Category Archives for "End of Day Analysis"

Slow and Steady Wins the Race

By Jani Ziedins | End of Day Analysis

End of Day Update:

Wow. What else is there to say about this monster rebound? Buyers haven’t been this desperate to own stocks over a two-day period since 2011. But is this aggressive buying good for the market? Is it sustainable? Does it give us a stable foundation to build on?

As kids learn from the Tortoise and the Hare, slow and steady wins the race. By that measure it is hard to get excited about the speed and size of this rebound from the 1,970 lows. The biggest concern I have is choppy trade is often a symptom of changes in trend. We’ve had three material dips since summer and now this uncharacteristically sharp up-move. The bull rally turned five this spring, making it fairly mature as far as bull markets go. And there is little fear priced into the market since it has largely ignored bearish geopolitical and economic headlines from around the world as it keeps setting record high after record high. US large cap stocks are the last-man standing in a world where almost all other markets and asset classes have seen material selloffs. How much longer can this continue?

Anyone taking the time to look through the CrackedMarket archives will see I’ve been a resolute buy-the-dip guy since I started this blog in early 2012. Greece, Cyprus, Euro breakup, Fiscal Cliffs, Govt Shut Downs, Taper, etc. It didn’t matter what the headline, I embraced the fear and saw every negative headlines as an excuse to pick up stock for cheap. But we all know this must come to an end at some point. Buying the dip has become so routine now that everyone is doing it. Good employment, bad employment, strong GDP, weak GDP, Russia invading sovereign nations, nothing matters to this market. That is until it does. We might finally be arriving at that point where it does.

While I’m not ready to say tomorrow is the first day of a 20 or 30 percent bear market, all these factors lining up here are enough to make a buy-the-dip guy far more cautious going forward. The market has enough momentum that it can coast into year-end, but what happens in January is anyone guess. Markets typically look ahead six to 12 months, which means if the market suspects we will see inflation/deflation/increasing interest rates/currency contagion/recession/or anything else next year, it will start pricing it in starting in January. If the rate of gains slows down and becomes more sustainable, then this can continue. But if we retreat back under key support levels in the near-term, I wouldn’t be so quick to buy the dip this time.

Jani

Start of the End, or End of the Start?

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

It was a wild ride as the market gapped lower at the open, rallied 40-points by lunchtime, only to give all those back and then some by the close. While the market closed lower by 16-points, we traveled nearly 120-points to get there. Absolutely stunning.

The crashing oil story took the day off as the market obsessed over the imploding Russian Ruble. Many pundits drew parallels to 1998’s currency crisis and that was enough to roil markets around the world. But was this just a hiccup, or the start of another global meltdown?

Russia’s been the target of sanctions from the West since they exploited and inflamed the crisis in Ukraine. These political tensions and preexisting economic weakness already reduced Western exposure to Russia, so it is far less likely this crisis will take Western banking and economies down with it. This story should leave the front pages in no time.

As for oil, it’s funny how bears try to have it both ways. Rising oil prices are clearly bad for consumers, but then so are falling oil prices?!?!? On popular social media it is hard to find many people on Main Street that are worried about $2 gasoline. This video clip got nearly four thousand up-votes on a popular website when one guy shared his feelings from his last trip to the gas pump.

Technically today’s price action was as ugly as it gets. We blasted above key levels in midday trade, but couldn’t hold them and made new lows by the close. This wild ride lead to lots of trading and volume was 28% above average and one of the most active days of the year.

But technicals are only half the picture. What about sentiment? Last week’s selloff saw bullish sentiment on Stocktwit’s SPY boards plunge from 65% to 41% while bearishness spiked to levels last seen near the bottom of October’s selloff. While hardly conclusive, it does show many traders have changed their minds recently and their selling is clearly evident in the falling prices. But the thing about markets is they operate on supply and demand, not sentiment. By the time the crowd is overwhelmingly pessimistic, that means they’ve already sold their stock. Once the crowd finishes selling their stock, we run out of supply and prices rebound.

While today’s headlines feel horrific, we have to remember they feel this way during every dip. If they didn’t, no one would sell the headlines, and we wouldn’t have a dip to begin with. The question is if this time is more than another routine dip. In a bull market we have to operate under the premise that every dip is buyable. That’s because a rally continues countless times, but only reverses once. When trading, I would rather put my money on countless profit opportunities, than bet everything hoping this is that one time.

But we cannot be ignorant to the risks either. If we are already at oversold conditions, the market should bounce and race higher into year-end. But if we cannot find a bottom, the next stop is 1,950. After that it’s 1,900. Break 1,900 and we’ll race past October’s lows.

Jani

Not a Big Deal

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Stocks tumbled Wednesday, giving back all of Tuesday’s rebound and then some. Volume was modestly higher, but far from panic levels. The 60-point selloff from last week’s highs was enough to knock 10% off of Stocktwits’ SPY bullish sentiment gauge, but the reading is still in bullish territory at 55%.

The thing both bulls and bears need to remember is markets go up and markets down. That’s what they do. Talking heads try to come up with a reason for every gyration, but the simple fact is prices fluctuate. They always have and always will. A dip from 2,075 shouldn’t surprise bulls and bears shouldn’t expect the market to collapse after slipping a couple percent from all-time highs. It’s been a strong, one-direction move from October’s lows and everyone should agree it is normal and healthy for the market to trade sideways here.

While the dip has dampened bullish enthusiasm, we probably need to test 2,000 support before we can say sentiment has been reset. Holding 2,000 and the 50-dma sets up an interesting buy-the-dip opportunity. If we slice through support and selling accelerates, then the next stop is 1,950.

Jani

Buyers MIA

By Jani Ziedins | End of Day Analysis

End of Day Update:

Stocks stumbled in late morning trade, challenging 2,050 support before recovering a small portion of the losses by closing at 2,060. There are a handful of explanations for today’s weakness, but the simple truth is we ran out of buyers.

The first hints of weak demand came on Friday as the market failed to make material headway following an unexpectedly strong employment report. This news was more than enough of a catalyst to launch us higher if there was upside remaining in this move. The fact we barely budged showed us an abundance of bullishness was already priced in. When we no longer rally on good news, look out below.

That is exactly what caught up with us today. Anyone who wanted to buy this market already bought it, meaning there was no one left. For much of the rally, the Stocktwits SPY sentiment gauge remained stubbornly stuck in bearish territory. It was the widespread reluctance to believe in this rebound that propelled us from the October lows. But last couple weeks saw a dramatic reversal as sentiment swung from 55% bearishness to 65% bullishness. That 20-percentage point reversal told us bears were giving up and bulls were getting cocky. The market is an equal opportunity humiliator. After thoroughly demoralizing bears with a 250-point rebound, it is now turning its attention toward bulls.

While we bounced above 2,050 support Monday, it is inevitable the market will dip under this key technical level before this is all said and done. How the market responds after violating support will tell us where we go next. If selling stalls and we quickly retake 2,050, this is just another buyable dip. But if buyers are MIA and the selling accelerates, 2,010 is the next meaningful support level. Trade accordingly.

This analysis diverges from my previous expectation of a Santa Claus rally, but we have to be flexible enough to change our outlook when presented with new evidence. The Santa Claus rally theory predicted a pop following bullish employment. When the market didn’t behave as expected, it meant the underlying theory was flawed. While there is still time for a Santa Claus rally in the second half of the month, at the very least expect weakness over the next few days.

Jani

Be careful

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

It was another interesting day. Weakness in European markets knocked us down at the open, but we came roaring back midday. Even though we closed in the red, we were well off the early lows. It is always encouraging when selling stalls and rebounds, instead of accelerating lower.

2,075 is resistance as the market struggles with this level, but the longer we hold near it, the more inevitable it becomes we will break through it. At this point in the year, fundamentals no longer matter as big money jockeys for position into year-end. While the S&P500 is up a very respectable 14% for the year, it left many cynical managers in its wake. Some never believed in this rally, others were flushed out in October’s dip under 1,900. Both groups are trying to figure out how to repair the damage before sending out annual reports to their investors in a few weeks. While they would love to see the market pullback to 2,000 before then, all too often the market does the exact opposite of what the most desperate traders are praying for.

The AAII sentiment survey took a nosedive this week. Bullish sentiment plunged 9.5% even though the market remains within a fraction of all-time highs. This shows many investors are afraid of heights and reluctant to embrace this rally. But all too often today’s holdouts become tomorrow’s chasers. But not to get too far ahead of ourselves, bulls finally overtook bears on Stocktwits’ SPY sentiment gauge this week.

While momentum is higher, end-of-year buying is an artificial tailwind that will vanish January 1st. Rather than put new money in this market, we should be thinking about taking profits. Breaking 2,075 could trigger one last short-squeeze, pushing us up to 2,100 before finally running out of steam. Its been a great run, but we need to consolidate recent gains.

Friday we have employment. While it gives the talking heads something to obsess over, the market hasn’t cared about employment since we started showing positive numbers several years ago. Hit, miss, or exceed expectations, it hasn’t mattered as this market rallied through it all. Outside of some intraday volatility, this report will be ancient history by the close.

Jani

Why we keep going up

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Today we closed at another all-time high. The unfortunate thing for anyone betting against this market is new highs come in clusters. We set a dozen records over the last few weeks and will most likely continue doing so for some time to come.

Many people have a hard time understanding how this market can keep going up in spite of all the economic and political uncertainty. What they fail to realize is we are going up because of this uncertainty, not in spite of it.

Everyone knows supply and demand drives prices, but few understand what that really means. People only trade stocks when their outlook about the future changes. Something happens that causes them to decide they want more of one thing or less of something else. It is this changing of opinion that translates to buying and selling, and ultimately moving prices. Since October 15th we’ve gone from acute levels fear and panic, to things are not so bad. It is this softening of negative sentiment that propelled us higher.

And this brings up back to our current situation. October was a painful month that not only inflamed fear and anxiety, but it also flushed many individual and institutional investors out of the market. These investors find themselves underweight equities as we continue making new highs. Over the last several weeks, the fear of a market collapse is giving way to fear of being left behind and many of these October sellers are turning into December chasers. The pressure to buy here is especially strong with institutional money managers who will send quarterly and year-end reports to their clients at the end of the month. Expect all this catch-up buying to fuel the Santa Claus rally. But this end-of-year buying is artificially driven by a date on the calendar. We could very easily find ourselves with vacuum of demand starting January first when institutional money managers are no longer under pressure to dress up their books for the quarterly reports.

Jani

Testing Support

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Stocks slipped to 2,050 support on the first day back from the holiday weekend. Journalists and talking heads are paid to come up with a reason for every market gyration. Real or imagined, producers and editors don’t care as long as it makes good copy. And today we were told the market sold off on poor Black Friday sales and weak economic numbers out of China. Maybe the truth is a lot more boring. Maybe we slipped to support for no other reason than a minor imbalance between supply and demand following an impressive run of up-days.

Traders know stocks cannot go up every day, but anytime we slip a few points, they start predicting this is the next collapse. Today’s elevated volume, the highest in nearly a month, shows a lot of people responded to this weakness by selling the dip.  While it is clearly an overreaction to claim a 1% pullback from all-time highs will lead to the next big selloff, this is actually a healthy response for the uptrend. The more cynical the crowd, the more viable the rally.

The market is still setting up nicely for October sellers to chase prices higher into year-end. Underweight money managers can only wait so long for their predicted pullback before they have to concede defeat and start buying. If they want to keep their job, they cannot look foolish by missing this easy up-trend when end of year statements come out.

Jani

What Bullishness?

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Stocks closed higher in a quiet, holiday-week session. Most big money managers are on vacation, so don’t expect a lot of meaningful trade this week. But the low volume leaves us vulnerable to volatility as smaller traders exert more influence over the market.

Paradoxically, the higher the market goes, the more nervous traders get. In AAII’s latest bulls/bears survey, bullishness actually decreased 9%, hitting 5-week lows all while the index kept setting record high after record high. We see a similar phenomena in the Stocktwits’ SPY sentiment gauge that is still more bearish than bullish. Don’t let anyone fool you into believing this market is overly bullish simply because we are at all-time highs.

Almost every day in September and October ended with above average volume. That tells us there was a whole lot of selling going on. All of it at lower levels from these record highs; some of it at much lower levels. These recent sellers are falling victim of regret while they watch the market march higher without them. Pressure is mounting to jump back in as the fear of a market collapse is quickly giving way to fear of being left behind. Expect the market to continue higher as these regretful sellers continue chasing the market higher into year-end.

Jani

Finding Support

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Volatility crept back into the market as early trade gave back all of Tuesday’s gains. It was a gut-check for bulls when prices slid nearly non-stop through the first two hours. But just like it was supposed to, prior resistance at 2,040 turned into support and we bounced right off of 2,040. While we still finished in the red, the midday rebound was clearly bullish.

With fresh memories of October’s demoralizing plunge, traders still have a hard time warming up to this relentless assault on record highs. The lack of enthusiasm is clearly evident through the low volume rally. Everyone automatically assumes the market has to be wildly bullish as it sets new high after new high, but burned traders remain far more skeptical than they were earlier in the summer. This doubt and worry is the fuel that keeps pushing the market higher.

Big money was patting themselves on the back when they took profits this summer, but countless all-time highs later, these same managers are under intense pressure to buy back in at higher levels, else they risk being left even further behind. It is this pressure to chase that keeps a bid under the rally and why every ten-point dip keeps getting bought. Owners that don’t want to sell and managers that need to buy is a recipe for higher prices.

Jani

Why the Contrarian is Buying

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Stocks smashed through 2,040 resistance and closed above 2,050, setting yet another record high. Volume was more brisk than in recent days as these gains triggered a wave of technical breakout buying and short-covering.

Too often people mistakenly think contrarian investing means going against the trend. They see something they think has gone too-far, too-fast and are convinced the underlying data doesn’t support the move. They see themselves as a savvy contrarian investor when they bet against the move. But all too often this ends up being a costly mistake.

Contrarian trading has nothing to do with the trend or technicals. It is only about the crowd and its mood. It doesn’t matter what the underlying price action is. Sometimes it is contrarian to go against the trend, but more often than not it means betting on the trend no one believes in.

October’s plunge left traders with a cynical hangover. Even at record highs, they continue talking down this market and are certain we are on the verge of crashing lower. Many of these traders bailed out during October’s selloff and were left behind by the subsequent rebound. They are desperately hoping for the breakdown so they don’t feel so foolish for selling last month.

Unfortunately for these cynics, with so many people bashing the market, the contrarian trade is buying the breakout. AAII’s Asset Allocation Survey showed equity allocations are at 14-month lows. Stocktwit’s SPY sentiment gauge is 54% bearish, a full 16% more bearish than when the market peaked in September. All of these doubters will turn into reluctant buyers as the fear of a selloff is replaced by a fear of being left behind. Expect the market’s strength to continue pressuring underweight money managers to chase the rally higher into year-end.

Jani

Whole Lot of Nothing

By Jani Ziedins | End of Day Analysis

End of Day Update:

Today’s low-volume gyrations confused traders by sending off multiple false signals. The morning’s breakout convinced us this would be yet another routine, record close. Then the intraday plunge pushed us down to levels we haven’t seen in a week. Early highs fading into a weak close is never a good sign. But afternoon buyers swooped in and bought the 10-point “dip”, pushing us back to break-even. What could have been a very insightful day, instead turned into a whole lot of nothing.

The last few days saw a decent amount of churn with buyers and sellers equally represented near 2,040. Trading sideways typically leads to a continuation because markets retreat from unsustainable levels quickly. Every move to new highs is met with suspicion. Many take profits or short the breakout. These traders make their moves in the first couple of days following a breakout, but if the market can withstand this early wave of selling, then it will resume uptrend once the supply from the doubters dries up. Already four days into this 2,040 consolidation, we can confidently assume the wave of profit-taking and shorting is already behind us. With another supportive day on Friday, 2,050 is all but assured.

But everyone knows markets move in waves, so don’t let a pullback to support catch us by surprise. Maybe the rally fails Friday. Maybe we smash through 2,050 before slowing down. Only time will tell. On the other side, maybe we bounce off of 2,020. Maybe it is 2,000 or 1,980. As long as we see it coming and plan accordingly, we can respond intelligently, deliberately, and most importantly, profitably.

Jani

Embrace Low-Volume

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Stocks finished with another record close. This puts last month’s emotional selloff even further behind us. While prices have rebounded decisively, many traders remain numb from the bitterly painful plunge to 1,820. If anyone is not totally dumbfounded by this market, then clearly they are not paying attention. We went from record highs in September, to a world-is-ending selloff in October, and are right back to making fresh highs in November. This was one of the most abrupt moves in recent history and it did an amazing job of humiliating nearly everyone trying to trade it.

October’s sell off triggered the highest volume we’ve seen all year, but the subsequent rebound has been much more sedate. While many prognosticators claim the low-volume rebound shows lack of conviction, they are misinterpreting this as a bearish phenomena. While the lack of conviction is real, the contrarian investor sees this as a bullish development. It shows a huge number of recent sellers missed this rebound. With every new high, the market is leaving them further and further behind. And the pressure is building for them to jump back in. These regretful sellers are the source of the low-volume buying that will propel us higher into year-end.

While the market is setting up nicely for a chase higher, we need to be mindful of support. A dip back under 2,000 or the 50dma so soon after reclaiming them shows larger problems are lurking under the surface. It is okay to own the market here, and sideways trade that dips back to 2,000 is normal and healthy, but failing to hold support would be a major concern. Trade accordingly.

Jani

Enjoy the Ride

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Today marked another record close. It is amazing how far we’ve come in three-weeks; from the depths of despair to all-time highs.

It’s been a volatile ride and most traders don’t know what to make of it. Stocktwit’s SPY sentiment still shows bears outnumber bulls on their stream, 55% to 45%. This is well below the 58% bullishness we saw the last time we were at these record levels back in September. While stocks have recovered, sentiment clearly has not. And even more interesting is sentiment actually trended lower while the market broke through the 50dma and 2,000. This shows a large number of traders are increasingly skeptical of this rebound.

Since this is a contrarian blog, the more skeptical the crowd is, the more bullish I become. Many traders bailed out during the plunge to 1,820 and these sellers are watching in stunned disbelief as this market keeps setting record highs. In truth, many are hoping for the the rebound to fail so they won’t feel so foolish for selling at much lower levels. But the contrarian sees these regretful sellers for what they really are, the next round of buyers. While they won’t all come rushing to the market at once, their fear of a market selloff is slowly giving way to fear of being left behind.

The risk of sitting out of this rally is especially acute for institutional managers that lightened up in October. Since the market moved so fast without them, they will start feeling the pressure to chase as we get closer to year-end and they face the prospect of yet another year underperforming the “dumb” indexes. They can only wait so long for the market to breakdown before they will be forced to start chasing.

So far the market is acting well and there are no signs we need to take profits yet. This gradual climb higher shows regretful sellers are buying back in and as long as their demand props up the market, we should continue higher. While it would be normal to see some sideways trade, failing to hold 2,000 support will be a concern. If the market continues under the 50dma, then we really need to worry. But as long as the market holds support, relax and enjoy the ride.

Jani

Why the Election Doesn’t Matter.

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

A little weakness on election day, but this was expected. We’ve come a long way in a short period of time. Resting here is normal and healthy.

Uncertainty on election day is also fairly typical as those who wanted to trade their predicted outcome have already made their bets and those that are not sure will wait until tomorrow to trade the result. This creates a lull in trade on the day of.

If the GOP wins the Senate, or doesn’t win the Senate, it doesn’t really matter to the market. After a few days of volatility and partisan pouting, it will move on to whatever comes next, like November’s economic and jobs data.

If anyone doubts this, just consider the last election cycle. The market initially cratered off on Obama’s reelection as emotional partisan traders sold in droves. But they missed out when the market rallied 42% over the next 2-years. This caught the partisan biased traders flat-footed when they assumed another four years of “socialist rule” would ruin the economy.

In truth, a divided federal government is good for markets because that leads to gridlock, status quo, and predictability. No matter what happens with the Senate, not much will get done with Obama’s veto stifling the Republican agenda so we should have a fairly predictable two-years left until the more meaningful presidential election cycle.

Jani

Misfortune

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Stocks ended flat following Friday’s record close. The lack of profit-taking and defensive selling is encouraging, especially if it continues through Wednesday.

The market feels dramatically different than it did two-weeks ago. The fear that consumed it and lead to a series of dramatic down-days largely disappeared. Traders shifted from fixating on negative headlines to cheering every nugget of good news. But it is wrong to say sentiment made a U-turn this quickly. Much of the anxiety remains, the difference is those who are sacred no longer own stocks. After they finished jumping out of windows, we ran out of sellers and the resulting tight supply launched us higher. Basic supply and demand at work.

What makes this a bullish setup is we have confident owners that either held the 10% dip, or had the courage to jump in and buy the plunge. This is both a brave and stubborn group, meaning they are extremely reluctant sellers. That tight supply is why prices have risen as quickly as they have. On the demand side, there is a huge number of regretful sellers that bailed out during October’s panicked move lower. Many of these sellers will come crawling back to the market in the next few weeks and months as the fear of a market crash is replaced with the fear of being left behind. Their misfortune selling low and buying high is what will keep this old bull market going even longer.

It is unreasonable to expect the market to continue the recent rate of gains, so plan on a sideways consolidation. A dip back to 2,000 or even 1,990 is healthy and constructive given how fast the rebound moved. If selling spirals out of control and undercuts the 50dma, then all bets are off and there is a good chance October’s selloff was only a preview of worse things to come. But for the time being, the outlook remains cautiously optimistic.

Jani

Round Trip

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Despite its detractors, the rebound continues, this time pushing up to 2,000.

October has been one of the most painful months in years. Obviously the 10% plunge to 1,820 crushed bulls’ spirits, convincing many to sell reactively at steep discounts. But just as shocking was bouncing as quick as we fell. It started as the selloff bears have been predicting for years and they jumped on the short bandwagon with reckless abandon. Unfortunately, rather than take quick profits, most bears were whacked by this historically powerful short-squeeze. They climbed over each other to buy back their shorts and provided the bulk of the lift from 1,875 to 1,975. But as we return to record highs, most bears have already covered for a loss. Without their buying, what keeps pushing us higher? Now the market switched back to humiliating bulls, this time piling on a mountain of regret for anyone who sold the dip. Two-weeks ago they sold defensively, fearing catastrophic losses, now they are buying, fearing being left behind.

The ironic thing is despite the towering losses many traders took this month, October will be a fairly good month, setting up for a very respectable 1% gain. There is a huge swath of investors wishing they were up 1% for the month. But their pain is someone else’s gain.

But enough reflection, where do we go from here? Expect the rate of gains to slow as the market struggles with 2,000 resistance. This consolidation could last days or weeks, but plan for an eventual upside breakout. The recent plunge flushed out almost all the available supply. Anyone that held through a 10% selloff demonstrated an iron stomach and won’t be selling any time soon. That keeps supply tight and makes it easy for the market to continue rallying on low volume into year-end as regretful sellers crawl back into the market.

Jani

The Fed Speaks

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Another volatile, but ultimately uneventful session. While the spread between the day’s high and low exceeded 20-points, we ended down less than three.

The headline event was the Fed’s policy statement and ending of QE. This was widely expected, but they also removed language about considerable slack in the labor market. To many this implies a sooner increase in interest rates and was enough to send the market into a quick, 10-point selloff. But rather than cascade lower, supply dried up near 1,970 and the market bounced, nearly recovering all the day’s losses by the close.

The dip tested 1,970 support and the 50dma, but we held both. This is encouraging and gives credibility to the young rebound. If the market was teetering on the edge of another emotional plunge, this weakness more than enough of an excuse to set it off. But instead of rushing for the exits, most owners were indifferent and that apathy tightened supply, leading to the late bounce.

While holding 1,970 is encouraging, we need to keep a close eye on these levels in coming days. If we slip under 1,950 by Friday, things could get ugly in a hurry. But close the week above 1,970 and the market is moving past the fear and uncertainty that gripped us in the first half of October.

Jani

Another sigh of relief

By Jani Ziedins | End of Day Analysis

End of Day Update:

Stocks continued last weeks rebound and closed just shy of the 200dma. Quite a reversal of fortune from the breathtaking plunge to 1,820 only days ago. Today’s strength is especially encouraging since it came on the heels of another European selloff. This shows many in the US are coming to terms with global weakness and they feel it is already baked into current US equity prices.

Getting to the technicals, 1,900 and the 200dma are significant resistance levels and seeing the market struggle with them in coming days will be no surprise. But ultimately they should only be speed bumps on our way to the 50dma. How the market trades when we return to 1,950 will be far more insightful in determining what comes next.

The big concern is if 1,950 forms the right shoulder in a much larger head-and-shoulders topping pattern. Failing near 1,950 and then undercutting the 1,820 lows means we have a lot further to fall and this could be the 20%+ correction many have been waiting for. But don’t worry too much about this since it is the worst case scenario. Most likely recent volatility flushed out any would be sellers and anyone who held through the plunge showed they are married to their positions. While this is a reckless attitude for traders to take, if we know they won’t sell, then we also know supply will be tight and that supports prices in the near-term.

A down-day or two is nothing to get excited about as long as the selling is rational and orderly. Some people who were paralyzed by fear during the dip to 1,820 will naturally sell the bounce they were praying for. But once these regretful owners finish selling, look for a surge of buying to follow a break above 1,900.

Jani

Don’t Panic

By Jani Ziedins | End of Day Analysis

End of Day Update:

Today’s modest up-day halted a three-day, 100-point rout. The question everyone is asking is if this signaled the end of selling, or is just another temporary reprieve on our way lower. Volume was off the chart, even exceeding the pace of the last few days of free-fall. While we are only 7% from all-time highs, it sure feels a lot worse than that.

The disappointing thing about today’s price-action is we were 20-points higher before another late-day collapse pushed us back near break-even. But maybe this isn’t a bad thing. The last few strong bounces turned out of be sucker’s rallies. A more measured response to the selling could be a welcome alternative to this month’s wild volatility.

The tone we set on Wednesday will go a long way to letting us know what happens next. Another free-fall day and who knows where this thing will stop. But a sideways day could indicate buying is finally catching up with selling. There always comes a point in every correction where prices become so attractive, deep-pocketed value investors can no longer resist the urge to snap up discounted shares from desperate sellers.

But that is the rational response and recently the market’s been anything but. In the wild, our ancestors were well served by adopting emotional cues from others in the clan. When everyone else was running, they started running too because those that stuck around to see what all the fuss was about quickly became lunch. And the same thing happens in the market. Few sellers over the last few days could clearly articulate why they were selling, which means they were selling primarily because everyone else was selling.

The VIX is at the highest level in over 2-years. Every other time we approached this level, that signaled an imminent bottom and is likely the case here too. But imminent can mean different things. Obviously that includes a bounce tomorrow. But 48-hours from now also qualifies as imminent, even if it means falling another 75-points.

The thing most investors need to keep in perspective is those with a longer-term outlook, this weakness is a blessing. While it always feels good to watch our accounts swell in value, there are only two prices that matter; what we paid and what we got when we sold. We want prices to be lower when we buy. Anyone who continued to invest in their 401k during the 2008 meltdown has seen those contributions more than double in value. They would be poorer today if we didn’t have that market crash. Markets go up and markets go down. The most successful are the ones who don’t let it get to them.

Jani

Easy Come, Easy Go

By Jani Ziedins | End of Day Analysis

End of Day Update:

Again the market bumped it’s head on the 50dma, giving back all of Wednesday’s gains and then some on exceptionally heavy volume. This is the most volatile trade since 2011 and it is doing a fantastic job of shaking off the summer’s complacency. We are a hair above recent lows at 1,925 and within easy striking distance of 1,900 and the 200dma. Given how volatile we are trading, we could easily tag these levels within the first hour of trade on Friday.

While every dip over the last several years presented a great buying opportunity, the lack of a tangible headline driver and huge volatility make this time feel different from the Taper Tantrum, Fiscal Cliff, Greece, and other recent selloffs. But this back-and-forth also feels different from previous runaway selloffs like the 2011 S&P Downgrade correction that collapsed over consecutive days. Given the lack of recent precedent, it is harder to anticipate what comes next.

While the financial press and talking heads blame the generic catch-all “global slowdown” for this selloff, weakness in Europe and a slowing Asia are nothing new. So why is it all of a sudden are recycled headlines causing owners to sell en mass?

First we need to segregate traders by timeframe to identify who is prone to sell this weakness. Since we are less than 5% from all-time highs and virtually every buy-and-hold investor is sitting on huge profits, few of them are hitting the panic button and we shouldn’t expect the average 401k investor to panic. Next come the medium-termed investors who still think the economy is on the rebound and expects prices to be higher over the next couple years. These guys are not likely to sell and are probably looking at this weakness as an opportunity to buy stocks at a discount. The final group is the shorter time-framed swing-traders who try to time each gyration. These are the guys buying and selling each 50-point move. And while they are exceptionally active, they are also the smallest segment of the money in market.

Long- and medium-term investors are unlikely to change their three- and five-year economic outlook based on these ambiguous headlines, so we should expect them to continue holding. Shorter-term investors are reacting to these moves and given recent volatility, the market has already tripped up a large number of them, reducing the number of them left to sell.

While a dip under 1,900 and the 200dma seems highly likely at this point, both bulls and bears should expect a bounce shortly after. The bull is looking for a decisive rebound to new-highs while the bear is expecting the right-shoulder of a head-and-shoulder pattern. Trading is never easy and the answer will only be obvious in hindsight.

Jani