Category Archives for "Free CMU"

Jun 26

CMU: Three Traders on a Mountain Road

By Jani Ziedins | Free CMU

Cracked.Market University

Three traders find themselves standing on a road at the top of a mountain. All three are looking over a blind crest, wondering what is on the other side.

The first trader announces to the other two, “Look at how the camber of the road leans a little to the left. Obviously that means the road turns left on the other side of this crest.”

Confidently, the first trader jumps in his car, turns the wheel to the left, reves the engine, closes his eyes, and guns it.

A few seconds later, the other two traders flinch as they hear crashing sounds coming from the other side of the blind crest.

The second trader responds with, “Can you believe that idiot, what was he thinking? If you look at the terrain a little further down the valley, obviously the road turns to the right on the other side of this crest.”

Confidently, the second trader jumps in his car, turns the wheel to the right, reves the engine, closes his eyes, and guns it.

By now, the third trader is not at all surprised when he hears the sound of crunching metal coming from the other side of the blind crest.

Hopefully by now, everyone realizes the point of this story. Successful traders react to what the market gives them. They don’t just guess at what is ahead and blindly trade it. And as such, the third trader calmly gets in his car and with his eyes wide open, carefully navigates all the twists and turns on his way safely back down the mountain.

If you want to survive in this business, you must react to the market as it comes to you. There is nothing wrong with making educated guesses about what lies on the other side of a blind crest. But by no means commit to that position regardless of what you find when you get to the other side.

In our current environment, there is nothing wrong with having a bullish or bearish opinion about these Coronavirus shutdowns and the unlimited resources governments are throwing at the problem. It’s human nature to anticipate what’s coming. But when we get to the other side of the crest, we must follow the road, not our biases.

Three weeks ago that meant buying a relentless rebound no matter how far we were above the March lows. This week, that meant locking-in profits as prices slumped back to support.

What is coming next week? I’m not sure. But I do know that if we go up, I will be buying and if we go down, I will be selling. What will you be doing?

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May 18

CMU: Why headlines don’t really matter

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 popped 3% today after an early vaccine trial produced encouraging results. We are still a long, long way from a viable vaccine being ready for widespread public use, but this is the first critical step in that journey. Also feeding into today’s rally, the Fed reiterated their willingness to use its “full range of tools to support the economy”.

While those appear to be obvious catalysts for a market rally, this market already wanted to go higher and these were simply the excuses. If it weren’t these headlines, it would have been something else.

The market reads whatever it wants into the news. Sometimes it grabs on to the half-full portion of a story. Other times it is the half-empty. Then there are the paradoxical “good is bad” and “bad is good”. What is the one thing all of these have in common? The market does what it wants to do and journalists search for the most plausible explanation after the fact.

If we want a powerful example of this phenomenon, we don’t have to look any further than the sharpest economic contraction in modern history. Economists haven’t seen anything this dramatic….ever! Yet stocks are barely off 10%. Explain that one using logic and reason! It can’t be done. Stocks are this far above March’s lows, not because this is where the headlines tell us we should be, but because this is where the market wants to be despite the horrifying headlines.

The market didn’t need vaccine trials or Fed’s reassurances to rally today. If it wasn’t these things, it would have been something else. More important for a trader was recognizing this market wanted to rally. It told us that quite clearly last Thursday when it bounced decisively off of recent lows. The latest dip died Thursday morning and today’s rally was practically inevitable. (Obvious hyperbole since nothing is inevitable.) Lucky for readers of this blog, they already saw this strength coming Is this week’s selloff already over? It sure appears like it.” I certainly didn’t expect a 3% pop today, but I knew the market wanted to go higher and that was the way I positioned myself.

What comes next? Expect more of the same. Volatility is off the charts and that means big moves in both directions, but the up days will be a little larger than the down days and any weakness will be shallow and fleeting. If this market was going to crash, it would have happened by now. This could change tomorrow or next week, but until we have a compelling reason not to, we need to continue giving this market the benefit of doubt.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 09

How much risk are you holding?

By Jani Ziedins | Free CMU , Weekly Analysis

Free End of Week Analysis and Lookahead: 

The S&P 500 added 3.5% this week and produced its first weekly gain in three weeks. That said, the previous two weekly losses were fairly modest at -1.3% and -0.2%. This continues to be the most epic rebound of all rebounds and the index is towering 30% above March’s lows.

In previous posts I covered the reasons this market is ignoring the horrific economic carnage surrounding us. But for those that missed it, it mostly comes down to the market’s forward-looking nature pricing stocks for where we are headed, not where we are today. The stock market expects the economic situation to be much improved in six months and that is how it is valuing stocks today.

But now that stocks are significantly above the selloff’s bottom, is there still a reason to be buying stocks at these levels? As is usually the case, the answer is both Yes and No.

First, let’s start with the Yes. Momentum is definitely higher and this market is refusing all invitations to breakdown. We just completed the seventh week of this rebound and if it was unsustainable and vulnerable to a crash, it would have happened by now. Compare this to the typical market crashes that are breathtakingly quick and force traders to sell first and ask questions later. The market most definitely doesn’t give us the luxury of multiple months to thoughtfully consider the full situation and allow us to sell in a calm and orderly fashion before the crash.

But just because this market is trading well and will most likely continue trading well doesn’t mean it is a good buy. Successful trading has less to do with the outcome of any individual trade and is more about managing our risks. Let’s say chances are good we can make $20 over the next few weeks. That seems like a no brainer, right? Well, what if that opportunity to make $20 also came with the risk we could lose $80. Does it still seem like a good deal? Probably not.

This market is dramatically higher and most likely it will keep going higher. But just because it goes higher doesn’t mean we should be chasing it here. The big run from the March lows ate up a big portion of the upside and means there is less profit potential left for us to squeeze out of the market over the near-term. And more than just limited upside, if there are any bumps in the road, there is an awful lot of air underneath us right now.

Given how skewed against us the risk/reward currently is, this is definitely a better place to be locking-in profits than adding new money. Just because the market goes up next week and the week after doesn’t mean buying stocks at these prices was the smart trade.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 05

CMU: How to trade a market that doesn’t make any sense

By Jani Ziedins | Free CMU

Cracked.Market University: 

There are not enough superlatives to describe this economic environment and the subsequent stock market. Unprecedented. Unexpected. Unicorn. Most un-words apply because they all fit when talking about something we’ve never seen before.

So how do we trade something without precedent? Unfortunately, a lot of people kept approaching this market the same way they always have. It doesn’t matter if you use fundamental analysis or technical analysis, this market has broken all of the rules. So why are people still stubbornly applying the old rules?

Now don’t get me wrong, I’m not saying to throw out all of the old rules because everything has changed forever. That is absolutely not the case. Soon enough things will return to normal. Maybe it will happen later this summer. Maybe this fall or even next year. But this too shall pass.

The challenge is what to do in the meantime. If your holding timeframe extends beyond this current environment, ignore the noise and stick with has always worked. Find the best companies. Wait for them to sell at a discount. Buy as much as you can. And allow the profits to come to you in 5+ years. That works great for slow-money investors like Warren Buffett and it will work this time toon.

But what about the rest of us traders with a shorter time frame? Well, quite simply, if something isn’t working, STOP DOING IT!!! If your understanding of the market cannot deal with this unprecedented rebound from the March lows, there is nothing wrong with the market. The problem is your system. The same goes for your technical analysis. If it cannot deal with something moving this far, this fast, you need to find a different way of looking at the market.

At best, our rules only apply about half the time. The challenge is knowing which half of the time. That is the art of trading. The other half of the time, we need to be smart enough to change our approach. Unfortunately, there is a an almost imperceptible difference between being patient and being stubborn, but the outcomes couldn’t be more contrasting.

As far as I’m concerned, conventional rules don’t apply to this market. Rather than figure out where this market is going using rules that don’t work, simply follow its lead. The greatest asset we have as independent investors is the nimbleness of our size. We don’t need to commit to positions days or weeks ahead of time. Instead, wait to grab on after the trade is already moving. And if we get in on the wrong side, no big deal, bailout, and flip directions.

Up to this point, many of my more conventional assumptions about this market have been flat-out wrong. But by having a flexible trading plan that can accommodate this unprecedented market, my trades have been on the right side of this market most of the time.

Eventually, our more conventional rules will become useful again. In the meantime, be fully prepared to follow a market that “doesn’t make any sense”. The market isn’t broken, your approach is wrong.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Apr 29

CMU: Don’t fall victim to binary thinking

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 popped at the open, recovering all of yesterday’s midday fizzle and then some. We closed at the highest levels in nearly two months and the stock market is darn close to pushing this selloff’s losses back under 10%. What a turn of events that would be given how desperate and hopeless the situation appeared only a few weeks ago.

Yesterday’s failed breakout to recent highs was a big red flag (read about it here). That very easily could have been the start of a near-term pullback. But today’s price action decisively beat back all of those concerns (at least for the time being).

While a lot of inexperienced traders love to categorize the market in binary terms. Either you are a bull or a bear. Either you are right or wrong. Either you are successful or you are a failure. And they compound those naive categorizations by making such extreme judgment calls based on a single data point. An inexperienced trader would have called yesterday a top and another inexperienced trader would have ridiculed him for being wrong today.

Unfortunately, few things in the market are binary. If they were, this would be so much easier. There is a ton of nuisance in the market that most novices miss. Yesterday’s dreadful price action wasn’t a “top”, it was a big fat warning flag. If it was followed by similarly disappointing price action today or tomorrow, then we could start positioning for a possible top. But that didn’t happen. Instead, the market exploded higher and when it exceeded yesterday’s early highs, that strength invalidated yesterday’s warning and put the rebound firmly back on track.

That said, just because yesterday’s warning was invalidated doesn’t mean we are racing back to the highs anytime soon. Again, that is thinking in binary terms. Instead, things look good until we get the next warning flag. At which point we start looking for another flag to confirm the first. Maybe we get it and maybe we don’t.

If you want to survive in this game for a long time, get past that binary outlook. And if you need a reason, all of the money is made between those extremes. Bull or bear, right or wrong, who cares as long as we’re making money!

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN

Apr 27

CMU: When to buy and when to wait

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 continues trading incredibly well and is hovering near recent highs. As much as people don’t trust this record-setting rebound, it keeps defying the odds and it deserves our respect.

As I’ve written previously, there are two “safer” ways to trade this rebound. Long-term investors with a holding period measured in years should be happy to buy this dip, the next dip, and the dip after that. What happens between here and three, four, or five years isn’t important. The most important thing is we get in. For example, during the last stock market crash, the S&P 500 bottomed at 666. Do you think anyone minds having bought the dip at 800? 900? Or even 1,200? More important than how close we get to the bottom is the simple fact we get in. Years from now, the Coronavirus will be long behind us and stocks will be much higher. (If for no other reason than runaway inflation!) Maybe prices go lower first, or maybe they don’t. Either way, it doesn’t really matter as long as we buy attractive discounts and hold for better times.

On the other end of the spectrum is our short-term trades. While I’m confident stocks will be higher in three, four, or five years. I’m far less confident about where they will be next week. Stocks are holding up amazingly well and I could easily see this strength persist into next week as governments continue scaling back restrictions. On the other hand, it wouldn’t surprise me to see infection rates edge higher after this relaxation. If our leaders get cold feet and pull the drawbridge again, that will send stocks into another tail-spin.

Which outcome will we see next week or the week after? I have no idea and I don’t even pretend to speculate. Lucky for me, I’m a nimble independent investor and I don’t need to commit to a position weeks ahead of time. I can buy and sell with a few mouse clicks and rather than fall for this bull versus bear argument, I’m simply standing by, waiting to see who wins before I put any money at risk.

Making money is 80% waiting for the right trade and 20% making the right trade. Right now we are in the waiting phase. Stay patient and wait for the trade to come to you. Making money is easy, the hard part is not giving back all of those profits by following it up with a bad trade. Maybe that next great trading opportunity is coming next week. Maybe the week after. And even if it doesn’t come until June, it’s not a big deal. We made a killing last month and there is no reason to follow that success with an unnecessary trade here.

As for the next good trade, an aggressive trader should wait for this strength to breakdown before shorting. For the less courageous, wait for the next wave of weakness to bottom before buying the dip.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Apr 22

CMU: If you don’t know how to be wrong, you shouldn’t be in the market

By Jani Ziedins | Free CMU

Cracked.Market University

Some of the worst behaviors come out when people hide behind anonymous handles on the internet. These trolls use the cover of anonymity to say things they would never have the courage to do in person. Yet somehow, this has become the normal way of interacting online.

One of the most frequent abuses in trading circles is taunting someone for making a wrong trading call. When a person shares an idea, a certain segment of the community eagerly looks forward to crucifying them if that call turns out wrong. While this vulgar act tells us very little about the skill of the person that made the incorrect call, it speaks volumes about the critic’s trading abilities.

Every savvy trader learned early in their career mistakes and losing money are normal parts of this game. They understand trading successfully means being wrong…a lot. The difference between the sophisticated trader and these trolls is the sophisticated trader doesn’t think anything of being wrong. To them, a mistake is a mistake and nothing more. Take the loss, learn from it, and move on.

Savvy traders most certainly don’t taunt anyone for a trading call that doesn’t work out. They learned a long time ago some trades simply don’t work out and the outcome of any individual trade is not an indication of a person’s abilities. They took a chance and it didn’t work out. Nothing more, nothing less. And just as important, when they are right, instead of gloating, they recognize they could have just as easily been on the losing end.

If you see someone criticizing another person for making a wrong call, that tells you the critic doesn’t have a clue how successful trading actually works. If a person believes there is nothing more important than being right or wrong, that person clearly doesn’t understand what it takes to be successful in the market.

If you find yourself on the receiving end of these attacks, shrug it off. It is obvious the troll attacking you knows even less about trading than you do and their opinion doesn’t matter. The most successful traders are the most modest because they have been on the losing end of more trades than they can count. Only novices make a big deal out of individual trades.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Apr 14

CMU: The Art of the Trade

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 bounced back from yesterday’s modest dip and the March rebound continues reclaiming lost ground. There wasn’t a definitive headline driving this strength, instead, this relief primarily comes from a moderation of the viral infection rates. We are still a long, long way from resolving this crisis, but at least for the moment, it appears like it is no longer spiraling out of control.

Last week I shared a day-trading strategy that has been working well in this market. It doesn’t matter if the market gaps higher or lower, what we are paying attention to is the market’s first move following the open. If the market rallies, we buy. If it dips, we short. Now, when I say first move, I don’t mean five seconds after the open, but in the first five or ten minutes. Identify that move, jump aboard, leave a stop near the open and see what happens. If the first move fizzles and hits your stop, get out. If you are aggressive, consider flipping directions and going the other way. Take profits in the afternoon and be ready to do it again the next day.

Easy enough, right? Well, today gave us one of the more challenging cases. To this point, the market’s been really good about going in one direction or the other. The handful of times it switched directions midday, that reversal kept on going, making a flipped trade work well. But today’s price-action caught us in the middle. The early rally dipped back to the open and then bounced higher. How this affected a person’s trade depends on the levels they got in at, the stop they picked, and if they switched directions or not.

If a person gave their stop little extra room under the open, they were probably okay and rode the afternoon rebound higher. But if they were more conservative, this midday swoon undercut their stops and knocked them out for a small loss. If they used that trigger as a signal to enter a short trade, they got washed out a few minutes later when that midday false-alarm bounced higher.

If I person got zinged twice today, there is nothing wrong with calling it quits and trying again tomorrow. These losses are measured in cents and not a big deal relative to the profits we’ve been collecting over the last few weeks. We cannot win them all and this is just part of the game. Come back tomorrow and by then today’s trade will be long forgotten.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Apr 06

CMU: Always have a plan to be wrong

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 exploded 7% higher after Coronavirus infection rates showed a modest moderation over the weekend. While these are only just the first hints of a beginning, anything remotely positive is being embraced by the markets. These small rays of light reassure traders there will be an end to this crisis and we are not falling down a bottomless pit. That said, today’s relief could easily turn into tomorrow’s disappointment when our economic realities come crashing back down on the market.

These 4%, 5%, and even 7% moves in both directions are a constant reminder we cannot survive these markets without a plan that allows us to be wrong. Despite the constant boasts on the internet claiming otherwise, no one is right all the time. In fact, any honest trader freely admits to being wrong…a lot. While braggarts are trying to convince us they already know where the next breakout/breakdown will be, I’m over here looking at all these boasts with a highly skeptical eye.

There is a popular saying in the market, there are bold traders and there are old traders, but there are no old, bold traders. And it’s true, only the novices boast about their trading prowess. (Many people still act like first-year traders even though they’ve been doing this for a decade!) Savvy veterans have been humbled far too many times to even consider tempting the market’s vindictiveness by bragging about their successes.

My most recent humbling experience occurred today.  Last week I was looking for a market swoon back to 2,300 support following the previous week’s 20% rebound. While I felt like a near-term dip was the most likely outcome, I knew better than to tempt fate by holding a short position over the weekend. With 3%, 4% and even 5% opening gaps as common as they are, a simple mistake could easily turn into a very costly mistake by leap-frogging any sensible stop. (IMO, stock options are far too costly to be usable right now.)

Since my trading plan couldn’t effectively manage my risk over the weekend, I chose not to hold a position and would wait until this morning to trade the next move. That decision meant I couldn’t profit from a nice move in my direction over the weekend, but it also meant I wouldn’t end up on the wrong side of a 5% gap against me. And it’s a good thing because that’s exactly what happened today.

Sometimes the best trade is to not trade and I’m glad my trading plan kept my gut out of the market this weekend. And more than just saving me from a big opening loss, my cash position and trading plan actually got me in on the right side of the market and I finished the day with a decent profit. Not bad for being wrong.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Mar 30

CMU: The importance of having a plan to be wrong

By Jani Ziedins | Free CMU

Cracked.Market University

One of the things I learned a long time ago is that while I’m pretty good at trading, when I’m wrong, I tend to be really wrong.

I’m an optimist at heart. It’s almost a requirement to surviving the markets over the long-term because we definitely go up more than we go down and bull markets last a lot longer than bear markets. That said, when things go south, they south in a hurry.

While I tend to give the market the benefit of doubt, I always have a plan for being wrong. The most obvious example is starting every trade with a sensible stop. But beyond this tactical technique, I also need a mechanism for recognizing when my outlook is flat-out wrong. When what seems like a buyable dip is really the next good shorting opportunity. Or what looks like a great short is actually the next great buy.

The most expensive mistakes we make are when we think the market is headed one way but it is actually going in the opposite direction. This is when we need to be the most open-minded about our outlook and the quickest to changing course.

I was looking for last week’s huge bounce to fizzle in a near-term pullback. As I wrote previously, “one day up, the next day down.” While that approach worked brilliantly for the first few weeks of this selloff, it stopped working late last week. Rather than alternate daily between losses and gains, the gains started piling up day after day. Cracks that should have triggered another waterfall selloff ended up bouncing even higher instead.

I could have gotten stubborn and dug my heels in like so many other traders that were skeptical of last week’s 20% rebound. But when my initial short trade didn’t work as planned, I had to acknowledge that I could have this backward. When the market refused to collapse in a waterfall selloff Friday, that was a strong indication it wanted to go higher, not lower. When the market opened strong this morning, rather than argue with it, I saw this counter-intuitive strength as a buying signal. Rather than argue with the market and lose money, I plugged my nose and bought the strength instead.

I still expect this market to pullback very soon (maybe tomorrow is finally the day), but as long as this keeps going up, my trading plan is going to keep forcing me to buy it. And for that, I’m thankful.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

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