing to do with it. Supply and demand drives market pricing and by rule the majority’s opinion is already priced in. Common sense tells us that anyone anticipating a correction would sell their stocks ahead of time. From this we can infer the large majority of people with bearish outlooks are at the very least underweight stocks. If that’s the case, then most of the selling is already behind us and this is the safest time to buy and hold stocks in quite some time. No one said being a contrarian was easy, but to make money we have to make the hard trades.

The headline event everyone is looking forward to is the monthly jobs report due before Friday’s open. While the media hypes this up every month, it’s been years since this report made a lasting impact on prices. This Friday will be no different. Expect early volatility, but the numbers will be forgotten by the close.

Jani

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What to Expect from Rate Hikes.

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 failed to reclaim 2,100 support after falling under this widely followed level Monday morning. Volume was light again as few traders chose to adjust their portfolios based on anything they saw or heard Tuesday.

Greece and China are ancient history as Puerto Rico, AAPL, July employment, and rate hikes dominate headlines. While the stories have changed, the results are the same; bearish headlines and resilient prices. The market is down eight of the last eleven trading sessions, but we remain within two-percent of all-time highs. Bears have plenty of reasons to criticize this market, but owners don’t care. When they don’t sell, supply is tight and prices strong.

Even though the broad market is holding up, AAPL sliced through its 200dma Monday and continued plunging Tuesday to the lowest level the stock’s been since January. This drop leaves many AAPL bulls perplexed because there isn’t a fundamental driver worthy of a 15% selloff, but that is how markets work. Prices go up and they go down, even when there isn’t an obvious reason. But there is always a reason, even when we don’t see it. Lately everyone’s been on the AAPL bandwagon as iPhone 6 sales knocked the ball out of the park, but recent developments in China lead many to question if the China growth will still be there. That was enough to weaken prices and from there the selling snowballed. Today’s look looks like capitulation and there is a good chance the stock will rebound to the 200dma. How it responds to this level will let us know if this is a false bottom on our way lower, or just another great buying opportunity on our way higher.

The other major story traders are worried about is the Fed’s first rate hike, but paradoxically raising interest rates will actually be a bullish catalyst. We saw this phenomena last year with the start of the dreaded Taper. Everyone expected the end of quantitative easing would depress prices because it meant the end of easy money used to bid up stocks. In reality we saw the opposite. The start of Taper spawned a great year for stocks because a reasonable and predictable Taper replaced the uncertainty that preceded it. Expect this market to follow a similar pattern once the Fed’s rate hike plan is formally announced.

While it is always nice to watch my account swell in value, I’d actually be more concerned about the sustainability of these levels if prices were wedging higher. That is when the last of the buyers are coming to market and we are on the verge of exhausting of demand. Selling like we’ve seen in recent days chases off the weak owners and clears the way for a sustainable move higher. The harder part is figuring out the exact timing of the breakout. It could happen tomorrow. Or we could slip a little further and retest the 200dma before launching the next move higher. While I cannot predict the exact timing of the next move, I’m confident it will be higher. When market is given every excuse to breakdown, but it stubbornly holds near the highs, that tells us the path of least resistance is higher, not lower.

Jani

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Testing Support

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 tested the resilience of 2,100 support for a fourth day. We sliced through this key level early in the day, but recovered most of those losses before the close. Volume was average for these typically slow summer months, but well short of the elevated levels seen in recent weeks.

Summer markets are often choppy when institutional investors are on vacation. Without big money’s steady hand, smaller and more emotional traders drive these erratic price swings. But these smaller traders don’t have the account size required to push sustainable moves and is why prices jump around, but ultimately don’t go anywhere. This phenomena perfectly describes the trade we’ve seen in recent weeks; dramatic, but unproductive.

Much to their detriment, these smaller traders pile in and out of the market following every gyrations. They reactively buy when prices go up, and reflexively sell when they go down. While everyone knows it is foolish to buy high and sell low, that is exactly what most of these small traders do. There are times to buy breakouts and sell breakdowns, but sideways markets is definitely not one of them.

While it is tough to be brave when prices fall and cautious when they go up, that is exactly what we need to do. There is no reason to be afraid of today’s weakness and break of support. We didn’t collapse when headlines were shouting Greek Contagion and Chinese Bubbles, so why should we all of a sudden be afraid they are going to fall on us now? Markets have been given every opportunity to implode this year. If that is what they really wanted to do, it would have happened already.

Jani

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Gut Check

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

The S&P500 extended Tuesday’s rebound and reclaimed 2,100 support. Volume was above average for the sixth consecutive day and shows there is far more participation in this market than the typical, dull summer sessions.

Chinese and European fears are fading fast. We passed the halfway point in earnings season without major problems. And the Fed is sticking to their script. In all, things are becoming boring, but given where we came from, boring is good and that is showing up in stock prices.

No matter how many reasons people have for not liking this market, prices are within two-percent of all time highs. When forced to choose between the crowd and the market, I always go with the market. It isn’t that the crowd is stupid, only that their opinion is already reflected in stock prices and there is nothing to be gained by trading with the crowd.

Contrary to popular opinion, prices don’t have to go down to price in bad news. Another way is by not going up. We’ve been in a tremendous bull market since the 2009 lows, but 2015 has been a dud as we’ve done nothing but drift sideways. Few would argue with me if I said this market would be significantly higher if we had been showered with good news. While we haven’t seen the 10% or 20% correction everyone is predicting, the difference between where we are now and where we would be if the news was better, is our “correction”.

This market has been given every opportunity to breakdown. If it was poised to go lower, it would have happened already. When the prices refuses to go down, no matter what our analysis or gut tells us, stick with the market.

Jani