Free Content Archives - Page 30 of 90

Jun 16

When to get worried about this market

Free After-Hours Analysis:

The S&P 500 rallied for the third day in a row and continues recovering from last week’s devastating 6% tumble.

One large bearish collapse followed by three smaller bullish responses. Which signal is legitimate and which is misleading? That’s the question everyone wants the answer to.

Thursday’s crash was the worst day since the original Coronavirus meltdown. What started as a disappointing open quickly morphed into a mad dash for the exits. But as quickly as the selling started, it exhausted itself and stocks have already recovered a big chunk of those shocking losses.

If there is one thing we know about crashes, they are breathtakingly fast. No one has time to think and if you pause even for a second, you get run over. That’s what occurred Thursday. But rather than extend the panic selling the runaway selling like we saw back in March, the subsequent price action has been far more orderly and thoughtful.

Few things calm nerves like rising prices and the last three days of gains has a lot of people feeling better. Last Thursday’s second thoughts are quickly fading from memory and confidence is returning.

As I wrote previously, until further notice, we give this rebound the benefit of doubt. Trends continue countless times but they reverse only once. Going strictly off the probabilities, last week’s dip was far more likely to bounce than it was to continue. And that’s exactly what we are seeing.

And as long as this market remains above 3k support, we continue giving it the benefit of doubt. Fall under this level and all bets are off.

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Jun 11

Is this the start of the end, or just another buyable dip?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

It was a dreadful day for the S&P 500. In fact, this nearly 6% loss was the worst day for the index since the depths of the Coronavirus collapse back in March.

There was no definitive headline driving today’s selling. Instead, this was one gigantic tidal wave of second-guessing that hit all at once. Between the struggling economy and signs of a second wave of infections in Asia, many investors slammed on the brakes and those second-thoughts were contagious.

As well as the market has done over the last few months, it is was actually surprising it took this long for stocks to take a meaningful step-back. But as I’ve been writing, investors have largely been ignoring headlines and this remains an emotionally driven market. Those blinders propelled us on the way higher and this group-think contributed to today’s simultaneous, mega-collapse.

But as bad as today felt, did anything change? No. The economy is still in shambles and a second wave of infections is inevitable. All things we knew yesterday and none of this is new to anyone. If these things didn’t matter before, then it probably doesn’t matter now. Stocks made a huge run since the March lows despite these fears and periodic waves of profit-taking like this are inevitable.

But just as important to this market is the nearly unlimited amount of money and resources governments are throwing at this problem. If we learned anything over the last decade, it’s that stocks absolutely love free money and by that metric, the good times are still rolling. The free money is flowing out of control and despite today’s temporary dip, expect those unprecedented flows to keep propping up stock prices.

This pullback was long overdue, but this was just a normal and healthy step-back on our way back to all-time highs. This is not the start of some much bigger collapse. Expect this selloff to bounce like every dip that came before it this spring. If the bounce doesn’t occur Friday, then look for it early next week.

But just because this market will bounce doesn’t mean we should ride this wave lower. Every responsible trader uses stops to protect themselves in case they are wrong. Earlier this week I suggested last Thursday’s close was a good level for a trailing stop. We undercut that level early in the day and that was our signal to get out no matter what we thought was going to happen next.

Now that savvy traders are in cash, it is time to start looking for the next buying opportunity. If prices bounce tomorrow morning, test that opening strength with a small buy and stop under the early lows. (It doesn’t matter if we open red or green, just which direction the market moves after the open.) If prices rally through the day, keep adding more. If prices finish near the daily highs, hold over the weekend.

On the other end of the spectrum, if prices fall from opening levels tomorrow morning, stay in cash and wait for the bounce. (An aggressive trader can short the weakness, just stay nimble and take profits early and often) As bad as today felt, traders should be excited to see this volatility. As much fun as it was riding this spring’s wave higher, we make a lot more money from this back-and-forth.

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Jun 10

Is it too late to buy TSLA?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

TSLA broke through $1,000 for the first time ever and is 250% above its March lows. That’s one heck of a ride for anyone lucky enough to catch it.

I will be the first to admit I’m not a big TSLA bull. It’s an expensive stock and prone to wild swings. But those same wild swings that give bulls and bears so much to argue about are the things swing-traders dream of. Who cares which side is right as long as the stock keeps giving us these huge, tradable swings.

Back in early May, I told readers this stock was buyable if it could get above $800 and hold those gains:

This is a strong sign and breaking through resistance in a sustainable way seems inevitable. That means the most likely next move is higher and if we get through $800, then all-time highs near $1,000 is the next stop.

Well, here we are! Now the big question everyone is asking is what comes next? This is a red-hot stock and there is a very good chance this is another bubble. While that scares some people, what should we be doing when we see a bubble? Why, buying it, of course! What a silly question.

Ride this thing higher with a trailing stop just under $1k and enjoy the profits. Obviously, the safer time to jump aboard this move was back at the $800 breakout. But for the more adventurous, this is still buyable with a stop just under $1k. That said, late buyers should be prepared to get squeezed out a few times by false alarms and whipsaws. But as long as you are committed to buying back in every time the stock pops back above $1k, you will be in the catbird seat for the next leg higher. A few small losses are no big deal if we are there to catch the next big move. $1,200 here we come!

Now that all the hype is out of the way, make sure you keep your head screwed on tight. Just because $1,200 seems likely doesn’t guarantee we will get there. Stay disciplined and always keep a nearby stop just in case we get this one wrong. If we get stopped out prematurely, we can always jump back in when prices recover. But losses, those are forever and we want to avoid them to the best of our abilities.

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Jun 09

The warning signs we need to be looking for

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 experienced its biggest dip in nearly three weeks. As bad as that sounds, the losses were modest and only pushed the index back to levels that were fresh highs two days ago. If we want to find other signs of resilience, the Nasdaq bucked the trend and actually closed at the highest level in its history. Even our bad days are not very bad and that’s been a very good thing for anyone who still believes in stocks.

At this point, the S&P 500 is so close to all-time highs that testing this level seems inevitable. What happens after we get there is still up for debate, but the market tends to go where people are looking and the next big milestone is all-time highs. Stating the obvious, this is a very bad time to be short stocks.

In my previous free posts, I explained why this market is headed higher. As long as prices keep making higher-highs, everything is going according to plan and we have nothing to worry about. But everyone knows all good things eventually come to an end and this strength will be no different. Today I’m going to describe the warning signs we need to be looking for.

Maybe the next dip will be headline-driven. Or maybe demand will dry up as we run out of new buyers willing to pay even higher prices. Either way, hints of the next meaningful dip will first show up in the form of weak closes.

The final hour of trade is when intuitional traders make their moves and where we first see any shifts in their outlook. More than red or green closes, what really matters is how prices moved in the final hour of the day. A good day can finish red or a bad day can still finish green. What we are looking at is which direction and how strongly we moved in the final hour. Are we above the early lows, like today? That is a good day even when we finish red. Did early strength fizzle and close well off the highs? That is a bad day even if we closed in the green.

The other meaningful signal to look for is a series of lower-highs and lower-lows. If every good day is slightly less good than the one before it, that tells us large institutions are taking profits, not adding more money. If big money is selling, then we should be moving out the door too.

Right now we don’t have anything to worry about because the market keeps closing strong and making higher-highs. But the best time to plan what comes next is before it happens. If you are ready and prepared for what is coming, you will never be caught off guard.

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Jun 08

Are all-time highs inevitable?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

It’s been six days since I wrote the free post titled “Why this market is still buyable“. Back then the S&P 500 was 10% short of all-time highs. Today, we find ourselves only 5% away from that “unthinkable” mark.

As I wrote back then:

This paradox largely comes down to expectations of a quick recovery combined with unprecedented levels of government stimulus. As bad as the economy looks today, when governments are throwing unlimited resources at the problem, that’s enough to placate investors.

Nothing’s changed since then and is why prices keep marching higher. At this point, why argue with what is working? The index is almost certainly headed back toward all-time highs and the only real question is what happens after we get there. But as nimble traders, we can worry about that when we get there. Until then, enjoy this ride higher and keep moving your trailing stops up. Right now, some stops near Thursday’s close and another portion near Friday’s intraday lows look to be be pretty good levels.

Now, maybe this rebound is getting a bit too obvious to everyone and that causes these gains to stall short of all-time highs. But as long as we respect our stops, it won’t be a problem. In fact, for the disciplined and nimble trader, near-term dips are simply another profit opportunity.

As the cliche goes, “plan your trade and trade your plan”. Until something changes, keep giving this market the benefit of doubt.

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Jun 02

Why this market is still buyable

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 continues racing ahead of the economy and is now less than 10% from all-time highs. The fastest economic contraction since the great depression and stocks are only down single digits? That’s the world we live in.

As I’ve written previously, this paradox largely comes down to expectations of a quick recovery combined with unprecedented levels of government stimulus. As bad as the economy looks today, when governments are throwing unlimited resources at the problem, that’s enough to placate investors.

As much as it seems like this market is ripe for a near-term dip and consolidation, it keeps chugging higher instead. I took some profits last week because that is always the smart thing to do following a strong run, but this week’s strength tells us it is already time to get back in. Maybe we are getting close to the top and these latest purchases will get stopped out prematurely. Or maybe this thing still has room to run. Either way, as long as we are thoughtful with our trading plan, entry points, and stops, we will be in good shape no matter what the market does.

As long as prices remain above last week’s close, this market is still ownable. If prices fall under this level, shift to a more defensive stance to protect our profits. We only make money when we sell our winners and it is foolish to let a good trade evaporate before our eyes. As nimble traders, it is far easier to get back in than it is to will the market higher after it took back all of our paper profits.

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Jun 01

Is TSLA’s breakout the real deal?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

It took a while, but TSLA finally broke away from $800 resistance. The stock first returned to this key level in late April but it has been suck drifting mostly sideways ever since.

As I wrote back in April, the first time we rallied to $800 was a great time to lock-in profits following a soilid breakout from $600. We only make money when we sell our best positions and anyone insisting on more than 30% over a couple of few weeks is definitely getting greedy.

The great thing about taking profits proactively is we can always get back in. When the stock held firm near $800 instead of hitting its head and retreating, that told us this was still buyable as long as prices held above $800. There were a few wobbles along the way, but whipsaws are part of this game and only a problem if we get discouraged and give up. The patient investor that stuck to their trading plan was finally rewarded with today’s nice pop. As the saying goes, better late than never.

Maybe this is the breakout we’ve been waiting for. Or maybe it is nothing more than a sympathy pop because Elon’s other company, SpaceX, made history this weekend after it safely launched astronauts into space. Either way, TSLA’s breakout is a good trade to participate in as long as we jumped aboard closer to $800 and have a stop near this level. In fact, those that have profits in this should at the very least move their stops up to their entry point, giving them a (mostly) free trade.

If TSLA’s strength was due to nothing more than a SpaceX sympathy plan, the air will probably come out of TSLA over the next few weeks and prices will retreat back to $800. If we bought right and moved our stops up, no big deal. It was a good trade and totally worth trying. That’s because the other possibility is a follow-on surge of buying that rechallenges $1k resistance. Win and we make money. Lose and we get out at our entry-level. Hard to argue with that risk/reward. While I don’t know if this breakout is the real deal, my trading plan has me covered no matter what happens next.

Looking ahead, if the stock rallies up to $1k over the next few weeks, that’s our chance to do this all over again. Take profits near the next resistance level and wait for prices to dip. If they don’t, then we have to greenlight to buy the next breakout.

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May 29

How much life is left in this rebound?

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis and Lookahead:

The S&P 500 extended its weekly win streak to three out of the last four and finally reclaimed the 200dma for the first time since early March. As much as it feels like the wheels are coming off the global economy, the S&P 500 is completely oblivious and 10% shy of all-time highs. (The Nasdaq is only 4% away.)

As much fun as it was watching the market rally 40% in two months, we need to keep our expectations in check. There is no way we will do another 40%. Even collecting another 10% to get back to all-time highs will be challenging. While this feels like an invincible market, someone always gets left holding the bag. Now don’t get me wrong, I’m not a bear or anything close to that. But I have been doing this long enough to know that we need to be really careful when this feels too easy. By the time this resilience is obvious to everyone, it is getting really late in the game.

Without a doubt, momentum can keep carrying us a little higher, but this is definitely a better place to be locking-in swing-trading profits than chasing prices higher. If we are in this to make money, the only way to do that is by selling our favorite positions. Being proactive usually means selling too early, but if we assume it is impossible to consistently pick tops, that means we either sell too early or we sell too late. I like selling too early because that leaves me in the best position possible to take advantage of the next opportunity. When everyone else is debating whether they should bailout, I’m looking at a buyble the dip.

But that’s just me. You do what’s right for you. As nice as this ride has been, it is probably time to start planning our exit. Whether that means selling proactively on the way up or following the market with a trailing stop and getting out on the way down, it doesn’t matter as long as you pick something. And even better, do a little of both! Take some profits proactively and hold the rest with a trailing stop. But whatever you do, don’t be that guy left holding the bag.

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May 28

Is it finally time to start locking-in profits?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 continued climbing this morning and notched yet another higher-high for this unprecedented rebound. But just as the market was looking invincible, concerns about the long-forgotten Chinese trade war started seeping back to the forefront.

The last two weeks have been a great run as the market ricocheted off the May lows. The index bounced 300-points over a handful of days and as good as that felt, everyone knows this cannot continue indefinitely. Savvy traders buy weakness and sell strength. Now that this resilience is obvious to every Tom, Dick, and Harry, maybe it is time to start taking some profits off the table.

As I wrote yesterday, this is definitely late in the game to be adding new money. And given today’s weak close, it might also be time to start thinking about locking-in some profits too. Maybe that means taking profits proactively. Maybe that means tightening up our training stop. Or even better, a bit of both.

Wednesday’s lows look like a good spot for a trading stop. Fall under that level in early trade tomorrow and we should definitely be moving to a defensive posture. On the other hand, if traders forget about this afternoon’s fizzle and start piling back into the market as they have done countless other times during this rebound, stick around and let those extra profits come to you.

Everyone knows markets move in waves and it’s been a good run. Rather than get greedy or become complacent, start eying the exits. If we get squeezed out by a false alarm, no big deal. Just buy back in when prices resume their uptrend. But if prices fall further, even better, that gives us another opportunity to buy the dip.

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May 27

Is it still safe to buy this rebound?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

As unpopular as this rebound has been with the cynics, it could care less and keeps chugging higher. We saw the market rebuff another selloff attempt today. A promising pullback had a good start as the indexes skidded into yesterday’s close and then followed that up by converting a nice open this morning into a bearish reversal before lunchtime. As ominous as this price action looked, most owners shrugged and continued holding. When confident owners don’t care, headlines and worrying price action stop mattering. As long as confident owners keep holding stubbornly, every dip fizzles and bounce within hours.

Now obviously this cannot last forever, but this is our reality and we need to keep giving this rebound the benefit of doubt until it proves otherwise. What could have started the long-awaited pullback unsurprisingly turned into yet another push higher.

This two-week-old bounce has been a great trade for readers who had the wherewithal to buy two weeks ago at much lower levels. But what about the people who missed this move? That’s a much trickier question to answer.

With a couple hundred points of profit cushion acting as a buffer, proactive dip buyers have time on their side. Keep following this move higher with a trailing stop and let the profits come rolling in. But what about the guy who missed that initial move? Is it too late?

Unfortunately, this is a much riskier level to be buying in because prices have already realized a big portion of their near-term gains and pushed the risk/reward away from us. Buying these higher levels exposes us to a fair amount of risk and with each passing day, the profit opportunity gets smaller and smaller.

Sometimes the best trade is to wait for a better trade. I really like the way the market is trading here, but for anyone still out of this market, it is better to wait for the next lower-risk entry point. It will come along sooner than you think.

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

May 26

The real reason this market is defying gravity

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 popped 2% at the open on the first day back from the long Memorial Day weekend. Governments around the world continue relaxing their economic restrictive policies. But even more important, they keep pumping out free cash. It’s gotten so excessive that some people are actually earning more on unemployment than they were in their jobs.

If we only learned one thing from the market over the last decade, it loves free money. As long as the Fed, ECB, and other governments continue handing out free money, expect stock prices to defy gravity. Why fight what is working?

Which is exactly what I wrote last week:

“when a market is trading this well, we follow those signals and keep jumping aboard the bounces. I have no idea how much longer this rebound can continue defying gravity, but as long as it keeps telling me it wants to go higher, I have no choice but to grab on and enjoy the ride.”

Unfortunately for the stragglers, now that the market is nearly 8% above the lows from two weeks ago, the easy money is behind us. Anyone waiting to buy the “confirmation” is putting themselves at risk of a very normal and healthy near-term dip. Two-steps forward, one-step back kind of thing. As much as I harp on this, the safest time to buy is when it feels the most risky. Buy the bounce early when you can place a sensible stop a nearby stop. If we’re wrong, we get dumped out for a small loss. If we’re right, we make big bucks and are sitting on a pile of profits when everyone else is debating whether it is too late to get it.

Is it too late to buy? I have no idea, but I will keep riding this as long as it keeps going higher. My stops are at Friday’s close and we’ll see if this afternoon’s late tumble into the close turns into anything more significant than the failed dips last week. Maybe we test Friday’s close and maybe we don’t. But for those of us with a profit cushion, riding these routine gyrations will be far easier than anyone who chased this strength today and bought high.

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

May 23

Should we be shorting this strength?

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Lookahead:

This was a good week for the S&P 500 and it logged a 3.2% gain. That said, nearly all of those gains occurred Monday morning at the open when prices snapped back from the previous week’s dip. Following those early gains, the market spent most of the week drifting sideways. But given how dreadful the economic headlines are, sideways is an impressive achievement in of itself.

Two weeks ago the market pulled back as much as 6% in the biggest test of this rebound. But rather than crumble, prices bounced back to set even higher-highs. Instead of caving to the pressure, this resilient market keeps grinding higher.

There is an endless stream of cynics criticizing this market for refusing to go down. But rather than argue with this strength, wouldn’t it be smarter to profit from it? That’s one of the things I don’t understand about many traders. They frequently accuse the market of being “rigged”. Well, if you know the market is rigged, instead of complaining about it, why don’t you turn those insights into a few bucks? If we know this Covid market is “broken”, rather than argue with it, why not use this knowledge to make some money?

I’ll be the first to admit I’ve been suspicious of this rebound and have been wary of the “inevitable” pullback. But as long as this market keeps trading well and is grinding higher, I have no other choice but to respect that and give it the benefit of doubt. There is nothing wrong with shorting the cracks when they form, but we need to be quick to lock-in profits because it gets ugly real quick if we stubbornly hold a losing short too long.

But more than question this strength, when a market is trading this well, we follow those signals and keep jumping aboard the bounces. I have no idea how much longer this rebound can continue defying gravity, but as long as it keeps telling me it wants to go higher, I have no choice but to grab on and enjoy the ride.

Until we get a string of dreadful closes or start a new pattern of lower-highs, we must continue giving this market the benefit of doubt. There will be inevitable down-days along the way, but as long as there is more up than down, this rebound is alive and well.

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May 21

Was today’s down-day a warning signal or no big deal?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Obviously, many up-days are good days and down-days are bad days. But don’t overlook the fact there are also bad up-days and good down-days. Where in this matrix did today’s price action land? Good question.

Stocks rebounded nicely from last week’s modest selloff and set two fresh higher-highs this week. There are few things more bullish than responding to an attempted dip with higher-highs. Not only did the market refuse to breakdown, but prices resumed rallying to even higher levels.

That said, the market stumbled into Tuesday’s close. A waterfall selloff in the last hour of trade is always something to be wary of. If we get a few too many weak closes in a short period of time, that tells us big money is getting out and we shouldn’t be far behind. But rather than extend Tuesday’s weak close, the index bounced even higher Wednesday. All clear right? Well…not so fast. In a bit of groundhog day, today’s price-action produced another weak close. Is this second weak close something we should be worried about?

No, and I’ll tell you why. First, the weakness developed early in the day and rather than trigger another waterfall selloff, supply dried up and prices drifted sideways for the remainder of the day. The all-important final hour of trade was more flat than anything and that told us big money wasn’t abandoning ship today.

The second thing to keep in mind is down-days are a very normal part of every move higher. In fact, I get nervous if we go too long without a normal and routine down day. They are healthy and they keep uptrends healthy sustainable.

The short answer to the original question is today was a good down-day. There was nothing unusual or noteworthy about today’s 0.78% loss. That means the path of least resistance remains higher and there is no reason to worry about today’s very benign down-day. Until further notice, continue giving this rebound the benefit of doubt.

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May 20

Trading wisdom for the cynic in each of us

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 bounced back from yesterday’s late-day tumble. But this was expected. As I wrote yesterday:

I don’t see any reason to expect today’s late selloff will turn into anything more dramatic. Last week’s dip was our best chance to crack this rebound. If bears couldn’t get it done with a far better setup, I doubt they have what it takes this time around.

And not only did the market shrug off yesterday’s dip, it went ahead and set yet another high water mark for this rebound. As bad as the economy is today, investors are encouraged by the modest improvements and are forecasting a far better outlook six months from now.

There are two ways to approach any market. Trading what we think “should” happen, or trading what “is” happening. As obvious as the correct answer is, far too many people get caught arguing with the market. There are a million reasons this market should be lower (30 million reasons if you count the job losses!) Yet this market keeps grinding higher. The worst economic contraction in modern history and stocks are barely down 10%. Surely something is broken.

And you know what, something probably is broken. But when the market is broken, we go with it, we don’t fight it. The only other option is to get out of the way. At this point, a mountain of stubborn bears have been bankrupted by this rebound. The more they resist, the more they lose. Now, maybe at some point they will be proven right. But most of them will be long dead and buried by then and that small victory won’t matter.

No doubt this market will go down at some point. But this is most definitely not that point. Until then, expect every dip to be quick and shallow. If this rebound was going to break, it would have happened by now. It is okay to disbelieve this market. But it is not okay to trade against it.

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

May 19

Is today’s late selloff a warning sign?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 finished in the red for the first time in three sessions. That said, today’s losses only gave up a small portion of yesterday’s gains. So far the rebound is fully intact and prices are just shy of the rebound’s highs. As long as this market keeps making higher-highs, everything remains on track.

While a 1% loss doesn’t mean much by itself, the one noteworthy attribute of today’s pullback is almost all of the selling occurred in the final hour of trade. This is when the largest institutions trade and almost all of their participation seemed to involve selling.

How much of that was swing-traders locking in recent profits and how much was fearful owners looking to get out before the next fall? We won’t have a conclusive answer for a few days, but here is what to look for. If it was simple profit-taking, then this is nothing more than a fleeting bout of indigestion and this weak close won’t amount to anything meaningful. On the other hand, if this is more chronic nervous selling, it could become contagious and trigger follow-on waves of defensive selling over the next few days.

Which is it? Well, since the market rebuffed a far more promising selloff opportunity last week, I don’t see any reason to expect today’s late selloff will turn into anything more dramatic. Last week’s dip was our best chance to crack this rebound. If bears couldn’t get it done with a far better setup, I doubt they have what it takes this time around. Last week’s bounce ended, continuing the trend of higher-highs and bulls remain fully in control as long as prices remain above Friday’s close.

Unless we see an extension of today’s waterfall selling, the path of least resistance remains higher. While I don’t have a problem shorting the next promising crack, remember, shorting is going against the trend and it must be done with extreme caution. That means starting small, keeping nearby stops, and admitting defeat early. Just ask anyone who held a short over the weekend what it feels like to give a short trade “a little more time”.

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

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 14

Know when to hold ’em and know when to fold ’em.

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 stumbled into a 2% hole not long after the open and it looked like the previous two days of selling was only just the beginning. The economy shed another three million jobs last week but as bad as that sounds, it wasn’t materially worse than the headlines we’ve been dealing with over the previous two months. If last week’s three million jobs lost didn’t dent the rebound, why was this week’s numbers any more significant? And that’s the conclusion investors came to as prices bottomed in midmorning trade and spent the rest of the day powering higher, finishing more than 3% above those early lows.

Is this week’s selloff already over? It sure appears like it. Rather than look at what the market is doing, I prefer looking at what it is not doing because often that is far more insightful. Far and away the most striking thing the market is not doing is selling off in the face of the most severe economic contraction in our lifetime. Rather than argue with what the market is not doing, we need to be savvy enough to recognize and respect the significance of the market’s defiance.

I’ve been there right alongside the crowd questioning the logic of this unbelievable rebound. It doesn’t make any sense. But that is also the reason we need to fear it. When the market disagrees with us, we are always the one that’s wrong, if for no other reason than the market is far more powerful than we are. If this market wants to trade strong, there are only two options, hop aboard or get the hell out of the way.

That said, even I couldn’t resist the urge to look for cracks in this facade. There is a lot of air underneath is and if this breaks, it could get ugly. I shorted the dreadful close two days ago and was adding to my short position yesterday. But rather than stubbornly stick with that trade this afternoon, I saw it was moving the wrong direction and I had no choice but to bailout. We don’t need to wait until our stops are hit to recognize when a trade is going off the rails. This morning was the perfect setup to extend the selloff. Instead, supply dried up and dip buyers flooded the market. That was my signal to lock-in the short profits I had and even get a little long.

If today’s bounce fizzles, I can always get short again. But if this strength persists, it will put a lot of shorts in a very uncomfortable position. As the saying goes, it is better to be out of the market wishing you were in, than in the market wishing you were out.

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

May 13

Why this dip might be different

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 stumbled on Wednesday for the second day in a row. While economic headlines haven’t changed in a material way, the market’s previously upbeat mood seems to be shifting more cautious the last few days.

Is this finally the long-awaited pullback? Maybe, but prices still remain within a few percent of the rebound’s highs. To this point, the market resisted every other invitation to sell off, including the highest unemployment rate since the Great Depression and the fastest contraction in corporate earnings ever. If those shocking headlines couldn’t break this market, why should “a little cooling” off be any more successful?

As I often write, headlines only matter when they convince owners to sell. This time around, confident owners didn’t flinch during the latest employment report or when the appalling second-quarter earnings were released. Since confident owners didn’t care, the headlines didn’t matter.

But we also need to remember, supply is only half of the pricing equation. No matter how confident owners are, if we start running out of buyers willing to push prices even higher, then we also have a problem. The difference is oversupply happens quickly while running out of demand is a more gradual process. Rather than crash lower following an unnerving headline, flagging demand shows up more often as a gradual series of lower-highs and lower-lows. Are we at that point? Maybe, but it is a little too early to say conclusively.

For the time being, we can continue to short this weakness as I described in yesterday’s post. But until further notice, we need to be very careful shorting such a strong market. More specifically, that means if the short trade isn’t working, get out immediately and don’t wait for it to start working. A whole lot of bears shorted this market at much lower levels and their patience with a losing position only added to their misery. Counter-trend trades are one of the hardest ways to make money in the stock market and that means we need to be extremely nimble. Keep a nearby stop and be willing to admit defeat quickly. If the selloff resumes after we get out, we can always put the short trade back on. As the popular saying goes, it is better to be out of the market wishing you were in than in the market wishing you were out.

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

May 12

The start of something bigger or more of the same?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 opened with modest gains, but that was as good as it got and prices quickly retreated back near breakeven, where they remained through midday. Unfortunately, the situation got even dicier after Anthony Fauci testified to Congress that he felt many of the states’ reopening were acting prematurely given federal infection and testing guidelines. Any threat to the recent wave of economic reopenings put investors on the defensive and stocks ultimately finished 2% lower following an acute wave of selling into the close.

Stocks have been trading really well the last few weeks, rebuffing every bearish headline and they continued hovering near the rebound’s highs despite the economic carnage surrounding us. Did today’s late-session selling change anything? Or is this more of the same and the rebound will be back to normal tomorrow?

This is one of those half-full, half-empty situations. How you feel about this market determines how you view today’s late swoon. Bulls think this is more of the same and are not worried. Bears are hoping this is finally the long-awaited pullback.

Which side is right? There are legitimate cases for both outcomes and unfortunately, only time will tell. That said, just because we don’t know what happens next doesn’t mean we cannot come up with a sensible plan to trade it. We know this market will either breakdown or it won’t. If it breaks down, we short it. If it doesn’t breakdown, we don’t do anything. Pretty simple, eh?

Pick a level tomorrow, maybe the market’s open. If prices fall under that mark in the first 30 minutes, short it with a stop just above the early highs. On the other hand, if prices rally above the opening levels, don’t do anything unless prices retreat under those early levels. That’s where go short with a nearby stop.

If this market is finally breaking down, it will be spectacular. If we get anything short of spectacular Tuesday or Wednesday, then the status quo remains in effect and this is still a strong market. If there is one thing bears learned over the last few weeks, we definitely don’t want to short a strong market.

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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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What’s a good trade worth to you?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

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