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Free After-Hours Analysis:

The S&P 500 is perfectly content hanging out between 2,700 and 2,900, a range it’s been stuck inside since early April. As shocking and unprecedented as the headlines have been, it is definitely strange to watch stocks slip into a relatively tight trading range.

Uncertain markets are typically volatile. And without a doubt, this market had its share of volatility in February and March. And by some measures, it is still incredibly volatile with 2% and 3% moves occurring multiple times a week. The difference is now most of these big swings are offset by equally large swings in the opposite direction. One day up, the next day down.

One way to interpret this sideways grind following a strong runup is distribution. Smart money is getting out and dumb money is getting in. And to a certain extent, it is hard to not see that point of view when looking at this stubbornly resilient market. This is the worst economy since the Great Depression, yet the S&P 500 is only down 15%. The Nasdaq even less. Something definitely doesn’t compute.

The next big move hinges on what comes next. Do infection rates continue to moderate? Will the virus largely disappear once warmer summer temperatures arrive? Will a stir-crazy public start going back to their normal routine even without a vaccine? That’s the scenario this optimistic market is pricing in. And so far that is the way things are progressing.

But success in the market doesn’t come from predicting what comes next. It comes from understanding the risk/reward and exploiting skewed opportunities to our advantage. If the market is expecting good things, then most of those good things are already priced in and there is not a lot of upside left for recent buyers. On the other hand, these optimistic projections put a lot of air underneath us if there is even the slightest hiccup along the way. Limited upside and unlimited downside, that’s definitely not a risk/reward skew I want to own, let alone be buying.

I like the way this market is trading and it deserves our utmost respect. Only a fool is stubbornly shorting this strength. But the bear is no more foolish than bull buying stocks with reckless abandon at these levels. Both sides are making the same mistake and allowing their bias to cloud their judgment. While these ideologues are arguing why their side is better than the other, opportunists are grinding out a few bucks from this rally and that dip. Smart money doesn’t care who wins. All they care about is following the market’s lead.

While I don’t trust this market, I know better than to fight it. I’m fully prepared to short this strength, but I won’t pull the trigger until I see those cracks forming. And if those cracks never show up, then I’m just as content grabbing this rebound and riding it all the way back to the highs. It makes no difference to me** as long as I’m making money. (**For the country and front-line workers, I definitely hope this is a sharp v-bottom recovery taking the economy back to the highs a quickly as possible.)

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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

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

May 04

The right way to admit defeat

Free After-Hours Analysis:

The S&P 500 started the day in the red and threatened to extend the losing streak to a third day. But those early lows were as bad as it got and prices eventually rallied into the green by the close.

There are few things more popular in the market than predicting this rebounds demise. And without a doubt, I was on that side too. Markets move in waves and following such a long and sharp rebound, a pullback is inevitable. But the more people called for it, the more the market resisted.

While I’m still cautious around this market, I know better than to fight a market that isn’t doing what it is supposed to be doing. We have to respect this market’s strength and that means being quick to get out of the way. Last Thursday and Friday gave us an opening to short the rebound, but rather than accelerate lower, the selling stalled this morning and we finished near the day’s highs. That tells us supply remains stubbornly tight. No matter what the headlines say, when owners refuse to sell, stock prices defy gravity.

The next pullback is coming, but we need to be extremely careful trading for it. Trading against a trend is one of the most difficult ways to make money because it requires impeccable timing. This is definitely an “experts only” kind of trade. Most people are better off waiting to buy the dip. But for the more adventurous, recognize early when the trade is not working as planned. Use that as your signal to pull the plug. Do it right and you will often abandon a bad trade while it still has a small profit! Very rarely do we need to wait for our stops to be hit before recognizing the trade isn’t working as designed.

That’s exactly what happened to me today. I shorted Thursday and Friday. But when the market was trading resiliently this morning, I used that as my sign to collect my modest profits and wait for the next trading opportunity. I didn’t need to wait for the losses to pile up before admitting defeat. There are few things better actually collecting a profit after being wrong.

Now, who knows, maybe I should have continued to hold my short position this afternoon. But I’m a nimble trader and if the short trade starts working again tomorrow, I can always jump back in. I always find it better to be out of the market wishing I was in than in the market wishing I was out.

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

May 02

What to look for next week and how to trade it

Free End of Week Analysis:

The S&P 500 finished in the red last week but the 0.2% loss hardly seems noteworthy. The optimist will say a six-point loss is laughable. The pessimist will say the lack of meaningful buying is the early signs demand is drying up. Which side is right? While I’d love to tell you, unfortunately, we will only know after it happens.

Momentum or gravity, which wins next week? While I cannot say what direction we go, we are definitely at a tipping point. If this market doesn’t break this week, it isn’t going to break anytime soon and we can quit worrying about it. But if it breaks, it is going to break in a big way. Either no move or a big move, now that’s something I can plan a trade around.

All we need to do is wait for the market to reveal its hand. If it stumbles, short the weakness with a nearby stop. If that initial wave of selling fizzles and bounces, cover and wait for the next opportunity. Just because the first trade doesn’t work doesn’t mean we give up and go home. Sometimes it is the second or third move that finally works. If we don’t stick around, then we let someone else collect profits that were supposed to come to us.

On the other side, if we get to the back half of the week and the selloff hasn’t started, give up because it ain’t going to happen. There is a fine line between patient and stubborn and we don’t want to step over it.

As usual, start early and start small. Regardless of the opening gap, short any early move that stumbles from the opening levels with a stop just above this level. Only add more money after the trade starts working. If we close near the lows, consider holding the position overnight. If the market rallies into the close, take what profits we have and try again tomorrow. If the first trade doesn’t work, get out and try again. And if the bounce is decisive, admit defeat and go long. There is no room for pride in the market, only making money and losing money.

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

Apr 30

What comes next for $TSLA

Free After-Hours Analysis

TSLA exploded higher at the open after first-quarter earnings shocked Wall Street with a healthy sized (paper) profit. Plenty of other contributors are covering the earnings report so I don’t need to rehash the details here. More interesting to me is today’s subsequent price action. After smashing through $800 resistance at the open, that was as good as it got for the stock. The rest of the day was spent giving back all of those gains and eventually skidding into the red.

Since early February, I’ve been saying $800 was a key level for the stock. Back then it was a critical stop-loss for protecting profits following Dec-Jan-Feb’s spectacular surge higher. Then in early March, it became a ceiling for the subsequent rebound and most recently, it was a smart level to be taking swing-trading profits near following the $600 breakout.

After taking profits near $800, the plan was to get back in by either buying the dip to $600 support or a breakout above $800 resistance. With the stock trading in the middle of the $600 to $800 trading range, it could have gone either way. This time it happened to push back to $800 and breaking above $800 yesterday near the close created a buying opportunity.

Everything looked great this morning following the stellar earnings and the market’s initial enthusiasm. But rather than embrace the higher prices, traders started locking-in profits and shorting almost immediately. That’s never a good sign. We want to see follow-on buying, not overpowering waves of profit-taking. That tells us more investors are concerned about these highs than they are excited to chase them. In the “next greater fool” theory of trading, it appears (at least for the time being) we ran out of new fools.

I’m not ready to give up on the stock yet and a rally back above $800 is still buyable. But if prices cannot get back above $800, that tells us demand is a serious problem. If $800 turns into a ceiling, that is a great short entry with a profit target near $600 support.

As usual, no matter which way this goes, start small, get in early with a nearby stop, only add once the trade starts working, and if we get stopped out, consider switching directions and going the other direction. Being wrong is okay as long as we admit defeat early and start preparing for the next trade as soon as we jump out.

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

Apr 29

CMU: Don’t fall victim to binary thinking

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 28

Did this rebound finally crack?

Free After-Hours Analysis

The S&P 500 gapped 1.5% higher at the open, reaching the highest levels since early March. Unfortunately, that was as good as it got and prices skidded back to breakeven in the first two hours of trade. And just as concerning, prices eventually finished near day’s lows.

While the market only gave up a seemingly trivial 0.5% and it remains just under recent highs, it is never good to see the market retreat from a push to new highs. Rather than embrace this strength, traders were more inclined to take profits. That’s the first real sign we’ve seen this rally could finally be running out of enthusiastic buyers willing to keep chasing prices even higher.

Anything can happen on any given day and we shouldn’t read too much into a single day’s price action. But this fizzle is definitely enough to give us pause. And the significance increases exponentially with each additional piece of concerning information we get over the next few days. Maybe the market shrugs this off tomorrow and prices continue rallying. But if we see further weakness develop over the next day or two, this could finally be the start of the long-awaited pullback.

Now I want to be clear, I’m most definitely not calling for a big crash. This market is trading really well and at this point we have no reason to doubt the sustainability of this larger rebound. But at the same time, everyone knows even strong markets move in waves and it is only time before this one experiences a perfectly normal and healthy pullback to support. Maybe this is finally that time. Or maybe this turns into something bigger. Lucky for us, both trades start the same.

If we see more intraday rallies fall victim to waves of profit-taking over the next few days, that is the first signs demand is falling off. If prices bounce and close strong, all is forgiven and forgotten. But if prices keep closing weak, that tells us the pullback is finally upon us. Another midday fizzle gives us a short entry and if prices close near the daily lows, it is worth holding a small short position overnight. But as I said earlier, close strong close and all short trades are off. If this turns out to be another false alarm, no big deal. We cover and try again next time.

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

Apr 27

CMU: When to buy and when to wait

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 24

What to expect from this market next week

Free Weekly Analysis and Lookahead

The S&P 500 lost 1.3% this week and slipped for only the second time in the last five weeks. As bad as the headlines have been, the stock market is holding up amazingly well as it continues ignoring all the critics calling for a pullback.

I will be the first to admit I was among those waiting for a pullback because that’s what markets typically do. Yet, this one is defying the odds. And even that is not that unusual. Markets tend to do the opposite of what the crowd expects. Not because it is spiteful, but because that’s the nature of supply and demand.

When people expect a particular outcome, they naturally trade in anticipation of it. That means all of the people who feared a near-term pullback already sold. Once these cynics abandon ship, there is no one left to sell and supply dries up. Holding true to its contrarian nature, when the crowd calls for a pullback, prices hold up instead.

While I was one of those that expected a pullback three weeks ago, I was also one of the first to change my mind when the market refused to do what it was supposed to do. There are few trading signals more reliable than looking at what a market isn’t doing. A market that refuses to go down is far stronger than most people give it credit for and it deserves our respect. While we don’t have to embrace this market, we definitely shouldn’t be fighting it.

What does next week hold? Most likely more of the same. The market is very comfortable at these levels and it will take something significant to change that. Right now we are in a very bad place but things are improving ever so slightly. Infection rates are starting to slow and some states are starting to relax their restrictions. If we get more of the same next week, expect stocks to continue trading well, which mostly means sideways to slightly higher.

To make a dramatic move higher or lower, we need a significant change in the headlines. Either a huge surge in infections and deaths. Or a cure. Outside of those extremes, expect more of the same, i.e. continuing to defy the cynics.

That said, as nimble individual investors, we shouldn’t be married to our outlook. If the environment changes, change with it. If stocks breakout or breakdown, disregard everything we believed previously and jump aboard the next move. When we disagree with the market, the market is always right.

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

Apr 23

The best way to approach this trading range

Free After-Hours Analysis

The S&P 500 continues consolidating inside the 2,700 and 2,900 range. We’ve been stuck in this region for two weeks following the mammoth rebound from the March lows. Thus far, the market refused multiple opportunities to breakout/breakdown and no matter what the bulls and bears claim, it continues chugging sideways.

It’s been a fantastic run and obviously the market deserves a break following a historic 20% surge. There are two ways markets rest and reset. The first is a more conventional pullback to support. The proverbial, two steps forward, one step back. That’s what a lot of people, myself included, were expecting. But as resilient as this market’s been over these two weeks, most longer-viewed owners are refusing to sell their favorite stocks at a discount. When owners refuse to sell, it makes no difference what the headlines say or what the experts think prices should do.

That said, supply is only half of the pricing equation. While owners are supporting prices by refusing to sell, our upside momentum has been blunted by prospective buyers refusing to pay ever-increasing prices. Owners not selling and those with cash not buying is the recipe for a sideways grind.

Which side caves first? That’s a good question and unfortunately, I don’t have the answer. Bulls have a good case that many states are already starting to reopen their economies. On the other side, bears point to the sharpest economic contraction in modern history and a stock market that’s only down 15%. There’s something definitely wrong with that calculus. Either stocks are way too high or the economy will bounce back a lot quicker than the headlines portend.

Luckily for us, we don’t need to place our bets just yet. As independent investors, our greatest strength is the nimbleness of our size. Rather than commit to one side or the other, we should wait for the bandwagon to start rolling before we jump aboard. Only the partisans need to be right. The rest of us are satisfied collecting a few bucks jumping aboard this no matter which way it goes.

Until proven otherwise, assume any dip to 2,700 will bounce and rally to 2,900 will stall. Buy the bounce off the lower end and take profits at the upper edge. If the market breaks above the highs or breaks under the lows, close those positions and flip the other direction. By staying nimble, we can profit no matter what the market does next.

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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

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 21

Is it finally time to short this market? (and how to do it safely)

Free After-Hours Analysis

The S&P 500 shed 3% Tuesday, adding to Monday’s nearly 2% decline. As well as the market has been trading lately, these two sessions closed nearly the daily lows and their price action stands out like a sore thumb.

Stocks have been defying gravity every since they launched off of the March lows. This has been one of the biggest and fastest rebounds in history and most seasoned observers were skeptical this strength could last given the frighteningly dreadful economic headlines surrounding us. But the same thing could have been said last week and the week before that. And unfortunately, a lot of anxious bears got themselves run over shorting this meat-grinder rebound a little too early.

As I often say, knowing what the market will do is easy, the hard part is getting the timing right and that’s where all the money is made. Without a doubt, this market was going to pull back, the hard part is knowing when. Are we finally at that point? Great question but if we are approaching this the right way, it shouldn’t matter.

Far and away the greatest strength we have as independent traders is the nimbleness of our size. We can go from full long to full short with just a few mouse clicks. We don’t have big money’s army of analysts, supercomputers, or inside connections, but those things are not necessary if we know how to exploit our size. We don’t need to know what the market will do ahead of time because we are fast enough to react to events as they happen. Rather than short the pullback before it rolls over, we can (and should) wait for it to happen before we jump aboard that move lower.

The keys are knowing what signals to look for and then being able to recognize quickly when we get it wrong. Get in, get out, and try again. That’s the formula for our success as independent traders. With that approach, we don’t need to predict the future. We simply react to it as it happens in realtime.

Yesterday’s weak close, this morning’s early dip and finishing again near the daily lows gave us the first interesting overnight shorting opportunity in a while. For several weeks I’ve been day-trading this market because opening gaps have been large and unpredictable. But this is the first time in a while I felt like there was something worth holding.

That said, this trade needs to be done carefully. Shorting today’s weak open gave us a profit cushion going into the close. And more than that, locking-in a portion of profits this afternoon both guaranteed some profits and reduced our exposure by leaving us with a smaller position.

If the short trade doesn’t work tomorrow, it won’t hurt much between the reduced position size, existing profit cushion, and the portion of profits already locked-in. If that’s the case, we get out and try again next time. But if it works, add more at the open and see where it goes. Close weak for the third day and we follow the same formula tomorrow afternoon.

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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

Apr 20

How to trade a market that lost its mind

Free After-Hours Analysis

As unprecedented and historic as this global shutdown has been, it keeps throwing curveballs at us that only a few weeks ago seemed too absurd to even be worth hypothesizing over.

The lastest unprecedented development was the most spectacular collapse in the history of commodity trading. $22 oil was shocking enough. Then we got barrels trading at $8 on the spot market a few days ago. But that was only warming us up for the main event.

People’s jaws were on the floor this afternoon when oil contracts for May delivery fell under one dollar. Fifty cents for 55 gallons of oil? Surely it couldn’t get any worse than that. And moments later, it did exactly that.

Traders were so desperate to avoid taking delivery of physical oil they became willing to pay people to take their oil. That’s just how bad the current situation is. And not just a dollar or two. The day closed with oil trading at minus $37 dollars! That’s right, traders were so desperate to get out of their positions they would pay you $37 for every barrel of oil you take off their hands!

How did one of the most important commodities in the world go from a coveted resource to something akin to raw sewage that requires payment to be disposed of?

But just as shocking as the collapse of May’s oil contract was the stock market’s indifference to it. The neighbor’s house was burning to the ground and the S&P 500 was too busy organizing its sock drawer to even look out the window.

Two months ago, if you told me oil would fall $55 dollars in a single day, I would have expected all financial instruments to be imploding. But not today. Today, it was just another headline the S&P 500 is ignoring.

At this point, we have three options. Argue with the stock market, fall in line, or get out of the way. No one wins an argument with the market, so please don’t do that. For our longer-term investments, buying at these levels still represents a decent discount if we plan on holding for a couple of years. For anything else, get out of the way!

There is a saying in the market, missing the bus is better than getting hit by the bus. If we don’t feel comfortable buying this strength for a long-term investment, there is nothing wrong with sitting this one out and waiting for a better opportunity. Remember, often the best trade is to not trade. Until the risk/reward lines up in our favor, wait patiently on the sidelines. That means waiting until this rebound is breaking down before shorting it. Or for the less aggressive, buying the next dip. But whatever you do, don’t allow yourself to argue with this strength.

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

Apr 17

Free Weekly Analysis and Lookahead

Free End of Week Analysis and Lookahead

The S&P 500 finished the week 3% higher and was the third up-week out of the last four. Equally impressive is Friday closed at the highest levels in six weeks. And not to be overlooked, this week’s spread between the lows and highs was the smallest in two months. As dire as the economic headlines have been, the stock market definitely seems to be coming to terms with our new reality.

Is a relatively modest 15% decline from all-time highs enough to account for the largest economic shock since the Great Depression? At this point, the stock market seems to think so. My Thursday post touched on some of the reasons the market finds itself at current levels, namely most investors believe the economy will bounce back relatively quickly. While this is part of the answer, there are also other supply and demand factors at play.

One of the bigger contributors to this limited selloff is the fact many investors have already lived through stock market crashes. Most of us were around to witness the 2008 Financial Crisis that cut stock prices in half. And the more recent example of 2018’s Christmas massacre that saw stocks tumble nearly 20% between Thanksgiving and Christmas.

What was the biggest takeaway from both of these crashes? Stocks bounce back even higher. Reactive sellers were left behind when the indexes pushed to new highs without them. Regret is a powerful motivator and these investors were not going to make the same mistake twice. Fool me once, shame you. Fool me twice, shame on me.

At least for the time being, many would-be sellers learned to hold through volatile episodes and not succumb to the panicked feeling in their gut. Rather than impulsively sell stocks again, these investors are still hanging on. And so far discipline has been rewarded with prices dramatically above the March lows.

No matter what we think should happen, when confident owners don’t sell, prices don’t fall. While we could see prices slip over the next week or two in a normal and healthy exhale, as long as the selling remains restrained and orderly, any dip is a buying opportunity, not an excuse to abandon ship. Short-term traders can exploit this weakness, but long-term investors should stick to their buy-and-hold plan.

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

Apr 16

What’s going on with TSLA and AMZN?

Free After-Hours Analysis

After weeks of dramatic moves, the S&P 500 finally seems to be getting comfortable at current levels. While we are still experiencing elevated volatility with 1% and 2% daily moves, they have largely been offsetting each other from day-to-day around 2,800.

While the market has been finding its footing, there are a few stocks that have definitely been taking advantage of this calm to reassert their dominance. NFLX and AMZN are inherently well-positioned to do well during these lockdown times because they cater to customers at home.

As expected, these two companies navigated last month’s stock crash relatively well, losing less than the indexes. No surprise there. But then something curious happened Monday. Investors started piling into these stocks with reckless abandon. There wasn’t a definitive headline driving this strength. Instead, retail investors were hungry for something to throw their money at and these two stocks happened to be the beneficiary.

Fundamentally, nothing changed between last week and this week for NLFX and AMZN. Neither one found the cure to the Coronavirus or unlocked the secretes to sustained fusion. These were some of the best run and best-positioned companies last week when no one was paying much attention to them and they are the exact same well-run companies this week. The only thing that changed is they are now popping up every Tom, Dick, and Harry’s stock screen. Nothing attracts a crowd like a crowd and these two mega-caps are the hottest thing going right now.

Of course, this should look familiar to anyone who’s been following the market over the last few months. In late January, we saw the same thing happen with TSLA. A company that was doing well and going about its business when all of a sudden it became the hottest trade in the market, for seemingly no explicable reason. There wasn’t a headline breakthrough. TSLA reported earnings a couple of weeks before and showed a small profit but not much happened after earnings. And then all of a sudden, one day out of nowhere, the stock started racing higher, much like NFLX and AMZN are doing today.

Like TSLA before it, NFLX and AMZN are nothing more than momentum trades. People want to get in because they’re afraid of being left out. They’re not buying AMZN and NFLX because they love the companies. They’re buying them because everyone else is buying them. And unfortunately, these things rarely end well. I warned people to lock-in TSLA profits when the stock slipped under $800 and I definitely hope a lot of readers heeded that advice. As similar as NFLX and TSLA’s stock charts look here, only a fool would expect this to end any differently.

Unsustainable moves are unsustainable. They’re great while they last, but always recognize it for what it is. Stick with what is working and ride this higher, but never let it go to your head. Make sure you stay disciplined and use a trailing stop to protect your profits. No doubt this will pop like all of the other unsustainable surges higher that came before it. Some people will make money and other people will lose money. Make sure you are one of the people who end up on the right side of this trade.

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

Apr 15

Is this market too hot, too cold, or just right?

Free After-Hours Analysis

The S&P 500 gapped lower at the open, making this the fourth consecutive day of large opening moves in opposite directions. One day the bulls are in charge, the next day belongs to the bears. As much passion as there is in the market, both sides have been equally wrong about this one.

Over the last few weeks, I’ve been discussing strategies to trade this rebound. Today I’m shifting gears and will get into why the market is doing what it is doing.

While it isn’t hard to point out a few historical examples of the market getting things wrong, the thing we need to remember is the market is right far more often than it is wrong. These cherry-picked instances ignore all of the other times the market got things right. This also means when the market is not doing what we think it should be doing, the very first thing we should question is ourselves. And even more important than who’s right or wrong, the market determines our profits and losses and by that measure, it is always right. Rather than fall into the argument of why the stock market should be dramatically higher or lower than it is right now, let’s figure out why it is where it is.

Tumbling 20% from the highs of only a few weeks ago is a dramatic move. But these are dramatic time and this kind of reaction is logical and expected. The world looks nothing like it did at the start of the year and that means the stock market should obviously reflect this new reality. Where we run into disagreements is if -20% is too hot, too cold, or just right.

At this point, most investors are encouraged by the moderating infection rates and they are hopeful people can start going back to work in a few weeks. This will require obvious adjustments to our old routines to include social-distancing and protective measures, but it will be a good start that gets most people back to doing what they need to be doing. There will be some outliers like concert venues and movie theaters that will continue suffering from bans on large groups, but the rest of the economy should start thawing soon. Or at least that is the market’s current expectation.

While the upcoming earnings reports will be some of the worst in history, the thing to remember is the market doesn’t care as much about what happened last month or what will happen next month, it is looking six months ahead and wants to know where we will be this fall. As bad as things look now, if the market expects economic activity to be picking back up this fall, that is how it will price stocks today. Everyone knows our economic numbers will be shockingly bad. But that also means we can assume this is already priced in. Just like the market, our attention needs to be focused on is where the economy will be six months from now.

As for this -20%, the bears think we haven’t fallen far enough and bulls believe prices are already too low. Split the difference between these two extremes and we end up right where we should be. That said, it is impossible for the market to stay at one level so we should expect these volatile gyrations to continue for the foreseeable future. But no matter how high or low we go, unless something dramatic happens (i.e. a vaccine is released or a flare-up races out of control), expect these big swings to cancel each other out and for the prices to move mostly sideways around these more moderate levels. That means buying the bigger dips and selling the bigger rebounds for the next six months.

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

Apr 14

CMU: The Art of the Trade

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 13

Don’t count this rebound out just yet

Free After-Hours Analysis:

The S&P 500 stumbled at the open following the long holiday weekend. Coronavirus headlines were actually fairly encouraging with infection rates moderating in a lot of areas. Unfortunately, much that optimism was already priced in during last week’s 12% surge. Now that we are at the upper end of the recent range, the market requires even better news to keep pushing higher and today’s headlines didn’t cut it.

That said, after the morning’s selling ran its course, the market held up surprisingly well. I’ve been one of the countless cynics that are suspicious of this market’s nearly 30% rebound from last month’s lows. But despite the widespread criticism, this market keeps hanging in there. And today’s price action was no different. Rather than devolve into a mass of panicked sellers, supply dried up in late-morning trade and we spent the rest of the day climbing out of that hole. While prices still finished in the red, I actually count this as a win for the bulls. When owners were given the invitation to sell, they shrugged and bought the dip instead. How much longer this lasts is anyone’s guess, but for the time being, the market is still acting well and it still demands our respect.

While odds are high the market will stumble and test support at some point, it doesn’t seem like we are at that point yet. Maybe it finally happens tomorrow, the day after, or even next week. But either way, we need to be careful shorting a resilient market. Lately, I’ve been day-trading this market because I’d rather not be caught on the wrong side of a 3%, 4% or even 5% opening gap. There is still plenty of money to be made trading during regular hours and most importantly, this allows us to exercise prudent risk management by preventing prices from leaping over our stop-losses in the middle of the night. While I might miss some profits when the market gaps in my direction, inevitably, I am also missing those days when it would have run over me instead.

I don’t need to make all of the money, just the easier, lower risk stuff. I’ll leave everything else to the gamblers. If you want to read how I’m trading this market, check out last week’s free posts.

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

Apr 09

Free End of Week Analysis and Lookahead