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Why we should have seen this coming

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 treaded water on Thursday following four consecutive days of gains. This week’s rally leaves us at the highest levels since March and puts us within a few percent of all-time highs. That’s a long way from the panic selling that gripped markets in early February.

I know I sound like a broken record when I keep saying this is a strong market, unfortunately a lot of people didn’t believe me when we were 200-points lower. That is the biggest frustration with trading, by the time the answer is obvious, it is too late to profit from it. But for those of us paying attention, it is possible find the answers long before it is obvious to everyone else.

The following is a quote from my free blog back in early May, the day the market crashed under the 200-dma and 2,600 support and many were fearing the start of a much larger selloff:

“As I’ve been saying since February, we are in a trading range. That means buying weakness and selling strength. Stick with what is working until something changes. Did something change today? Nope. That means today’s weakness was a buying opportunity, not a chance to bailout “before things get worse”. Maybe we slip a little further, but that’s not a big deal. Remember, risk is a function of height. The lower prices go, the less risky it is to buy. If this market wanted to crash, it would have happened months ago. There have been more than enough excuses to send prices tumbling. Instead, every time we slip to the lows, supply dries up and prices rebound. This is a resilient market, not a weak one. And the only people losing money are the ones overreacting to these gyrations. They lose money buying when they feel confident (high) and sell when they are fearful (low). If we want to make money, do the opposite of most people. That means buying fear and selling confidence.”

Since I wrote that, the market is up 7%. I don’t have a crystal ball, but I’ve been doing this long enough to know what is real and what is market trickery. Last months selling was misleading because it was being driven by recycled headlines; Fed rate hikes, rising interest rates, Trump’s trade war, and the growing Muller investigation. All of these are real risk factors, but they became priced-in when they originally came out earlier in the year. The first and second time these stories flared up, waves of nervous owners bailed out of the market. These nervous sellers were quickly replaced by confident dip buyers who demonstrated a willingness to hold these headline risks. Out with the nervous and in with the confident. It didn’t take long for us to run out of nervous sellers and the third and fourth time these stories flared up, there was no one left to sell a recycling of these stories. When no one sells the news, we stop going down. And that is exactly what happened in early May and the same thing happened again last week.

Market selloffs are brutally quick. Hanging at these levels through countless waves of recycled headlines told us we had nothing to worry about. The most important thing to remember is we trade the market, not the news. Headlines cannot be bullish or bearish, only people’s reaction to them is what determines if they are good or bad for stock prices. And so far, everything looks pretty good.

But no one wants to hear what the market did last month since it is now obvious to anyone looking at a chart. What people want to know is what is ahead of us. I wish I could say everything looks great and we will surge another 200-points from here over the next few weeks. Unfortunately the market doesn’t work that way. In fact, most of the time it works the opposite way. Risk is a function of height. No matter how scary it felt in early May, that was one of the least risky times to buy stocks this year and the subsequent rebound proved that. But after that rebound put us at the highest level in months, the risk/reward looks far different. Everyone feels great because we rebounded off the lows, but that actually makes this one of the risker times to be buying stocks this year.

Momentum and the path of least resistance is definitely higher, but this is also the slower summer months and we are quickly approaching 2,800 resistance. That makes this a better place to be taking profits than adding new money. Anyone who bought last month’s dip should definitely start thinking about locking in some of those gains. Those that missed the rebound should let this one go and resist the temptation to chase prices higher. I’m most definitely not calling a top or predicting a large pullback, but a cooling off would be normal and expected. Everyone knows markets move in waves; unfortunately most forget that in the heat of battle.

As well as S&P500 has been doing, the FAANG stocks have been doing even better, pushing the Nasdaq to record highs this week. Back in April I wrote the following about the FAANG stocks following a particularly painful down-day:

“Everyone’s favorite FAANG stocks got hammered today. But this isn’t a surprise. These highfliers magnify the market’s move in both directions. They go higher than everything else, but that also means they get hit the hardest on bad days too. Weeks ago people were begging for a pullback so they could get in. The market answered their prayers. The question is if any of those people have the courage to buy. While we could see a little more near-term weakness, months from now people will be kicking themselves for not buying more at these levels.”

Here we are a couple of months later and no doubt people are kicking themselves for not taking advantage of those discounts. Maybe next time……

And just so people don’t think I’m a perma-bull, here is my bearish call on Bitcoin from several weeks ago, just after BTC slipped under $9k support:

Bitcoin is a completely different story. Last week’s $9k support has turned into this week’s $8k support. And thus far it is giving every indication that $7k will become next week’s support. I hope you see the trend here. Cryptocurrencies are still very much in a downtrend and we should expect lower prices. It takes most bubbles between 6 and 24 months to finish bursting. If bitcoin is like most bubbles, that means the worst is still ahead of us and we should expect lower-lows over the next few months.

And unfortunately things don’t look any better now that we have dipped to $7k support. This cryptocurrency had a very ugly May and it looks like things will only get worse. This is a long-term downtrend and lower lows are still ahead of us. Breaking $7k support will trigger to another wave of selling, but the fear won’t strike in earnest until we undercut the $6k lows. Remember, double-bottoms are a common and powerful reversal pattern. But there is a reason why no one talks about triple-bottoms, because they are not a real thing. Hit bottom three times and you are headed much lower.

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Jani

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Does Italy change anything?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 crashed under 2,700 support Tuesday following a political flare-up in Italy. A populist movement is taking hold that threatens Italy’s membership in the EU and common currency and these headlines were enough to send global markets into a tailspin. Losing one of the largest economies in the EU and euro could be a fatal blow to entire union. These headlines echo Grexit and Brexit of years past. While both of those past episodes avoided the worst, it isn’t hard to imagine the economic devastation a collapsing EU would cause and is why markets are understandably jittery.

Owning stocks is risky. There is no way around it. Last week the stock market was acting well and even negative headlines surrounding rate hikes, interest rates, trade wars, and North Korean tensions couldn’t dent this teflon market. But the thing about all of those headlines is they had been in the news for months and were largely priced in. Anyone who feared those stories bailed out months ago and were replaced by confident dip buyers who demonstrated a willingness to hold these risks. After a period of turnover, we ran out of fearful sellers and recycling old headlines stopped bothering the market. When no one is left to sell a headline, it stops mattering. There are few things more bullish than a market that refuses to go down on bad news. And that is where we finished last week.

But that was then and this is now. These Italian headlines are new and unexpected. Few saw this coming and if the crowd doesn’t know about something, then by rule it cannot be priced in. That is what makes these Italian headlines a far more serious threat to stock prices than rate hikes, interest rates, trade wars, and North Korean summits. Sometimes we can ignore the news, other times we need to snap to attention and take them seriously. These new and unexpected Italian headlines most definitely deserve our full attention.

While Italy’s departure from the EU would most definitely be disruptive, this is a binary, black swan event. Either it happens or it doesn’t, and the chances of it happening are extremely remote. We saw similar episodes play out with Greece earlier in the decade. The ramifications of a Grexit were frightening, but the risks were so great that political leadership in Europe ensured it didn’t happen. And what could have been a catastrophe turned into a fantastically profitable dip buying opportunity.

No doubt most money managers remember the fear mongering surrounding the Grexit and Brexit. And most money managers also remember selling that fear and uncertainty was a big mistake. Just like the boy who cried wolf too many times lost his credibility, I expect the same to happen here. The typical reaction on Wall Street will be “not this again” and most will discount it as another EU drama that ultimately isn’t worth worrying about.

These new and unexpected events usually take at least a few days to work their way through the system and we should expect headlines to flare-up over the next few weeks. But as bad as the worst case sounds, I expect most money managers will be more confident sitting through this uncertainty than they were during the Grexit and Brexit episodes. We could see further near-term weakness, but I don’t expect this to go too far and any dip is still buyable. This will be more of a blip than a crash. There is no reason to abandon medium and long-term positions, but a short-term trader could wait for things to get a little worse before jumping in and buying the dip.

Of course the above assessment assumes Italy doesn’t destroy the EU. All bets are off if this situation escalates to the point of no return. But we are most definitely not there yet. I still think this market looks good, but I would let this situation play out for a few days before rushing in and buying the dip.

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Jani

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Is this market being manipulated?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 started Thursday with another abysmal gap lower. Trump called off his scheduled meeting with Kim Jong Un before the open and that sent stock futures into a tailspin. That mirrored Wednesday’s horrible open following a flareup of Trump’s trade war. Consecutive days of bearish headlines followed by horrid opens, can it get any worse?

As bad as we started, the S&P500 is actually ABOVE Tuesday’s close! How could two horrible days end in gains for the index? No wonder so many people feel like the market is “rigged”. When the market doesn’t do what we think it should, obviously the only plausible explanation is someone is manipulating it.

Of course that is far from the truth. There is there is no evil wizard hiding behind the scenes tricking and deceiving us. People who think the market is fixed simply don’t understand why it is doing what it is doing. There is no trickery. There is no boogie man. It is nothing more insidious than a simple misunderstanding.

When humans didn’t understand why the Sun came up every day, they assumed is was being controlled by the Gods. The same logic  occurs in the stock market today. When people don’t understand why the market does something, they blame it on some evil conspiracy that has rigged the market against them. It couldn’t possibly be that their analysis is flawed.

Luckily for regular readers of this blog, most of us understand what is going on and were not fooled by these bearish headlines and weak opens. As I’ve been saying for a while, this market is strong, not weak. There have been plenty of bearish headlines swirling around this market for months. Yet this market is consistently oblivious to them. Bears claimed it is only time before the “sheep” wake up and send stock prices tumbling. But the critical flaw in the Bear thesis is market selloffs are brutally quick. They happen so rapidly most people don’t have to react. Yet here we are, holding 2,700 support for two full weeks. What selloff gives us two weeks of warning before plunging? None. That’s how I knew the last two weak opens were not sustainable and were bound to bounce. If we were going to crash, it would have happened a long time ago. This market is strong, not weak. That meant recycling trade war and North Korean headlines were not going to make any more of a difference than the first time they occurred.

Everyone knows markets move up and down. This is one of the most fundamental principles of the stock market and it is plainly obvious to anyone who glances at a stock chart. We all know stocks mostly go sideways and most of the ups and downs don’t really mean anything. Yet most people forget this most basic concept in the heat of battle. If most day’s gyrations are meaningless noise, why do we always try to find a meaning in today’s price-action? Why do we automatically assume today’s bump in the road is the start of the next big move when most bumps in the road never go anywhere?

With the benefit of hindsight, we can confidently say Wednesday’s and Thursday’s gap lower opens were nothing more than meaningless noise driven by a handful of reactive traders trying to “get out before things get worse”. Their impulsive selling was clearly a mistake and just a few hours later they are poorer for it. As I’ve said countless times before, this is a strong market, not a weak one. If we were going to crash, it would have happened by now.

While the path of least resistance is most definitely higher, the easy gains are behind us. There is no way we could keep the sharp rebound from May’s bottom going indefinitely. We knew a cooldown and consolidation was inevitable. We also know gains slow down the further into a move we get. Applying that to this market, it seems pretty obvious that prices want to go higher, but that we should expect the rate of gains to slow down and for there to be more back and forth. And guess what? That’s exactly what’s happened.

Those of us that were paying attention during May’s dip and rebound have collected our fast money. But that trade has come and gone. Now we are into the slow money portion of the rebound and should expect the gains to accumulate much slower and be accompanied by a bunch of back and forth. Those of us that believe in this market should stick with our buy-and-hold positions and enjoy this slow glide higher. Anyone who has less conviction should simply sit this one out and wait for a better trading opportunity. Without the conviction to sit through dips like Wednesday and Thursday, that inevitably leads to reactive selling and poorly timed trades.

FAANG stocks are acting well and these tech highfliers will continue leading this market higher. But just like the broad market, we should expect the rate of gains to slow down as we fall into the slow summer sessions.

Bitcoin still looks broken. $9k support two weeks ago gave way to $8k support last week, which has since given way to S7k support here. Hopefully everyone sees the pattern here. We are in a bear market and the downtrend is still alive and well. Expect prices to undercut the $6k lows over coming weeks. This bubble isn’t done bursting and that means lower-lows are ahead of us.

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Jani

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What should we make of today’s reversal?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 started Tuesday with modest gains, putting us near the highest levels since March, but a late selloff pushed the market firmly into the red. The question is if today’s bearish reversal means anything, or if this is just more meaningless noise tricking over-active traders into making poorly timed trades.

Headlines have been relatively benign, allowing stocks to remain above 2,700 for nearly two-weeks. There has been some back-and-forth regarding Chinese tariffs, but to this point we seem to be avoiding a larger trade war. As expected, there have been some small bumps along the way. One day a positive development pushes us up 10-points. The next day a hiccup sends us tumbling 10-points. But so far last month’s resistance has turned into this month’s support.

Holding 2,700 this long is encouraging. Stocks tumble from unsustainable levels quickly. Maintain these levels for nearly two-weeks tells us we are standing on solid ground. There have been more than enough unnerving headlines and weak price-action to send us tumbling, but confident owners refuse to sell and that is keeping supply tight.

We’ve seen several dramatic dips over the last few months, largely driven by uncertainty surrounding Fed rate-hikes, rising interest rates, a looming trade war, and a potential scandal in the White House. While this uncertainty has created some near-term volatility, prices haven’t undercut February’s lows and this price-action looks more like basing and consolidating last year’s gains than standing on the precipice of another plunge lower. As I’ve been saying for months, if this market was fragile and vulnerable, we would have plunged a long time ago. This resilience against a larger selloff tells us this market is strong, not weak.

I’ve been encouraging readers to buy the dips over the last few months and that lead to some very profitable trades. But now that we are at the upper end of the trading range, should we be concerned about another dip? Two-weeks ago I was cautious and told readers the easy gains were behind us and that was a better place to be taking profits than adding new positions. As so far that has been wise advice since we have been trading sideways ever since. The sharp gains from the May lows made us vulnerable to a dip and the risk/reward was skewed against putting new money in stocks. But two-weeks later and the picture is shifting. The market resisted dipping back into the trading range and is holding up quite nicely despite the headline headwinds. That tells me the path of least resistance is still higher.

Unfortunately the easy gains are behind us. The best profit opportunities come during the scariest moments. Now that the fear and uncertainty has passed, the discounts have disappeared. Even though the market is acting well and the path of least resistance is higher, further gains are going to be harder and slower. It took little more than a week to bounce more than 100-points from May’s lows, but it could take all summer to rally the next 100-points.

The best short-term opportunities arise from emotional overreactions. Unfortunately this calm isn’t giving us much to trade. But just because we don’t have a short-term trade in front of us doesn’t mean we cannot make money. The path of least resistance is higher the best slow-money trade is buying-and-holding these near-term gyrations. The market is acting well and don’t let the bears scare you out of good positions. If this market was fragile and vulnerable, we would have crashed a lot time ago.

The tech trade is alive and well. Most of the FAANG stocks are near all-time highs and even GOOGL is well off its lows. I told subscribers weeks ago that people would be kicking themselves for not buying the tech dip and no doubt that is what a lot of people are doing. It is human nature to beg for pullbacks so we can jump aboard the hottest trades, yet when the pullback happens, those same people are too afraid to jump in.

Even though the easy profits are behind us, the Tech Darlings are acting well and will lead this market higher. But just like the broad market, further gains will be hard and slow. The path of least resistance is higher and smart money is still sticking with these stocks.

Bitcoin is a completely different story. Last week’s $9k support has turned into this week’s $8k support. And thus far it is giving every indication that $7k will become next week’s support. I hope you see the trend here. Cryptocurrencies are still very much in a downtrend and we should expect lower prices. It takes most bubbles between 6 and 24 months to finish bursting. If bitcoin is like most bubbles, that means the worst is still ahead of us and we should expect lower-lows over the next few months.

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Jani

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Where this market is headed next

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Thursday the S&P500 closed mostly unchanged, losing a trivial 0.1%. This was the sixth consecutive close above 2,700 as last month’s resistance turns into this month’s support.

In Tuesday’s free blog post, I told readers May’s rebound could go one of two ways. Either we hit our head on the upper end of trading range and stumble back into the mid-2,600s. Or prices stabilize above 2,700 following Tuesday’s dip and test of support. Two days later and we are still holding 2,700 support and things look good for this market. If we were overbought and vulnerable to tumbling back into the heart of the trading range, it would have happened by now.

The lack of follow-on selling when we tested 2,700 earlier this week tells us most owners are confident and not interested in selling. Plenty of bad news has been making the rounds between oil topping $70, gas approaching $3, interest rates passing 3%, trade negotiations breaking down, and Trump’s North Korea summit on the verge of collapse. There have been more than enough reasons for this market to tumble, yet here we are still holding above support.

The thing to remember about headlines is if no one sells them, they stop mattering. All of the above headlines have been reoccurring themes that keep popping up over the last few weeks and months. The thing about recycled headlines is they get priced in. Anyone who fears these stories bailed out a long time ago when these issues first came up. Those nervous sellers were replaced by confident dip-buyers who demonstrated a willingness to own these headline risks when they bought. And it should be no surprise these confident dip-buyers are not flinching when these headlines come back around. As I said, when no one sells the news, it stops mattering. That is why prices are holding up so well despite the headline headwinds.

A market that refuses to do down will eventually go up. And while the path of least resistance for this market remains higher, the easy gains are behind us. A couple of weeks ago I encouraged readers to buy the dip. Risk is a function of height and falling near the lowest levels of the year made May’s dip one of the safest times to buy stocks this year. But now that the easy money and quick gains are behind us, the ride is going to get slower and harder. The market’s resilience this week tells us it still wants to go higher and 2,800 is very much in play. But it will be a grind getting there that could take a couple of months. If buying the rebound off 2,600 support was the fast money trade. Buying 2,700 support is going to be the slow money trade and it could take most of the summer to reach 2,800. That means lots of up and down between here and there.

Last month I told readers people would be kicking themselves for not buying the Tech Highflier dip and no doubt a lot of people are now kicking themselves for not buying it. People had been begging for a pullback so they could jump aboard this year’s hottest trade. Yet when the market granted their wish, most were too afraid to by the dip they were asking for. Even though prices are nowhere near as attractive as they were a few weeks ago, the Tech Meltdown is over and these stocks are leading the way higher. Most of the FAANG stocks are back near their highs and will only go higher as the broad market climbs this summer.

The same cannot be said for Bitcoin. I wrote a couple of weeks ago that $9k support risked turning into stalling if we held that level too long. The problem with staying near support too long is it makes a violation inevitable. When BTC couldn’t rally beyond $9k, falling under it was the only option left. And now last week’s $9k support has turned into this week’s $8k support and we are on the verge of falling to $7k support next week. The rebound off $6k earlier this year boosted sentiment, but this dip is threatening to erase all of those good feelings. I don’t think the lows are in yet and that means lower prices are still ahead of us.

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Jani

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Trading plans for what comes next:

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Tuesday the S&P500 experienced the first real giveback since the May rebound kicked off. Economic headliners were mixed, but that’s all it took to knock us from the highest levels in a couple of months.

Last Thursday I warned readers to be more careful now that we were approaching the upper end of the trading range. Risk is a function of height and this was the highest we’ve been since early March. Recent gains made this a better place to be taking profits than adding new positions. And Tuesday’s pullback to 2,700 support validated those warnings.

The question is what happens next? It was nice to see buyers show up once prices slipped to 2,700. Market crashes are brutally quick and while we are not in the clear yet, one day of support is constructive. If this market was grossly overbought, we would have tumbled far more dramatically from the highs. Tuesday was a more measured pullback and that tells us this market is not overly vulnerable.

Hold 2,700 for another day and everything is looking pretty good and the path of least resistance remains higher. But if we slip under 2,700 Wednesday, be prepared for a wave of technical selling to weight on the market. The way it responds to this violation of support tell us what comes next. If the selling intensifies, expect the weakness to carry us back into the heart of the trading range. That puts 2,650 and the 200dma in play. But if we dip under support, supply dries up quickly, and we reclaim 2,700 before the close, then things are looking strong and the May rebound continues.

At this point the odds are 50/50 if support holds or fails. For a good trade, we want better odds than that. The this opportunity doesn’t get real attractive unless we dip back to the 200dma and bounce. That’s where the discounts create a safer and more profitable trade. If prices don’t dip and we hold current levels for a few more days, that tells us the market wants to go higher. In that case 2,800 is in play and we need to be patient.

I don’t know what the market will do next, but I have several trading plans ready to go. It won’t be long before the market tells us what it wants to do next and those of us that are ready will be positioned to profit from it.

After holding $9k support for several weeks, Bitcoin finds itself under this widely watched support level. As I warned readers two weeks ago, there comes a point where support turns into stalling. That is what happened here. The inability to move beyond support made a violation inevitable. The latest rebound from the $6k lows helped rebuild sentiment, but expect most of those positive feelings to disappear if we stumble back into the $7k range. It often takes bubbles six to twelve months to find a bottom. If that happens here, that means lower-lows are still ahead of us. I’m skeptical of BTC at these levels and it needs to recover $9k as soon as possible to prove me wrong. Otherwise expect nervous selling to return and push us back under the $6k lows.

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Jani

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What to do now that we bounced

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Thursday the S&P500 extended last week’s rebound off 2,600 support and now finds itself well above the 50dma and 2,700 resistance. What a difference a few days makes. Last week traders were fleeing ahead of the expected collapse, this week those same traders are scrambling over each other to get back in.

Not a lot changed over the last week. The Fed is still planning on raising rates. Treasuries hover near 3%. Trump’s Trade War is still hanging over us. Last week these things were going to wreck our economy. This week no one remembers them. Are these things important? Should we ignore them? What is a trader supposed to do?

As I’ve been saying since early February, the big selloff was over but the drop in prices did enough damage that we wouldn’t rebound to the highs anytime soon. If we weren’t going any lower, but weren’t going higher either, what’s left? Sideways. And that’s exactly what’s happened since the February selloff bottomed. Rebounds fizzle and the breakdowns bounce. Bulls and bears trading these as larger directional moves have been getting humiliated by the reversals. But their loss is our gain and it has been highly profitable for those of us buying the weakness and selling the strength.

Now that we are at the upper end of the range, has anything changed? Nope. Rather than chase the relief higher, we should be growing more cautious looking for a place to take profits. Risk is a function of height.  Last week we were near the lows of the year. Rather than run from the market, we should have been buying those discounts. And now that prices are significantly higher, rather than rush in, we should be growing cautious as the risk/reward swung the other direction. Trading is not hard once we learn what to look for.

I’m most definitely not calling this a near-term top. It would be foolish to short this strength for no other reason than we reached the upper end of the latest trading range. But the risk/reward is no longer in our favor and that means moving to a defensive posture and taking profits. Only after cracks start forming should anyone even consider going short.

Nothing has changed from last week to this week. That means keep doing what has been working. Buy weakness and sell strength.

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Jani

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Why everyone should have seen this rebound coming:

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Tuesday S&P500 closed flat after spending most of the day in the red. Prices dipped in anticipation of Trump’s announcement to leave the Iranian accord and reimpose sanctions. This injects further uncertainty into the already unstable Middle East. Not knowing what is going to happen next is a big reason oil has rallied above $70.

But as much noise as the media made over Trump’s widely anticipated announcement, the market largely brushed it off. Prices dipped more than 0.5% as the knee-jerk reaction was to sell the announcement, but anyone who has been paying attention knew the market expected this and it wasn’t a big deal. After the headline sellers finished selling, prices rebounded and I doubt many people will give this a second thought on Wednesday.

Last week it felt like the market was on the verge of collapsing. We undercut the 200dma and 2,600 support, but instead of triggering a wave of selling, that was the capitulation bottom and prices have rebounded back to the upper end of the recent trading range.

The thing about markets like this is both bulls and bears are right. Wait a few days and the bull will be right when prices rebound. A few days after that the bear will be right when we stumble back to support. While both sides keep getting proven right, the painful irony is both sides are also bleeding money from poorly timing their trades.

Bulls buy the strength when it confirms their bullish bias. Unfortunately buying strength in a trading range is jumping in at the exact wrong time. Same goes for the bears who short weakness moments before prices rebound. The biggest challenge in the market isn’t knowing what is going to happen, but getting the timing right. Unfortunately most bulls and bears are getting crushed in this sideways market because they are making the right move at the wrong time.

Last Thursday I wrote the following in my free blog post, the same day the market scared the hell out of everyone by crashing through the 200dma and undercutting 2,600 support:

“As I’ve been saying since February, we are in a trading range. That means buying weakness and selling strength. Stick with what is working until something changes. Did something change today? Nope. That means today’s weakness was a buying opportunity, not a chance to bailout “before things get worse”. Maybe we slip a little further, but that’s not a big deal. Remember, risk is a function of height. The lower prices go, the less risky it is to buy. If this market wanted to crash, it would have happened months ago. There have been more than enough excuses to send prices tumbling. Instead, every time we slip to the lows, supply dries up and prices rebound. This is a resilient market, not a weak one. And the only people losing money are the ones overreacting to these gyrations.”

Read the full post if you want to learn how I came to that conclusion, but less than 24-hours later the market exploded higher. As I said before, predicting the market isn’t hard, the trick is getting the timing right. And often it takes more than good timing too. Many times the market tests our conviction and convinces us to abandon our well thought out trades moments before proving us right. I don’t mind losing money on a bad trade because that is the cost of doing business. But there are few things more frustrating than losing money on a winning trade. I wish there was an easy answer for this, but recognizing the difference between conviction (right) and stubbornness (wrong) is the art of trading and only comes from experience.

But that was last week’s trade. What most people want to know is what is coming next. Even though the market is approaching the upper end of the latest trading range, I actually think there is a little more upside left in this rebound. The market likes symmetry and last Thursday’s dip under support was fairly dramatic. We should expect the rebound to be similar and it doesn’t feel like we are at dramatic levels yet.

The resilience of this rebound was confirmed by Tuesday’s strength in the face of Trump’s headlines. The midday selloff could have easily spiraled out of control and sent us tumbling back to support if this market was weak. Instead of accelerating lower, supply dried up and we rebounded. Prices tumble from overbought levels easily and quickly. Resisting the temptation to selloff Tuesday afternoon tells us the market is solid, not fragile. At the very least I expect a retest April’s highs. That said, even though the near-term path of least resistance is still higher, this is a better place to be taking profits than adding new money. In trading ranges we buy weakness, not strength. Those with profits should start looking for an opportunity to lock them in.

Long gone is talk of a Tech Meltdown. Weeks ago I told readers people would be kicking themselves for not buying those discounts and it didn’t take long for those discounts to evaporate. For months people were begging for a dip in their favorite stocks. Yet when the dip finally happened, most people were too scared to buy. Of course if this were easy, everyone would be rich. The thing to remember is most people lose money in the stock market, so that means doing the opposite of most people. If most people are selling great stocks, that means we should be buying them.

There is a lot less near-term upside left in most FAANG stocks because they have returned to their highs. but this trade is still alive and kicking and that means sticking with it over the medium term.

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Jani

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Is this dip different?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Thursday the S&P500 finished down a modest 0.2%, but how it got there was anything but a smooth ride. Stocks gapped 0.5% lower at the open and it only got worse from there. At the height of the selling, we shed 1.5% and undercut the 200dma and 2,600 support. But just when things were the most hopeless, supply dried up, prices rebounded, and we even briefly poked our head into the green. Anyone just looking at the closing price would have no idea what happened today. But maybe that isn’t a bad thing given all the people that made poor trading decisions reactively selling the midday weakness. This is one of those times when ignorance really was bliss.

The selling actually started Wednesday shortly after the Fed announced their latest policy decision. Even though they kept interest rates steady, they confirmed their plans to continue raising rates later this year. That was followed by revelations Trump’s money was used to coverup his alleged affair with a porn star. Combined those headlines set off a selling spree that didn’t end until we shed 60-points and violated the support.

Even though they fueled a dramatic ride, the headlines driving this selloff were suspicious at best. The Fed did exactly what they said they would do, and everyone expected them to do. No surprises and it is simply a continuation of previously stated policy. Policy that hasn’t moved the stock market in a meaningful way over the last five years. Even 2013’s “Taper Tantrum” was a flash in the pan and erased within a couple of months. Would today’s policy statement turn out any differently? No, of course not. But that didn’t stop people from overreacting and reflexively rushing for the exits.

The same goes for Trump’s brewing sex scandal. Maybe its “fake news”, maybe “where there is smoke, there is fire”. Either way it doesn’t really matter to the market. The stock market rallied after Trump’s election on expectations of regulatory relaxation and tax cuts. He delivered both of those promises last year and the market got everything it wanted. If the Trump administration goes down the toilet, it will be a political scandal, not an economic problem. For confirmation of this thesis, all we have to do is look at Clinton’s impeachment in the late 90’s. While it dominated headlines and monopolized Congress, the economy and stock market chugged along, totally oblivious to what was going on in D.C. In fact Congress getting bogged down by a political scandal is actually a good thing because that keeps those fools from screwing up anything more important. The less Congress does, the better it is for the economy and the stock market.

And while a lot of traders were scrambling for the exits today “before things get worse”, there really wasn’t any meat to the headlines and is why the selling stalled so quickly. This is only the latest in the long list of headlines that failed to break this market. Why where these headlines any more significant than the last time the Fed bumped interest rates? Or Muller raided Trump’s lawyer’s office? Or the escalating Trade War with our allies and China? These headlines didn’t matter any more than the others and is why prices bounced.

Days like today challenge our resolve. Without a doubt the selling felt real. But the thing to remember is by rule, every dip feels real. If it didn’t, no one would sell and we wouldn’t dip. Given the huge directional moves over just a few minutes, I actually suspect computer algorithms are driving a lot of this volatility. These computer programs look at all the same data and make the same trading decisions at the same time. That herd behavior triggers these cascading selloffs and explosives surges higher. But the thing to remember is algorithmic traders only represents a small fraction of the total money in the stock market. Once all of these small trading firms go “all in”, or “all out”, the buying/selling stalls and prices reverse to more normal levels.

The only way to survive periods like this is to have conviction in your positions. Or to simply ignore the market. Anyone who checked their stocks at 5 o’clock tonight totally missed the temptation to sell at a much lower levels. That’s the problem with watching the market too closely when you don’t have enough conviction in your trading ideas, the market’s volatility chews you up and spits you out.

As I’ve been saying since February, we are in a trading range. That means buying weakness and selling strength. Stick with what is working until something changes. Did something change today? Nope. That means today’s weakness was a buying opportunity, not a chance to bailout “before things get worse”. Maybe we slip a little further, but that’s not a big deal. Remember, risk is a function of height. The lower prices go, the less risky it is to buy. If this market wanted to crash, it would have happened months ago. There have been more than enough excuses to send prices tumbling. Instead, every time we slip to the lows, supply dries up and prices rebound. This is a resilient market, not a weak one. And the only people losing money are the ones overreacting to these gyrations. They lose money buying when they are feel confident (high) and sell when they are fearful (low). If we want to make money, do the opposite of most people. That means buying fear and selling confidence.

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Jani

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How I knew the Trade War selloff would bounce

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Tuesday morning the S&P500 tumbled at the open, extending Monday’s selloff. Trump’s trade war returned to the headlines as proposed tariffs were set to start May 1st. In the closing hours of April 30th, the Trump administration relented and further postponed the start of tariffs for our allies to allow for more negotiations. Unfortunately those concessions didn’t calm the market’s nerves and we tumbled back near 2,600 support in midday trade. But just when things looked their most hopeless, the market found a bottom and rebounded into the green by the close. What happened???

Loyal readers of this blog know we don’t get worked up over recycled headlines. That’s because most owners who feared those headlines sold them the first time it came out and those sellers were quickly replaced by confident dip buyers willing to rush in and hold those risks. That turnover in ownership is what “prices in” the news. Once all the people who are afraid of a headline bailout, there is no one left to sell the next reoccurrence of those headlines. When no one sells the news, it stops mattering. And that is what happened here.

A couple of months ago Trump’s trade war sent a chill through the markets. But now it is more of a shiver. And soon it will barely raise goose bumps. Those of us that recognize this pricing-in phenomena profit from these dips. Were these headlines new and unexpected? No. Where they more of the same? Yes. That told us to expect a smaller dip than last time and gives us a good gauge of when to buy the dip. We’ve been living with these headlines for a while, so that meant the dip won’t go very far and we could jump in early. And that is exactly what I did. I hope some of you were able to do the same.

The opposite is true when confronted with new, unexpected, and especially dire headlines. During periods like that, we stay away from the market for several days because it takes time for the market to come to terms with its new reality. But that wasn’t the case today and why prices rebounded so quickly.

As I’ve been saying since February’s plunge, we transitioned into a trading range and the market was going to consolidate last year’s gains. In theory trading ranges should be really easy to trade, all we have to do is buy when we get to the lower end and sell when we get to the upper end. It is actually that easy if that is what we did what we were supposed to do. Unfortunately most people get caught up in their bullish or bearish bias and that prevents them from seeing each of these range bound moves for what they are, an unsustainable move to the boundary of the range that will soon fizzle and reverse.

Instead of confidently buying the dip and selling the rally, most traders convince themselves that each mover lower is the start of the next crash and the following rebound is the start of the next breakout. People get way too emotional as we approach the edges of the trading range and overreact to what is really just a normal gyration. Buying weakness and selling strength can be really profitable for those of us that do it right. Unfortunately the crowd is constantly giving away money buying strength (high) and selling weakness (low). If most people lose money in the market, shouldn’t we be doing the exact opposite?

Keep doing what has been working. Right now that is buying weakness and selling strength.

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Jani

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Why we should have seen this bounce coming

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

On Thursday the S&P500 surged higher, extending Wednesday’s bounce off of 2,600 support and the 200dma. Markets sold-off Tuesday on fears of 3% Treasuries, but that nervousness and uncertainty evaporated as the focus returned to earnings. So far Facebook and Amazon knocked the ball out of the park and that strength is putting investors at ease.

While anyone can explain what happened after the fact (hindsight bias), it wasn’t hard to see this bounce coming a few days ago. This is what I told readers in Tuesday’s free blog posts:

“The thing to remember about today’s 3% headline is bond prices have been rising since Trump’s election. For practical purposes, 3% is no more significant than 2.9% or 3.1%. The round number simply makes for a better headline. Will 3% change anything, probably not. If the market didn’t care about 2.5%, 2.7%, or 2.9%, then 3% won’t matter either. This market has been incredibly resilient because confident owners refused to sell every bearish headline thrown at it over the last three months. Will this time be different? Not likely.”

Predicting the market isn’t hard if you know what to look for because the same thing keeps happening over and over. But just because we know what is going to happen doesn’t make trading easy. Far and away the hardest part is getting the timing right. That is where experience and confidence comes in. Several months ago investors were begging for a pullback so they could jump aboard this raging bull market. But now that prices dipped, rather than embrace the discounts, these same people are running scared. Markets dip and bounce all the time, but we only make money if we time our trades well.

The most important thing to remember is risk is a function of height. The higher we are, the greater the risks. By that measure, Tuesday’s dip near the 2018 lows was actually one of the safest times to buy stocks this year. Did it feel that way? Of course not. But that is why most people lose money in the stock market. If most people were selling Tuesday, and most people lose money, then shouldn’t we have been buying? Given the market’s reaction today, the answer is a pretty resounding yes.

The point of this post isn’t to brag about the calls I made, but letting people know it is possible to read the market and make money from these swings if they learn to look at the right things and ignore all the other noise around them.

And this doesn’t just apply to this week’s move. In January I warned readers the relentless climb higher was unsustainable and incredibly risky. Just when the crowd was feeling the most confident, February turned into a bloodbath. But what most people failed to realize is that dip was actually the safest time to be buyings stocks because prices were dramatically lower. It is always safer to buy when fear and uncertainty are peaking than when everyone is calm and confident. This year, far and away the riskiest time to own stocks was in January when everyone was confident and the safest was to buy when everyone was scared in February.

Then we come to what happened since. I told readers the selloff did enough damage that we shouldn’t expect a rebound back to the highs. Instead, look for a sideways consolidation and a trading range to develop. In a trading range we buy weakness and sell strength because every directional move fizzles and reverses. And what has happened since February? Every directional move fizzled and reversed.

While it is easy to identify a trading range when looking at an old chart, these things also easy to spot in real-time. Unfortunately most people miss it because their judgement is clouded with bullish or bearish biases. They assume every move the higher or lower is the start of the next big move. But just when everyone is convinced the rally is back on, or the selloff is about to get worse, the move fizzles and reverses.

I don’t have a crystal ball, but I have been doing this long enough to recognize these patters and profit from them as they happen. If you learn what to look for, you can do it too.

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Jani

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Is it time to get scared?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Volatility came roaring back Tuesday as the S&P500 plunged 1.3%. The most noteworthy headline was 10-year Treasuries topping 3% for the first time in several years.

Rising interest rates are one of those half-full, half-empty things. Interest rates are recovering to more normal levels as we finally put last decade’s financial crisis behind us. But a big portion of the stock market’s strength comes from high valuations due to ultra low-interest rates. Stocks and bonds compete for investment dollars and when bond returns were laughable, a lot of bond investors turned to equities for better returns. But now that bonds are becoming more attractive, some of that money is flowing back into bonds.

The thing to remember about today’s 3% headline is bond prices have been rising since Trump’s election. For practical purposes, 3% is no more significant than 2.9% or 3.1%. The round number simply makes for a better headline. Will 3% change anything, probably not. If the market didn’t care about 2.5%, 2.7%, or 2.9%, then 3% won’t matter either. This market has been incredibly resilient because confident owners refused to sell every bearish headline thrown at it over the last three months. Will this time be different? Not likely.

Two weeks ago I wrote the following in my Free-After Hours Analysis and it still every bit true today:

“Technically we are at the upper end of the latest trading range and that leaves us vulnerable to a dip back to the lower end of the range and even a test of support. But that won’t change anything. This weakness would be a buying opportunity, not an excuse to sell stocks. This is a resilient market and these discounts are attractive. A couple of months ago people were begging for a dip so they could get in at cheaper prices. The market answered our prayers. Don’t lose your nerve now.”

The thing to remember about market crashes is they are brutally quick. We’ve been trading sideways since February’s selloff. That is in the face of relentless bearish headlines. If this market was going to crash, there have been more than enough excuses to send us tumbling a long time ago. Instead of selling these bearish headlines, confident owners are holding for higher prices. When owners don’t sell bad news, it stops mattering. That is what happened over the last 90 days and it is what is going to happen here.

If the market is in a trading range, should we be buying this weakness or selling it? Most people lose money in the stock market because they buy when they feel safe and they sell when they get nervous. Obviously buying high and selling low is a horrible strategy. What we really want to do is buy low and sell high. But that is a lot easier to say than it is to do. That means we need to zig when everyone else zags. That means buying when everyone else is selling. The best trades are often the hardest to make.

Everyone’s favorite FAANG stocks got hammered today. But this isn’t a surprise. These highfliers magnify the market’s move in both directions. They go higher than everything else, but that also means they get hit the hardest on bad days too. Weeks ago people were begging for a pullback so they could get in. The market answered their prayers. The question is if any of those people have the courage to buy. While we could see a little more near-term weakness, months from now people will be kicking themselves for not buying more at these levels.

Jani

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These are the discounts we were asking for

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Thursday the S&P500 bounced back from Wednesday’s modest weakness and continues hovering near 2,650 resistance. Headlines remain overwhelmingly negative. Wednesday added a potential military response in Syria and confirmation from the Fed to expect three more rate-hikes this year. That is on top of Trump’s trade war and Muller’s growing investigation.

But rather than fear these waves of bad news, the market is holding up remarkably well. Owners have been given more than enough excuses to drop everything and run for the exits. Yet most of them seem content holding for higher prices. Strong price-action in the face of bad news is typically very bullish. If this market was going to crash, it would have happened by now. That tells us the path of least resistance is higher, not lower.

While it is tempting to argue with the market and insist it must go down because of all of these bearish headlines, the thing to remember is we trade the market, not the news. If the market doesn’t care about these headlines, then neither should we. The trade war and Muller’s investigation has been with us for weeks, even months. Everyone who fears these headlines has been given plenty of time to get out. Every one of these nervous sellers has been replaced by confident dip buyers who demonstrated a willingness to hold these risks. Once all the people who are afraid of a headline are out of the market, then the headline stops mattering because it is priced in.

Technically we are at the upper end of the latest trading range and that leaves us vulnerable to a dip back to the lower end of the range and even a test of support. But that won’t change anything. This weakness would be a buying opportunity, not an excuse to sell stocks. This is a resilient market and these discounts are attractive. A couple of months ago people were begging for a dip so they could get in at cheaper prices. The market answered our prayers. Don’t lose your nerve now.

The thing to remember is we cannot pick a bottom and it isn’t even worth trying. Once we come to terms with that idea, then we are left choosing between buying too early, or buying too late. If prices slip a little further over the next few days and weeks, all that means is we bought a little too early. No big deal. As I said earlier, if this market was fragile and vulnerable to a crash, it would have happened by now. Instead we should be impressed by how well it is holding up despite these waves of negative news. That tells us this market is strong, not weak. These are attractive discounts attractive even if prices slip a little further, which they might not. Wait too long and you will miss this opportunity.

Bitcoin surged today on news that some high-profile money managers are buying. While on the surface that sounds like good news, it probably isn’t as bullish as it seems. First, these guys are really good at keeping secrets when they are buying. They only let it out after they finished accumulating their positions because obviously they don’t want the price to surge while they are buying. Second, if these whales have been buying over the last few weeks and months, shouldn’t prices have bounced more meaningfully? If this is the best BTC could do while these big money managers were accumulating positions, what happens when they finish buying? The knee-jerk reaction was to send prices higher on the news, but unless other people follow these big names into Bitcoin, prices will resume their down-trend. I don’t expect prices to bounce until we get in the $4k range and all today’s headlines do is delay the inevitable.

Much like the broad market, the FAANG stocks are basing and are on solid ground. These are the discounts we’ve been waiting for and months from now people will be kicking themselves for not buying more at these levels. Have we put in the bottom yet? Maybe. Maybe not. But either way this will be a profitable position months from now. Our P&L doesn’t care if we buy early or we buy late, as long as we buy.

Jani

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What to make of these whipsaws

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P500’s whipsaw continues as Monday’s fizzle turned into Tuesday’s surge. On Monday the market opened strong following a weekend where tariff headlines cooled. Unfortunately the relief was short-lived because a FBI raid on Trump’s personal lawyer sent the market tumbling from its early highs. But Monday night the president of China took a conciliatory tone in a speech about trade and that was enough to kick off Tuesday’s buying frenzy. What does Wednesday have in store? If overnight futures falling 0.5% are any indication, it looks like another whipsaw is headed our way.

Lets discuss the big headlines one at a time. Stocks popped Tuesday when China’s president said he wanted to open the country up to more free trade. While that was a good start, it is a long way from a done deal. As they say, talk is cheap. What these promises of freer trade don’t include is a timeframe and Trump has often accused China of appeasing previous administrations with phony promises it never delivered on. Chances are good Trump will brush off these Chinese overtures and keep applying pressure. And more than that, let’s remember this is the “Art of the Deal” president. If the Chinese really are willing to give an inch, expect Trump to demand a mile. Without a doubt the trade headlines are anything but over and we should expect a bumpy road as we approach next month’s tariff deadlines.

The second story dominating headlines is Muller’s investigation into the Trump administration. The knee-jerk reaction was for owners to sell the news of the FBI raid. But reality is most of that reactionary fear is misplaced. Trump already delivered on tax and regulatory reforms, so most of the good stuff from the market’s perspective is already behind us. If Trump gets bogged down by a scandal, it won’t really affect the things the market cares about. In fact, given Trump’s strong nationalist bent lately, it could actually be a good thing for stocks. If a scandal consumes Trump’s time, energy, and political capital, that means there is less he can do to screw thing sup. As strange as it sounds, a paralyzed Congress and White House is actually bullish. Two decades ago when the Clinton White House was embroiled in a scandal that eventually lead to Clinton’s impeachment, the stock market actually went up. That’s because our government was too busy discussing a blue dress to mess up the economy. Most likely the same thing will happen here. The less our politicians do, the better off we are.

Technically speaking, the market continues hovering near the lows and is falling into a 2,600ish-2,650ish trading range. The problem with sticking near the lows is it makes it more likely that we will stumble under them. Violating widely followed technical levels near 2,600 and 2,550 will trigger swift waves of stop-loss selling and send us tumbling. On the other side, breaking 2,650 overhead resistance is unlikely to trigger waves of breakout buying. Instead demand will most likely dry up as those with cash adopt a wait-and-see approach given all the volatility and uncertainty that surrounds the market. Remember, stocks fall a lot faster than they go up. whi

While the near-term prognosis for stocks is cautious, the economic outlook is actually quite positive. That means any near-term weakness is simply another dip buying opportunity. This is especially true of the vaunted FAANG stocks. These tech highfliers are carving out a base and a few months from now people will be kicking themselves for not buying these discounts. These are attractive levels for anyone with a longer time horizon even if we fall a little lower over the near-term. Remember, no one can consistently pick a bottom. That means either we buy too-early, or we buy too-late. What a trader chooses to do largely depends on their personality and risk tolerance.

It seems like everyone has forgotten about bitcoin and it hardly gets mentioned in the mainstream financial press anymore. That’s a problem for bitcoin bulls because they need the exposure to encourage new buyers to come into the market. As I’ve been writing about for a while, bursting bubbles take six months or more to play out. That happened during the first three major corrections in bitcoin and there is every indication that is what is happening here. At best we are in the middle innings and we should expect further weakness to come. While $6k seems to be providing support, let’s not forget we said the same thing about $14k, $12k, $10k, $9k, $8k, and $7k. I hope everyone sees the pattern here. Expect bitcoin to undercut February’s lows over the next few weeks and for that to trigger a wave of defensive selling that doesn’t stop until we slip into the $4k range. Then and only then can we buy the dip for a quick bounce.

Jani

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Weekly Scorecard: A dramatic, but profitable week

By Jani Ziedins | Scorecard

Weekly Analysis and Scorecard: 

It was one hell of a week for the S&P500. Trump’s escalating trade war and the Chinese retaliations dominated headlines. At last count we ran through three rounds of tit-for-tat tariffs and subsequent retaliations. Combined both sides are looking at $300 billion in products being taxed at up to 25%. If the two largest economies battling a trade war doesn’t send a shiver through global growth, I don’t know what will.

Early in the week there was optimism this was little more than posturing ahead of far more sensible negations and compromises. By midweek the markets surged higher in relief and left Monday’s lows in the dust. But any feelings of relief were short-lived because Thursday night Trump lashed out at China’s “unfair retaliations” and tripled the size of his proposed tariffs. That sent markets into a tailspin Friday and we finished the week near the lows.

Trump promised us he didn’t want a trade war, but his actions say otherwise. What started as a complaint about Chinese policies is now threatening hundreds of thousands of American jobs and higher prices will plunder middle America’s discretionary income. If that is how Trump looks out for hard working Americans, they would probably be better off if he stopped trying to help them.

I wrote a fairly critical post Thursday evening. If Trump is your guy, then you probably won’t like it. But if you want to understand what is going on and how it affects the stock market, it is a worthwhile read.

As for next week’s outlook, expect the volatility to persist. The market was willing to give Trump the benefit of doubt and is why prices rebounded nicely in the middle of the week. But Thursday night’s betrayal will stick with traders for a while and they will be far less willing to give him a pass next time. Even though this trade war will most likely cool down over the next few weeks, don’t expect traders to chase stock prices higher anytime soon.

Weekly Scorecard

Even though it was a challenging week for the market, my analysis proved to be quite insightful and profitable.

Last week I warned subscribers:

While the market’s resilience is impressive, we could still see a little more near-term weakness before this is over. Rebounds from oversold levels are shockingly fast. Instead of rebounding higher, we seem to be drifting sideways. The market rarely gives us this long to buy the bottom and that means we might not be at the bottom yet. This is still an attractive level to buy the discounts, but any dip-buyers need to be patient and be prepared for a little more weakness.

This was the Friday before Monday’s dramatic, 2.3% plunge.

But rather than run for the hills, on Monday I told subscribers:

Most likely this [trade war] won’t amount to much over the near-term and prices will rebound once the headlines cool off. But until then, expect volatility to persist. Thing will get ugly if Trump and China turn this into a major trade war, but that is the worst case scenario and is weighing on the market today. Anything short of that will be a relief and prices will rebound. We could see further near-term weakness, but most likely this is the time to be buying, not selling.

Two days later the market was 100-points.

Tuesday’s analysis proved to be prophetic in both directions:

Trump is the biggest wild card in this. If he says the wrong thing, that could lead to another 3% down-day. If he says nothing, then prices rebound and dip-buyers make a lot of money. Without a doubt that makes this a challenging time to own stocks, but the only way to make money is by taking risks. By the time things are safe, the discounts will be gone.

That afternoon stocks exploded higher when Trump held his tongue following China’s second retaliation. For a brief moment in time traders thought the worst of the trade war headlines were behind us. And Wednesday the surge higher continued. But Thursday night Trump proved everyone wrong by tripling down on his trade war. Thursday Night I told free blog readers:

Are today’s threats simply more political posturing ahead of negotiations? I wish I knew. But the one thing I do know is the market hates uncertainty and I don’t think the stock market is going to forgive Trump as easily this time. Fool me once, shame on you. Fool me twice, shame on me. It will be interesting to see how this turns out, but this is one of those things that is better watched from the safety of the sidelines…

…I was one of those confident dip buyers and everything looked awesome this afternoon as my profits were piling up. But all of a sudden I’m not as confident anymore. I have a reasonable profit cushion, but I’m definitely less confident than I was this afternoon and I will seriously think about locking in profits tomorrow. If too many people feel the same way, Friday could be an ugly day. The only thing we can do is wait for China’s response and hope that confident owners stay that way.

On Friday the stock market actually recovered a big chunk of those overnight losses. But that was as good as it got because not long after the stocks rolled over and we didn’t stop until we fell more than 2%, erasing nearly all of the week’s prior gains. I was lucky the market opened fairly strong and I was able to lock-in profits before things got a lot worse.

Now I will be the first to admit I was a bit lucky in calling this week’s moves so well and it often isn’t this easy. But the better we understand the market, the more lucky we tend to be.

Looking ahead, even though I locked-in profits this week, Friday’s volatility is setting up another buyable dip and I will be looking to jump back in soon. The best profit opportunities come from the scariest markets. Not all that long ago people were begging for a pullback. Now that the market has answered our wishes, don’t lose your nerve.

Jani

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Trump did it again.

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Thursday was another strong day for the S&P500. Unfortunately that doesn’t matter anymore because after the close Trump announced he wants to triple the Chinese tariffs. It seems China hurt his feelings when they “unfairly retaliated” against his first and second rounds of tariffs.

Clearly someone doesn’t understand how trade wars work. Unfortunately that person is the president of the United States. To save one-thousand jobs in the steel and aluminum industry, Trump is now threatening hundreds of thousand, if not millions of Americans jobs in other industries. Even the steel and aluminum industries are opposed to his trade war because it doesn’t matter what aluminum and steel prices are if their manufacturing customers’ businesses are crumbling.

The overnight futures plunged 1.5% on the news. If that’s all that happens, then we should count ourselves lucky. The market’s latest rebound was based on the idea that the worst of the trade war is behind us. That the last couple of weeks of threats were nothing more than posturing ahead of far more reasonable negations and thoughtful compromises. Unfortunately Trump threw cold water on that idea and now the market has been thrown back into turmoil.

I wish I could say this will turn out fine and this is nothing more than the start of another buyable dip. An opportunity for those that missed Tuesday’s rebound to jump aboard the rally. Unfortunately no I longer have those convictions. Things would be different if I knew we were dealing with a “rational actor”. Someone who made sensible decisions based on the facts and chose what was in his own best interests. But clearly Trump is not acting this way. Nearly every member of Congress, both Democrats and Republicans alike are unified against this trade war. Very rarely do both sides of the aisle agree on anything, but they are quickly coming together over this. The business community is equally unified in their opposition to Trump’s trade war. And 100 years of economic experience learned the hard way taught us it is impossible to win trade wars. Too bad Trump isn’t listening.

Are today’s threats simply more political posturing ahead of negotiations? I wish I knew. But the one thing I do know is the market hates uncertainty and I don’t think the stock market is going to forgive Trump as easily this time. Fool me once, shame on you. Fool me twice, shame on me. It will be interesting to see how this turns out, but this is one of those things that is better watched from the safety of the sidelines.

There is a chance Trump could quickly backtrack on his threats. And maybe China’s leadership will be the bigger man and won’t respond to Trump’s threats. But no matter what, traders are quickly learning to distrust Trump. The market hates uncertainty and the way Trump handles himself does nothing but stir up controversy and uncertainty. Mr. Trump, thank you for the tax cuts, but the rest of us would appreciate it if you didn’t touch anything else.

It’s really hard to say how the market will respond to these headlines. A lot of nervous owners have been selling the tariff headlines over the last few weeks. They have been replaced by confident dip-buyers who were unafraid of these headlines because they assumed everything would work out. Which until this evening looked like it was happening. Will these confident dip buyers remain as confident when Trump is threatening to escalate the trade war for a third time? Will they confidently sit through China’s inevitable retaliation? Maybe. Or maybe they will lose their nerve and “get out before things get worse”.

I was one of those confident dip buyers and everything looked awesome this afternoon as my profits were piling up. But all of a sudden I’m not as confident anymore. I have a reasonable profit cushion, but I’m definitely less confident than I was this afternoon and I will seriously think about locking in profits tomorrow. If too many people feel the same way, Friday could be an ugly day. The only thing we can do is wait for China’s response and hope that confident owners stay that way.

Jani

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CMU: Are you addicted to stock quotes?

By Jani Ziedins | Free CMU

Cracked.Market University

One-hundred years ago a person was lucky if they could find weekly stock quotes. Fifty-years ago most traders lived off of daily quotes from the newspaper’s financial section. Thirty-years ago we got 24-hour news networks. Twenty-years ago the internet gave us 20-minute delayed quotes. Five-years ago real-time and after-hours quotes came free with most trading accounts. And now countless phone apps give us access to global stocks and futures around the clock.

The question few are asking is if this abundance of information is actually helping the average investor? Given the success rates of the typical retail investor, the answer is clearly not. The question then becomes if this is not helpful, is it actually hurting investors? There is a pretty compelling case that information overload causes a person to make more mistakes, especially when it comes to something as tricky as the market.

Who among us hasn’t found themselves transfixed by an intraday move? We get an alert on our phone and stop what we were doing to read the linked article. Then we tune the TV to the financial news to find out what the “experts” think. All of a sudden we went from having a good day at work to being worried the latest selloff means will delay our retirement five years. But we won’t be innocent bystander. We won’t be a victim to the market’s wrath. Instead we take control of our financial destiny by whipping out our phone, logging into our brokerage app, and start selling. And best part is we do it all in the five minutes before our next meeting.

Unfortunately what started the day as a buy-and-hold investment quickly turned into a “sell everything before things get worse”. The problem for most long-term investors, turned spur-of-the-moment traders is that over the last 30 years, there have only been two instances when “sell now before things get worse” was actually a good idea. The 2000 dot-com bubble and the 2008 financial crisis. Two and only two times over the last 30 years was reacting to the fearful headlines a good idea. Compare that to the 1,000+ plus phony stock market crashes that spooked investors out perfectly good positions just before rebounding. Would you rather put your money on the 499, or the 1? Unfortunately most retail investors are so afraid of the next stock market crash that they have an irrational fear it is hiding around next corner. Combine those emotions with an endless stream of market headlines and stock quotes and that is the perfect recipe for over trading.

And I will be the first to admit this happened to me. I used to trade newspaper quotes. Buy something, forget about it for a few weeks or months. Check the newspaper and “wow, I just made 20%, cool!” Then the internet revolutionized trading and let me follow the market more closely. But the 20-minute delay kept me from obsessing over it too much since the prices I saw were already old news. I’d buy what I wanted to buy and then get on with my day. Then high-speed internet came along with real-time streaming quotes.  Now I could put charting programs and stock tickers on my second monitor (because one monitor definitely isn’t enough), and now I could start counting pennies. It would have been nice if it stopped there, but now my phone gives me access to S&P500 futures around the clock. (speaking of stock futures, they are up nicely in Asia as I write this at 10pm MDT) And the worst of all, if I wake in the middle of the night, it is hard to resist the temptation to see what the futures are doing in Europe. If my trade isn’t working, then I have to pull out my iPad and find out what happened. And people call this progress???

I’ve been there and done that, as have many of you. I can and will attest this most definitely didn’t help my trading. In fact, the access to endless information made me miserable and my trading suffered. These daily gyrations got to me, even small moves against me inevitably lead to second thoughts. Second thoughts lead to doubt. Doubt lead to anxiety. And anxiety lead to impulsive and emotional trading. All of this certainly makes me miss the old days of waiting for the daily newspaper, looking up my stocks, and then spending the rest of the day not thinking about the market.

More is most definitely not better and the addiction to endless streams of information is something we need to resist. Without a doubt the worst thing a person can do is check stock quotes in the middle of the night. Don’t do it. It doesn’t help and all it does is lead to crushing anxiety and sleepless nights. Same goes for getting alerts on your phone. Turn them off. If you are not a day-trader, you don’t need to have real-time quotes and charts on your computer. If you are a buy-and-hold investor, don’t look at daily quotes. Don’t even look at weekly quotes.

The most important thing to regaining control of your trading is only looking at the market with a frequency that is appropriate for your holding period. Retirement accounts? At the very most look at them quarterly and even then only for rebalancing. It would be better if you limited checking retirement accounts to once a year. Swing-traders who hold positions for days and weeks should limit themselves to daily quotes. Only day-traders need streaming quotes and live charts. For everyone else, all it does is shake your confidence and lead to impulsive and emotional trades. The first step to beating the market is getting your addiction to stock quotes under control.

Jani

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It it time to buy?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 bounced back Tuesday, recovering a big chunk of Monday’s selloff. Things got ugly Monday after China announced 30 billion of retaliatory tariffs in response Trump’s steel and aluminum tariffs. Fortunately the worst fears dissipated by Tuesday and the S&P500 reclaimed the 200dma and 2,600 support. While we are still on thin-ice, it was encouraging to see traders more inclined to buy the dip instead of turning Tuesday into another bloodbath.

The stock market fell in love with Trump and his tax cuts in 2017. Unfortunately the relationship has been far less blissful in 2018. Trump’s protectionist stances are contrary to the market’s preference for free and open trade. To this point the announced tariffs and retaliations have been modest and manageable. But the fear is round one could lead to rounds two, three, four, and five. The problem with trade wars is once they get started, retaliations and counter-retaliations get out of hand quickly. And so far China claims they are willing to go tit-for-tat with Trump. The biggest question is how far Trump is willing to take this.

The situation got even more complicated Tuesday afternoon when Trump announced a second round of tariffs specifically aimed at China’s anti-competitive practices. While overnight futures are down some, they are actually holding up relatively well for what looks like the start of round two of these trade wars.

It is encouraging to see the futures market only give up a small portion of Tuesdays gains. While things could change during Wednesday’s regular session, the longer these tariff headlines play out, the more they get priced in. That’s because owners who fear a trade war with China have been bailing out of the market for several weeks already. Once a pessimist leaves the market, he is replaced by a confident dip buyer who is willing to hold these headline risks. This turnover in ownership, replacing fearful owners with confident dip buyers, is what helps the market find a floor. While it is too early to say the worst is behind us, the potential for a larger selloff diminishes with each successive round of fearful headlines. Nervous sellers can only sell once. After they leave the market, their opinion no longer matters. And maybe, just maybe this is what is propping up the market here. If it doesn’t react strongly to Trump’s second wave of Tariffs on Wednesday, then the market has already largely priced them in.

And none of this surprised those of us that were paying attention. As I warned subscribers last week, holding near 2,600 for several days was an ominous sign. The inability to rebound decisively left us vulnerable. The longer we hold near support, the more likely it is we will violate it. And that is exactly what happened Monday. While I had no idea what the headline would be, I knew we were vulnerable to a reactionary selloff and the risks were elevated. But I also told subscribers that a dip under support was to be bought, not sold. As I wrote earlier, the longer a story plays out in the news, the more it gets priced in. The first dip is always the most shocking. But each successive dip gets smaller and smaller. While Monday’s headline losses were shocking, most of what we gave up were last week’s rebound. The actual dip under support was far less significant and bouncing so quickly after crashing through support was an encouraging buy signal.

A couple of months ago people were begging for a dip so they could get in at cheaper prices. But now that the dip is here, those same people are too afraid to buy. The thing to remember about risk is it is a function of height. Despite how it feels, the lower we go, the less risky owning stocks is. That’s because a lot of the downside has already been realized. While we could slip even further over the next few days and weeks, without a doubt it is better to have bought at these levels than at much higher prices when it felt safe. The most successful traders are the ones who buy when other people are fearful and sell when everyone else feels safe. Even though prices could slip a little further, this is still a very attractive place to be buying. We were asking for a dip and the market gave it to us. Don’t lose your nerve now just because everyone else is freaked out.

Bitcoin continues to struggle. Even though prices bounced on Tuesday, a few hundred dollar rebound from recent lows is a pathetic bounce for BTC. We are still most definitely in a strong down trend and there is no reason to think the worst is behind us. The thing to keep in mind is prices bounce decisively from grossly oversold levels. It is hard to claim last week’s dip to $6,500 was anything like the shocking free falls over the last few months. And the same can be said of today’s few hundred dollar rebound. If we haven’t reached shockingly oversold levels yet, then we are not done falling yet. Expect prices to undercut Feburary’s lows over the next few weeks and that violation to trigger a large wave of defensive selling. Don’t expect prices to bounce until we fall into the $4k range. Then and only then will it be safe to buy the bounce.

The tech trade has also been weighing on the stock market lately. But the fever broke Monday when FAANG stocks failed to undercut their recent lows (unlike the broad market). That relative strength told us prices were actually firming up because owners were less inclined to sell them. As the saying goes, the stock market predicted nine of the last five recessions. The same can be said for the market predicting the demise of the tech trade. In a few weeks time most people will be kicking themselves for not buying this dip.

Jani

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Why bad news doesn’t matter

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Thursday the S&P 500 rallied after Trump unveiled his less-bad-than-feared tariff plans. He included exemptions for Mexico and Canada and left the door open for further flexibility with other allies. The market’s strength puts us just below the 50dma, a level that has acted as resistance the last few weeks.

I’m impressed with the market’s resilience in the face of what could have been interpreted as bad news. Most Republicans and members of the business community opposed Trump’s tariff plans because they believe it will cost more jobs than it creates. But either the market doesn’t care, or it doesn’t think it will be a big deal because we already erased the losses following Trump’s surprise announcement.

A market that rallies on bad news is a strong market. It doesn’t matter which side of the tariff debate we fall on, we are traders and the only thing that matters is what the market thinks. When confident owners refuse to sell, it doesn’t matter what the headlines are. I’m impressed with the market’s strength and the path of least resistance is still higher. If we were going to crumble on these headlines, it would have happened already. That means there is not much downside risk over the near-term.

Bitcoin finds itself in a bit of a rut as it stumbled under $9k for the first time in several weeks. What started as a routine dip a few days ago built downside momentum and we already exceeded the lows of a couple of weeks ago. Either we are carving out a near-term double bottom and will resume the rebound over $12k. Or owners will panic and bailout before “things get worse”.

While I still think there is more downside for BTC over the medium and long-term, it takes six months or more for a bursting bubble to find a bottom. That means there are still many months of bounces along the way. Now that we undercut the late February lows and triggered all that reactive and defensive selling, we should be in better shape. I wouldn’t rush in at these levels, but if we bounce above $10k, we should be on our way past $12k.

Is a trade war coming?

By Jani Ziedins | End of Day Analysis

End of Day Update:

Tuesday was a relatively benign session for the S&P500 with prices bouncing between modest losses and gains. But that no longer matters because shortly after the close, Trump’s top economic advisor dropped a bombshell by resigning in protest over the proposed tariffs.

This is a major blow to business groups because Gary Cohn was the leading proponent for business interests inside the Trump administration. Unfortunately he lost the tug-of-war with the pro-nationalist advisors. Potentially this marks a big shift in Trump’s policy priorities going forward.

The market is most definitely concerned about this development and futures are down more than 1%. Previously prices had been recovering from last week’s selloff on hope Trump would moderate his stance on universally applied tariffs. But now it looks increasingly likely we are headed for a trade war with our North American and European allies. I warned readers last week this could get ugly and unfortunately it looks like that is the way this is headed.

I most definitely disagree with Trump, there are no winners in a trade war. The proposed steel and aluminum tariffs will raise prices on goods Americans buy. Higher prices means less money left over for other things. And that is just the start. Europe already outlined retaliatory tariffs they will apply to American made products. As a whole, the EU’s economy and population is larger than the United States, so that will definitely have an impact on domestic exporters. Even the Aluminum Association that represents 144 producers wrote a letter to Trump saying they don’t support these tariffs because they think it will harm their customers.

Different reports I’ve seen said these tariffs will add about 1,000 jobs in the steel and aluminum industry, but costs us tens of thousands of jobs in other industries because of the higher steel and aluminum costs as well as the consequences of foreign retaliatory tariffs. The math just doesn’t add up and is why almost all business leaders and most Republicans in Congress are strongly opposed to Trump’s plan. The only logical conclusion is Cohn resigned because he felt like his views were not being listened to and that most likely means Trump is siding with the pro-nationalists on this issue, not the business community and fellow Republicans.

Inevitably this won’t be as bad as people fear because lobbyists will put loopholes large enough to drive a truck through, but we should expect a lot more volatility over the near-term as the trade war rhetoric ramps up. We will likely see further weakness over the next week. I don’t think this is a reason to dump long-term positions unless the retaliations get ridiculous, but swing-traders should wait for better prices before buying the dip.

Bitcoin prices continue to hover above $10k despite a wave of negative headlines over recent days. There was more talk of Korea and other countries banning Bitcoin. A month or two ago this would have sent prices tumbling. Instead we are only down $1k from recent highs. That tells us sentiment is improving as prices rebound from the $6k lows. The path of least resistance remains higher over the near-term, but it will take weeks for us to break $12k, $13k, and flirt with $14k. In the meantime, expect lots of back-and-forth.