Category Archives for "Free Content"

Don’t Read Too Much Into The Price-Action

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 started Tuesday with modest losses, rebounded decisively into the green by lunchtime, but ultimately was unable to hold those midday gains and finished flat. While it looked like a lot was going on and it gave the financial press something to talk about, the mistake is reading too much into what is truthfully little more than random noise.

We have been stuck inside a tight trading range since early December. The market only briefly ventured outside of 2,250-2,280 and even that departure lasted little more than a day. If we assume the market is driven by fundamentals, it is hard to fathom four-weeks of alternating bullish and bearish news so perfectly balanced that we danced on this fine line. That’s akin to flipping a quarter twenty-times and having it come up heads every time. Possible, but not likely. Instead of being driven by headlines and fundamentals, this market is responding to the simple laws of supply and demand.

Trump’s surprise win put stock owners in a good mood as they anticipate bullish policies that will drive stocks even higher. When owners are patiently holding for higher prices, supply stays tight and that props up prices. But on the other side, those with cash have been far less convinced. While there was a brief flurry of short covering and breakout buying following the election, further gains have stalled because buyers are scarce near these record highs. No matter what the headlines have been trumpeting over the last several weeks, owners don’t want to sell and those with cash that don’t want to buy.  The result is this trading range.

The biggest risk in flat markets is most traders arrive with a bullish or bearish bias. That means they assume every story or price gyration will lead to the next directional move. Bulls rush to buy every apparent breakout and bears pile on the breakdowns. But because there is no substance behind these random moves, each breakout or breakdown fizzles within days and these overactive traders get washed out for a loss when prices reverse. Often the best trade is to not trade and that has definitely been the case recently.

Stocks tumble from unsustainable levels quickly and it is encouraging we’ve held the upper end of the trading range for five-days. Even though today’s intraday price-action was pathetic, the market is acting like it wants to test the psychologically significant 2,300 level. At the same time the Dow will have finally broken 20,000 and once we get these round numbers out of the way, we can finally get on with business. Many traders will use the exuberance around these milestones as an excuse to take profits and we are more likely to stumble from these highs than stage a decisive breakout. Lack of demand continues to be a major obstacle and it unlikely to be rectified anytime soon.

Assume we will continue trading sideways until something unexpected happens. That means buying weakness and selling strength.

Jani

Buy the Breakout, or Settle into the Trading Range

By Jani Ziedins | End of Day Analysis

End of Day Analysis

The S&P 500 added modest gains Tuesday, extending Monday’s rebound for a second day. That leaves us a couple of points from all-time highs. Volume was average, but not bad for this lull between Thanksgiving and Christmas.

In last Wednesday’s free blog post, I warned readers to be wary of the market’s pathetic afternoon fizzles.

“Today’s bullish news was more than enough to unleash a flood of buying when we opened near record highs. If the market was a coiled spring ready to explode higher, this would have triggered that move. Instead we hit our head on the ceiling and fell into tail-spin. There are few things more ominous than a market that cannot rally on good news because it tells us we are running out of new buyers.”

“Don’t get me wrong, not ready to call the bull market dead, but this week’s poor price-action says we are not ready to extend the breakout into record highs just yet. The market was getting a tad frothy following the straight-up move from the November lows. A step-back here would be a healthy part of building a sustainable foundation for the next leg higher. A high-volume dip to 2,180 would flush a lot of excess enthusiasm from the market. If prices bounce and reclaim 2,200 not long after, that tells us bulls are still in control.”

And that is exactly what happened.

While it was nice to call that move, attaboys don’t pay the bills. The more pressing question is what happens now that we returned to all-time highs. Do we resume the prior uptrend, or are we getting sucked into another sideways trading range? This is a critical distinction because it is the difference between buying the breakout, or selling the top of a trading range.

If last week’s selloff was driven by bad news and we recovered those losses this quickly, that would be a strong buy signal. Shrugging off bad news so easily tells us the market is ready to fly. But that’s not what happened. In fact the opposite happened. We fizzled on bullish news. Private payroll numbers were strong and oil prices popped when OPEC finally agreed to production caps. Even though everyone was cheering the news, the market couldn’t make any more headway because everyone was already fully invested. Unfortunately it takes more than a two-day dip to fix supply-and-demand problems like that. Tuesday’s smaller gains suggest this week’s rebound is slowing down, not getting ready to take flight.

That said, we need to be careful we don’t read too much into what could be an innocent gyration. Was last week’s fizzle telling us the November rally is running out of steam? Or was it a normal step-back on our way higher. Lucky for us the market will give us the answer over the next couple of days. If we hit our head again, supply is a serious problem and we will trade sideways into year-end. On the other hand, if we break 2,220 and don’t look back, last week was little more than an anomaly and the chase higher into year-end is on. Trade accordingly.

Last week’s fizzle makes it feel like we are falling into a trading range to close the year and is how I’m positioned, but the trader in me hopes we resume the breakout because it is more profitable to ride a wave higher.

Jani

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The market is telling us to be careful

By Jani Ziedins | End of Day Analysis

End of Day Analysis

Wednesday morning the S&P500 rallied to all-time highs shortly after the open. Oil popped 10% when OPEC finally agreed to cap production and the ADP payroll number came in far stronger than expected. But the enthusiasm was short-lived and the market retreated from those highs in a relentless selloff that saw us close under the psychologically important 2,200 level. Volume was off the chart and only exceeded in recent months by the two-trading days following Trump’s unexpected election.

While November had a heck of run from the pre-election lows, this week’s poor price-action has been far less confidence inspiring. We rallied to record highs during the low-volume Thanksgiving week, but the market has been behaving poorly ever since. The last three-days has seen significant givebacks in the final hours of trading. That tells us big-money investors are far more inclined to take profits near all-time highs than they are to add new money and chase prices higher.

I’ve been quite bullish and expected the market to rally into year-end. We’ve been consolidating since mid-summer and the market refused multiple invitations to breakdown. When the market doesn’t go down on bad news, look out above. But this morning’s pathetic price-action forced me to reevaluate that outlook. Today’s bullish news was more than enough to unleash a flood of buying when we opened near record highs. If the market was a coiled spring ready to explode higher, this would have triggered that move. Instead we hit our head on the ceiling and fell into tail-spin. There are few things more ominous than a market that cannot rally on good news because it tells us we are running out of new buyers.

It looks like we’re stuck in a market that won’t break down on bearish news and won’t rally on bullish news. Owners are stubbornly clinging to their stocks and won’t sell negative headlines and price-action while those with cash have zero interest in chasing prices near record highs no matter how “safe” the market feels. Entrenched views like this are what trading ranges are made of. The longer we stay inside the range, the more stubborn both sides become. But this building pressure also means when the dam finally breaks, the resulting move will be swift and decisive.

Don’t get me wrong, not ready to call the bull market dead, but this week’s poor price-action says we are not ready to extend the breakout into record highs just yet. The market was getting a tad frothy following the straight-up move from the November lows. A step-back here would be a healthy part of building a sustainable foundation for the next leg higher. A high-volume dip to 2,180 would flush a lot of excess enthusiasm from the market. If prices bounce and reclaim 2,200 not long after, that tells us bulls are still in control. On the other hand, if the losses accelerate through 2,180 and we cannot find a bottom, the 200-dma and 2,100 are very much in play. Right now the pressure is on Bulls to prove they are still in control and that is what we need to watch over the next few trading days.

I took profits defensively this morning when we couldn’t add to the early gains, but I am more than ready to jump on the next trade when it shows itself. The price-action over the next couple of days will tell me if that is shorting this weakness or buying the dip.

Jani

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Why this breakout is the real deal.

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 poked its head above 2,200 for the first time in history. This is a level we’ve been flirting with since mid-summer and while it took nearly half a year, we finally did it. Now that we’re here, question is if this rally through the upper end of the trading range is the real deal, or if it will fizzle like every other failed breakout over the last six-months.

The GOP takeover continues to be the fuel propelling this 100-point rebound. While there was pre-election apprehension over what a Trump presidency would look like, so far investors are clearly excited about the prospects of a business friendly administration. This is a significant and unexpected development that has the makings to be the catalyst that drives us out of this trading range.

While this week’s price-action has been constructive, we have to remember this is a holiday shortened week. Big institutions know volume is typically light and they cannot move big blocks of shares, meaning they made most of their important trades last week. Most of the trading going on this week comes from smaller and less meaningful traders. Without big money’s guiding hand, these little guys throw their weight around and can boost volatility, but their limited size means they don’t have the money to drive directional moves. And so while I like this week’s price-action, we won’t know the market’s true intentions until next week.

That said, it was encouraging to see how the market responded Tuesday on an intraday basis. We opened above 2,200 but cynical profit-taking quickly pushed us under this psychologically important level. But rather than trigger a wave of follow-on selling, supply dried up and we rebounded back to the opening highs. That tells us most owners are more inclined to continue holding than take profits. Their patience and conviction is keeping supply tight and propping up prices. We’ve seen a lot of churn during this half-year consolidation with nervous and pessimistic owners being replaced by buyers expecting higher prices. This core group of owners has ignored every excuse to breakdown all year and it was inevitable we would make a run to all-time highs. Now that we’re here, there is little reason to think they will give up now. Smart traders keep doing what is working and right now that is betting on the market.

Jani

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Is this the real deal?

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 closed within a few points of all-time highs Thursday as the post-election rebound continues. We survived a lot of bearish headlines this year and no matter what they cynics claim, the market isn’t listening. While there is a chance we could kiss all-time highs and tumble back into the heart of the trading range, the more likely outcome is breaking out and continue higher.

The market enjoys humiliating the largest number of traders at any given juncture. Stumbling from here means patient bulls with piles of profits will give a small portion back. That doesn’t sound very humiliating to me. On the other hand, smashing all-time highs will send bears scrambling for cover. Shorts will be forced to cover and anyone out of the market will start second-guessing their decision as they watch everyone around them raking in profits. It’s pretty obvious which side has more to lose here.

We’ve been flirting with 2,200 for nearly half a year. The longer we hold near this level, the more likely it is we will break through. Unsustainable levels are by definition unsustainable. If we were going to crash in a hopeless ball of flames, it would have happened by now. This resilience tells us there is a lot of support behind these prices. If all of the headlines we encountered in 2016 couldn’t break this bull, it is really hard to imagine something coming along in the final weeks of the year that will break it. The smart money is clearly betting on this bull, not against it.

Right or wrong, when confident owners don’t sell, supply stays tight and prices remain firm. Bears can argue until they are blue in the face, but it all matters for naught if they cannot convince owners to sell. I’m not sure what 2017 holds, but things look good for the market going into year-end. Fight it at your peril.

Jani

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Are we ready to breakout?

By Jani Ziedins | End of Day Analysis

End of Day Update:

It’s been a week since Trump was elected president and the market is holding up amazingly well. Today’s gains puts the S&P500 within striking distance of all-time highs.

Reality turns out to be a long way from the pre-election consensus that a surprise Trump win would roil global markets. I’m not criticising because I also assumed Trump’s win would unnerve investors. Everyone assumed it was Hillary’s election to lose and markets hate surprises. Overnight stock futures traded that way when they cratered 5% as Trump captured key swing-states, but by the time we opened Wednesday morning most of those losses vanished and we quickly traded in the green.

While Trump’s win was largely unexpected, the market likes the GOP’s more business friendly approach to governing and is why stocks reacted positively in the aftermath. One of the most powerful signals in trading is when the market does the opposite of what everyone expects. Rather than sell Trump’s surprise win, the market told us this was a buying opportunity. And the last few days of support has confirmed that signal. The question is what happens now that we are pushing up against the upper end of the summer’s trading range.

We’ve been trading sideways for months because nothing new was happening. The GOP capturing all three branches of government is definitely something new. Reforming corporate taxes is on the GOP’s agenda as is a tax holiday so corporations can repatriate their overseas cash. Both of these will boost profits and dividends, and thus stock prices. At least that is why people are in a buying mood.

We are coming up on significant resistance near 2,190 as we approach all-time highs. If we break through, expect us to keep going into year-end as underweight money managers are forced to chase. If the market cannot attract new buyers at all-time highs, demand is becoming a serious problem and that doesn’t bode well for next year. At this point I give the edge to bulls because countless headlines have been unable to break this market. When owners refuse to sell, it doesn’t matter what the headlines are.

Jani

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Should we sell ahead of the election?

By Jani Ziedins | End of Day Analysis

End of Day Analysis

It’s taken awhile, but the stock market is finally doing something! We’ve been mostly range bound since mid-summer, but traders are finally getting pre-election jitters and that nervousness lead to eight consecutive down days for the S&P500. What was previously viewed as a slam dunk win for Hillary is turning into a much closer race than most expected. It is still Hillary’s election to lose, but Trump is giving her a run for her money.

Last Friday’s FBI revelations are finally showing up in the polling data. Battleground states like Nevada, North Carolina, and Florida that were leaning toward Hillary last week have shifted ever so slightly in Trump’s direction.

While momentum is always a good thing, the Electoral College math still favors Hillary. In addition to taking the above mentioned states, Trump also needs to steal one of Hillary’s “firewall” states; New Hampshire, Colorado, Pennsylvania, or Michigan. Without one of those, the math simply doesn’t work for Trump no matter what is going on in FL, NV, and OH. At the moment, New Hampshire is Hillary’s most vulnerable firewall state and is more important to the outcome than the much talked about FL, NV, and OH.

While we can dissect the polling data a million different ways, the more important question is can we believe it? The biggest challenge in polling is counting the right people. Obviously we don’t want to ask a 12-year old who she will vote for. But what about a 34-year old male? Surely his opinion counts, right? Would we feel the same way if we knew he has never voted? So maybe we shouldn’t count him. But what if we find out he drove 5-hours to attend a Trump rally. Does that make a difference?

Voter intent is the hardest, yet most important thing to measure. This is especially critical in a historically unpopular election. We will have people who have voted in every presidential election since the 1970s skip this one because they find both candidates so deplorable. We will also have middle-aged, blue-collar workers vote for the first time because they are so passionate about Trump. Countless polling results are being thrown at us, but if they are using a flawed measure of voter intent, the polls everyone is taking for fact could be way off the mark.

Right now Trump has a one-in-three chance of winning. That means if we held three elections under similar circumstances, the favorite would win twice and the underdog once. This has nothing to do with the candidates and a last-minute surge, but reflects the errors that naturally arise anytime a small sample is used to predict the characteristics of a larger group. If we’re not asking the right people the right questions, our poll won’t accurately reflect the opinions of the larger group.

As we discussed previously, a Trump win would unnerve the market because he is the least understood major party candidate in modern history. While he is using this outsider status to his advantage to attract disgruntled voters, markets hate uncertainty and no one really knows what a Trump presidency will look like. Even though many people don’t like Hillary, the market prefers her because at least we know what we are getting. The market always prefers a damaged status quo over a wildcard. And if anyone doubts that, the market’s current bout of weakness largely coincided with Trump’s improving chances.

While all that Electoral College and Statistics stuff is interesting, what we really want to know is how to trade this. The simple answer is those that are in the market should stay in, and those that are out should stay out.

The time to sell defensively was weeks ago when everyone was comfortable. Reacting emotionally to a selloff rarely results in a smart trading decision. If someone has long-term positions, stick with them and ignore this near-term volatility. Contrary to popular opinion, the president has little influence over the economy and stock market. While we could see some volatility after the election as supporters of the losing side reflexively dump their stocks at a discount, that will be a better buying opportunity than time to get defensive.

If someone has cash, stay calm and continue watching. Prices might get even more attractive over coming days. But rather than fear impending doom-and-gloom, we should be greedily rubbing our hands together as emotional owners start giving money away. Risk is a factor of height and we are at the lowest levels in months. While no one can pick the exact bottom, it is less risky to buy today’s selloff than it was to hold last week’s benign sideways drift.

The widely expected Hillary win will be a relief to the market. While we might see Trump supporters dump their stocks in disgust on Wednesday, the relief of a conclusive outcome will no doubt keep any post-election weakness brief. A Trump win on the other hand will be a surprise and not something that is currently priced in. Fear of the unknown could lead to an extended selloff. But like I said, the president isn’t as important as most people think, especially one that has a strained relationship with Congress. Within two-weeks the market will go back to business as usual, which up until this week was hovering near all-time highs. If people want to give us stocks at a discount, it would be foolish not to take them.

Jani

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What the election means for the market

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 tumbled for a 6th straight day as it undercut 2,120 support and closed at the lowest levels since early July. While there wasn’t a decisive headline driving the 1% midday selloff, most people chalked it up to pre-election jitters. The encouraging thing is we bounced off 2,100 support after briefly violating it. Rather than trigger a tidal-wave of defensive selling, buyers rushed in and we closed well off the midday lows.

This is the largest directional move we’ve seen since September’s rate-hike tantrum and is the longest losing streak in over a year. Is this forewarning us of much worse to come, or did we just pass through the worst of it?

Up to this point, most assumed Hillary would walk away with the election, but last Friday’s reopening of the FBI investigation into Hillary’s email servers gave Trump a small boost over the weekend. While he still faces long odds, closing the gap made people reconsider the prospects of a Trump presidency.

The market prefers Hillary because she is the establishment candidate. We know what we are getting with her and it won’t be much different from what we’ve had over the last eight-years. The market hates uncertainty over all else and it favors Hillary because she is a known quantity.

While we spend a lot of time debating the merits of each candidate, most people give the president way too much credit for influencing the economy and stock market. Four-years ago we went through a multi-week selloff following Obama’s reelection because emotional Romney supporters were dumping their stocks at steep discounts. We bottomed at 1,350 and with the benefit of hindsight, anyone who sold those lows was clearly an idiot. There is no reason to think this time will be any different. Sore losers dump stocks and savvy buyers snap up the discounts.

A big part of what pulled us down over the last six-sessions is the risk premium associated with an uncertain outcome next week. No matter who wins, that risk evaporates Wednesday morning once the result is conclusive. Removing that risk is bullish, but that is only one component of what will affect prices Wednesday.

A Hillary win is largely priced in and will produce a relatively modest reaction. A Trump win is definitely not priced in and will cause larger reaction. Today’s selloff definitely tells us which direction it will be. But even that will get priced in relatively quickly and the market will go about its business just like it did after both of Obama’s elections and every other election before that.

Many stock owners will trade emotionally next Wednesday and there will be a lot of profits waiting for those who keep their composure. Prices will bounce pretty quickly following a Hillary win because that is the expected outcome. If Trump wins, wait a few more days for the emotional selling to subside before buying the dip.

Jani

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What’s Next?

By Jani Ziedins | End of Day Analysis

End of Day Update:

Stocks dropped 10-points at the open due to what the financial media claimed was weak earnings. But rather than rattle nerves, a sharp reversal erased those losses before lunchtime. While we continued to bounce around in the afternoon session, we finished the day well off those morning lows.

Once upon a time price-action like this was insightful. Running out of sellers so quickly after an unsettling open is often a strong buy-signal. But in our current market, we have to assume this is just more random noise and cannot base a trade off it. If anything, I’m more inclined to trade against this signal than with it given how quickly this market reverses.

We remain inside the recent trading range and until the market shows us something new, we have to assume we are still playing by the same rules that have governed us since mid-summer. That means expecting directional moves to fizzle and reverse.

The thing to remember about stock market “rules” is they are only rules half the time. Sometimes we buy the breakout, other times we sell overhead resistance. A bearish lower-low looks just like a bullish double-bottom. Knowing what rule to apply when is the art of trading.

The first job of the trader is paying attention to the mood of the market. Are we in a buying mood? A selling mood? An indifferent mood? With this critical piece of information, we know which set of rules to apply. Currently we’re in an indifferent mood and that means ignoring traditional buy and sell signals.

It usually takes something significant to trigger a change in mood. Many times it is a dramatic and unsettling headline. Other times it is as simple as a change in the calendar as we transition from one quarter to the next.

I hoped going from the summer doldrums to the higher-volume fall trade would liven up our market and give us something to trade. Unfortunately that didn’t happen and now we need to look ahead for the next big thing to wake traders up. We are already a good chunk into the 4th quarter and 3rd quarters have not moved the needle. The election is the next big thing on the horizon and less than two-weeks away. Following that is the Fed’s largely expected rate-hike in November or December and institutional money managers repositioning for year-end. Hopefully one of these wild cards will pull us out of the trading range doldrums.

I will be shocked if the market trades lifelessly for the rest of the year, but the market has a nasty habit of giving us the thing we least expect. All we can do is wait and see.

Jani

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How to trade this weakness

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 steadied itself Wednesday following Tuesday’s crash through 2,40 support. While this price stability ended Tuesday’s emotional wave of selling, the muted rebound was hardly confidence inspiring. The calm didn’t last long because as I write this, overnight futures are down more than half-a-percent. Is this a sign of worse things to come? Or is it simply another routine bounce off the lower end of the trading range?

There wasn’t a clear headline driving Tuesday’s selloff. The best the media could come up with was disappointing earnings. We fear selloffs without a reason if it means the market knows something we don’t. But we ignore ones when the market is simply humiliating nervous and impulsive owners by convincing them to dump their stocks right before the next rebound. Which is this? That’s what we have to figure out.

New and unexpected headlines drive large directional moves. That’s because new information causes traders to change their outlook, and as a result, adjust their portfolios. This wave of buying or selling fuels the big moves. On the other hand, recycled headlines produce fleeting gyrations and quickly reverse because everyone already knows about these problems and they are factored into their outlook. If traders expect something, they don’t adjust their portfolio when those headline pop up again. The million dollar question is if the driving force behind Tuesday’s selloff is truly new and unexpected, or if it is simply recycled headlines we have been talking about for months.

Wednesday’s Fed meeting minutes gave us the strongest hints a rate-hike is just around the corner. Rather than extend Tuesday’s selloff, stocks hardly budged. That’s the clearest indication we have that the next quarter-percent increase is already priced in. We can cross that one off our list.

The next big bogie is third-quarter earnings. Expectations are relatively muted and it is hard to find anyone excited about our economic growth. Many even claim we are in an earnings recession. Given that less than enthused outlook, earnings have a very low bar to clear. While things could certainly could come in worse that this, they have to be be worse than the widely expected sluggish. Since front-line managers continue to see more demand than their current staffing levels can handle, we shouldn’t expect a large falloff in earnings. It will be another lackluster quarter, but the sky is not falling.

Assuming the overnight futures hold these losses into tomorrow morning, expect another wave of reactive selling to hit the market as nervous owners bailout before “things get worse”. But without any real meat to this selloff, this is definitely a better place to be buying than selling. Remember, risk is a function of height. By that measure, this is the least risky place to own stocks since June. Unless earnings over the next few days come in far worse than expected, a bounce off 2,100 support makes for an attractive entry point. When yet another selloff fizzles and bounces, expect underweight money managers to start feeling pressure to chase this market into year-end.

Jani

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Why the market remains rangebound.

By Jani Ziedins | End of Day Analysis

The S&P500 slipped for a second day as it continues to struggle with 2,160 resistance and the 50dma. Volume was above average, but average is relative since it is calculated using the last 50-days of painfully slow summer trade.

The market crashed under the 50dma in early September as traders woke from their summer slumber just as the Fed started hyping the prospects of a rate-hike. While it was a brutal 2.5% selloff, bears haven’t been able to do much since. Volatility has definitely picked up, but we remain stuck in a sideways market.

Directional moves happen when people change their mind. When bulls become less bullish and start selling, or bears become less bearish and start buying. The reason we remain range bound is bulls are stubbornly bullish and bears are stubbornly bearish. The Brexit bears haven’t been able to do anything with those headlines, while the no-rate-hike bulls haven’t been able to move the needle either.

The high levels of intraday volatility come from a small group of traders that overreact to every headline and gyration. While they bounce back and forth like a ping-pong ball, no one else is interested in joining them. The vast majority of the market is content with their positions and over-caffeinated talking heads and sharp price moves are not changing that.

Supply and demand are fairly balanced because sentiment is similarly balanced. When the crowd gets overly bullish or bearish, we setup for a snap-back. Reversals from unsustainable levels are quick and decisive. But the trade over the last several months has been anything but quick or decisive. That tells us prices are sustainable and not overbought even though we are within shouting distance of all-time highs.

While the market suffers from a serious lack of demand every time prices move to the upper end of the 2,100s, I still give the edge to the bulls. There have been more than enough spooky headlines to send us tumbling into the abyss. Instead owners shrug off every bearish headline. Whether rational or not, when owners don’t sell, supply remains tight and prices firm. As long as owners are confident, expect selloffs to stall and bounce like they have all summer.

The next big bogie on the horizon is third-quarter earnings. While this is a multi-month event, over the next couple of weeks we will know if there are any systemic problems hiding under the surface. Even with as few as 10% of the companies reporting, we will have a good sample of the overall economic conditions. If there are serious problems, we will know by then.

If third-quarter earnings don’t kill us, expect the stable trade to seduce underweight money managers to start chasing stock prices into year-end. September’s 2.5% selloff priced in the inevitable rate-hike, so we no longer need to fear that. Anytime the market slips to the lower half of the 2,100s, treat that as a buying opportunity. If we were vulnerable to a crash, it would have happened by now.

Of course the significant disclaimer is as long as nothing new and unexpected happens, like a surprise Trump victory. If that happens, all bets are off and we need to reevaluate. Most likely that will be another dip buying opportunity, but the key is figuring out how low we go first.

Jani

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How to Trade the Fed Decision

By Jani Ziedins | End of Day Analysis

While volatility has definitely picked up in recent weeks, the S&P500’s propensity to trade sideways remains the same. This summer we were stuck in a tight range between 2,170 and 2,190. Now we find ourselves marooned between 2,120 and 2,150. The more things change, the more they stay the same.

The last couple of days have been low-volume throwaways as most traders sit on their hands ahead of the Fed’s interest rate decision due Wednesday. The brief September swoon was fueled by fear of an impending rate-hike, but the reactionary selling was short-lived as the consensus quickly determined the Fed doesn’t have the courage to bump interest rates this month. In less than 24-hours we will know if the crowd got this one right.

I side with the consensus and think the Fed will hold off until the final months of the year. But just because the Fed remains stationary doesn’t mean stocks will rally. If the crowd expects no change, then that decision is already priced in. We could very well see a brief pop as uncertainty and risk evaporates following a no-change policy statement, but after that we are more likely to see a sell-the-news than a runaway rally. Delaying the first rate-hike by a few weeks isn’t going to change anything and the market is likely to see it the same way Wednesday afternoon.

While I remain bullish and expect stocks to finish the year strong, three-months is a long time and a lot can happen between now and then. Clearly the September selloff lost momentum as we keep bouncing off 2,120 support. Gone is the anxiety and fear as owners feel more comfortable following a rebound off of the recent lows. But the thing that concerns me is our inability to break out of this consolidation. If we were truly oversold, we would have bounced higher and not looked back. That means we are not oversold yet.

The longer we hold near support, the more likely we are to violate it. If we cannot escape this trading range by the end of the week, expect the next move to be lower. Breaking 2,120 support will launch another wave of reactionary selling as we trigger all the stop-losses under this widely followed technical level. That will be followed by another wave of reactive “sell before things get worse”. But not long after that, expect the supply to dry up like it did on September 9th. Most owners know a 0.25% bump in interest rates doesn’t change much and will continue to confidently hold their stocks, just like they did through the Brexit, the last rate-hike, and all the other bearish headlines that came across the wire this year. No matter what the “experts” think should happen, when confident owners don’t sell, supply remains tight and prices firm.

If we pop following a no-hike decision Wednesday, I wouldn’t chase it because we will likely run out of buyers near 2,180 like we have so many other times this year. But if we crash under 2,120 support in a sell-the-news reaction, stay calm and let other people dump good stocks for steep discounts. The most ambitious of us take advantage of the opportunity and buy the bounce off of 2,100 support. If the selloff is sharp and volume extremely high, that will finally be the capitulatory bottom we’ve been waiting for.

Jani

The Big Move Came. What Happens Next?

By Jani Ziedins | Weekly Analysis

My August 30th free blog post was titled “The Next Big Move is Coming“. By almost all standards Friday’s 2.5% freefall qualifies as that move. We’ve been lulled into complacency by this summer’s tight, sideways trade, but we knew it couldn’t last forever.

Friday’s volume was the highest we’ve seen since the Brexit, but certainly not over heated considering the size of the accompanying price move. The selloff crashed through all kinds of technical levels and triggered most automatic stop-losses, but the relatively constrained volume suggests we didn’t set off a frenzy of reactive and emotional selling. That can be good or bad depending on how you look at it. It is nice to see most owners remain calm during a painfully ugly period. That bodes well for a rebound if these owners keep their composure next week since confident owners keep supply tight. But the opposite argument is Friday’s turnover didn’t look capitulatory. That could lead to further losses if emotions and fears flare up next week.

A major theme in my August 30th blog post was the risks associated with holding a sideways market. Every day we own stocks we expose ourselves to the unknown. When we buy right, the market moves in our direction and we get paid for holding that risk. But in a sideways market, we don’t get compensated for holding risk. All risk and no reward is a lousy trade. Long-term investors can sit through these flat stretches and subsequent gyrations, but shorter viewed traders should avoid owning flat markets. Quoting William O’Neil, “all stocks are bad unless they are going up”. While it is helpful to critique the past, what everyone really wants to know is what comes next.

The widely circulated explanation for Friday’s selloff was disappointment over no additional stimulus from Europe and the prospects of a near-term rate-hike by the U.S. Fed. Allegedly this “news” turned traders into sellers on Friday. The question for us is if this was a one-day tantrum, or the start of something far more significant.

The key is figuring out the real reason people were selling on Friday. Anyone who honored their stop-loss levels was flushed out automatically as the market smashed through every technical level established over the last few months. While this technically driven selling added fuel to the fire, there are not many technical levels left to violate. That means most of the autopilot selling is behind us, allowing us to focus on the trading decisions made by humans.

Humans sell for rational reasons and they sell for emotional reasons. Let us start by examining the rational hypothesis. The Fed is going to raise interest rates at some point in the near future, the only real debate is if that 0.25% hike comes in a few days, or a few months. You have to be living under a rock if you don’t know it is coming because the media has been obsessing over it for years. We survived the first rate-hike last December and even traded higher following it. Were traders really selling on Friday because they are afraid of a 0.25% rate hike? Let me ask you, are you afraid of a 0.25% rate hike? Or is something else driving people to sell?

I believe very few stock owners are personally afraid of this rate-hike. This is old news and 0.25% isn’t that meaningful. Certainly not enough to derail our improving economy. And if someone really is terrified of rate hikes, they would have cashed-in months, if not years ago when we first started debating this. People who are afraid of rate-hikes don’t own stocks in this environment plain and simple. If they don’t own stocks, they are not selling stocks. (most investors don’t short stocks)

If traders are not selling because of the rate hike, why are they selling? It comes down to Game Theory. People are not selling because they are afraid of a rate-hike personally, they are selling because they think other people are afraid of a rate-hike. The financial press has conditioned us to believe stocks are going up because of easy money and prices will fall once the spigot is turned off. Say something enough times and people believe it.

We make money in the stock market, not by predicting the future, but predicting what other traders will do. Even though we might not fear something personally, if we think the crowd will get spooked by a headline, we will sell ahead of the anticipated decline. That is what really happened Friday. Traders are not selling the economic damage of a rate-hike (real), they are selling ahead of what they think will cause a selloff (imagined).

What does it mean if most traders are only selling because they think other people will sell? It means there is no meat to this selloff. If no one is changing their personal outlook about the economy, then they will continue to have the same appetite for stocks. While they might cash in some chips ahead of the widely expected “rate-hike crash”, they will jump back in once the waves settle down.

Value investors are not afraid of a trivial bump in interest rates and will start buying the dip once prices get so attractive they cannot resist. This pullback also gives underweight money managers the opportunity to salvage their year by buying stocks at prices they wish they had bought earlier in the year. When there is no real fear in the market, traders jump back in quickly and is why this rate-hike weakness will be short-lived. No doubt emotion and fear could flare up Monday as traders sell “before things get worse”, there is very little substance behind this move and we should be looking to buy it, not sell it. There is no reason to rush in and catch a falling knife, but once prices stabilize, don’t dally and miss these bargains because they won’t last long.

Are you personally afraid of interest rate hikes? Or are you going to take advantage of these discounts? Let me know in the comments below.

Jani

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The Next Big Move is Coming

By Jani Ziedins | End of Day Analysis

It’s been a painfully slow summer. The last time I blogged was 26-days ago when the S&P500 finished at 2,164. Today we find ourselves 12-points higher at 2,176. Holding nearly three-weeks of market risk netted owners an average of 0.02% profit per day.

This year the market gapped lower 20-points or more at the open on multiple occasions. This means owners have been risking a 20-point loss for a measly 0.5-point per day gain. Over this period the potential downside has been at least forty-times the gain! All risk and almost no reward makes this a very poor time to be invested. Big money knows this and is why they have largely been absent as noted by the extremely low trading volumes. They haven’t been wasting their time on this mindless chop and neither should we. Stay in, stay out, but don’t try to trade this.

While the market netted a measly 12-points, we witnessed far more intraday volatility. Ten, fifteen, twenty-point intraday moves and reversals have been common. Even though the market gained 12-points over three-weeks, very few active traders made that much because they have been faked out by these phony breakouts and breakdowns. Trading mindless chop makes it way too tempting to buy high when things look good and sell low when second-thoughts creep in. That’s why I’ve been in cash for the last several weeks. The hardest thing for a trader to do is not trade, but that’s been the right call.

But that was then and this is now. We are quickly approaching the market’s next directional move. Big money managers will return from summer vacation after Labor Day. With just a few months left in the year, they will start positioning their portfolios for year-end. That either means chasing these record highs even higher, or cashing in and taking profits. Since big money hasn’t been active the last several weeks, we don’t have enough information to discern if they are more inclined to chase, or alternately are in the mood to take profits. By mid-September we will have more data and a better indication of their intentions.

Over the near-term, since the market has stubbornly held near record highs in the face of falling oil prices and the threat of rate-hikes, that shows most owners are confidently holding for higher prices. If we were over-bought and vulnerable, we would have fallen by now. That means the market wants to test the psychologically significant 2,200. Expect this slow, choppy grind higher to continue for the next couple of weeks. But what happens after that is anyone’s guess. That is when underweight big money will get desperate and start chasing prices higher. Or they will get cautious and start taking profits.

The most likely outcome? Both! Four-months in the market is an eternity and plenty of time to have crisis in confidence, dip to 2,100 support, and rebound to all-time highs before year-end. Or maybe it happens the other way, desperate traders chase the 2,200 breakout up to 2,300 where we run out of demand and slip into year-end.

The great thing about being a little fish is we are nimble enough that we can wait for more information. If the market does something unexpected, we can cash-in, evaluate, and adjust. While this mindless summer trade is putting us to sleep, this is the time to wake up and start looking for the next big trade because it is just around the corner.

Jani

How to Trade Friday’s Employment Report

By Jani Ziedins | Intraday Analysis

End of Day Analysis:

The S&P500 extended its streak of listless summer trade Thursday as we remained stuck inside a tight trading range stretching back several weeks. Tuesday’s selloff was the biggest move in a while, but even that failed to motivate traders to trade.

Barring a calamity, we shouldn’t expect volume to pick up until after institutional money managers return to work after Labor Day. In the meantime little guys will continue ruling the roost. Their erratic trade drives these wild intraday swings, but they have so little money that these gyrations peter out hours later. Up five-points, down-five points, repeat until thoroughly seasick.

Friday morning we get the monthly employment report. Unless it is truly shocking, we shouldn’t expect much from it. The first six-months of the year we were stuck in a half-empty mood. But now that we’ve held near all-time highs for a month despite numerous bearish headlines, it seems we shifted to a half-full mindset. That means the market will likely cheer a strong employment report because it means the economy continues to improve. If July hiring is weaker than expected, that means interest rates will stay low for longer. No matter which way employment goes, owners will have the excuse they need to keep holding. When owners don’t sell, prices remain firm. The Brexit and all the other negative news we received this summer failed to rattle owners’ resolve and I don’t expect anything we hear Friday morning will change that. If prices fall in a knee-jerk reaction, that will be yet another buying opportunity.

I apologize for the two-week delay since my last free blog post, but I’ve been busy working on the backend of my website. The most noteworthy item you will notice is I changed my domain from “crackedmarket.com” to “cracked.market”. Both addresses work identically and will take you to the same place, but I’m rebranding the website “cracked.market” because I like the way it looks. Now that I have several major behind the scenes items taken care of, I’m working on the layout and you will see those changes in coming weeks. I will probably post with a lower frequency for the remainder of the summer as long as the market continues trading sideways. If something dramatic happens, I’ll be sure to share my thoughts, but hopefully the remainder of the summer will be quiet and dull. For readers that want daily analysis, don’t forget about my Premium Subscription, which includes a two-week, risk-free trial.

Jani

Trading Outlook for Wednesday, July 20th

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 slipped a negligible amount Tuesday in one of the lowest volume sessions of the year. To this point stocks are holding the recent breakout as they trade in a tight range between 2,155 and 2,170. Quite a reversal in fortune from the turmoil and uncertainty we faced earlier in the year. The biggest question on everyone’s mind is if these record highs are the real deal, or these are the last gasps before the crash.

Last year many bull market skeptics claimed they would have a lot more confidence in this rally if we pulled back and refreshed. Many were quoting how many months it’s been since we had an X% pullback. Since then we’ve had two dramatic selloffs, the first occurring last fall and an even more dramatic one this winter. Now that we checked that box and reset the clock, have we won over the skeptics? No of course not. But now they have to be more creative when coming up with a reason to disbelieve this strength.

For years I’ve been firmly in the secular bull camp. Over the last 100-years, “lost decades” have been followed by monstrous secular bull markets lasting a dozen or more years. That makes this seven-year old bull market relatively young in comparison. That said, secular bull markets contain brutal and terrifying selloffs. The infamous Monday in 1987 where stocks lost over 20% in one day was inside a phenomenally profitable, two-decade long bull market. This bull market will die like every one that has come before it, just don’t expect it to rollover any time soon.

But that is the big picture and mostly applicable to long-term, buy and hold investors. Those of us with shorter timeframes can look at this 150-point rebound from the Brexit lows with a more cynical eye. Even in powerful up-trends, we experience the inevitable (and healthy) step-backs.  Having moved as far as we have over the last few weeks, it is little surprise we ran out of buyers willing to chase prices higher. But even though we are struggling to find new buyers, stock owners are confidently hanging on for higher prices. Even without strong demand, prices are holding up well because so few owners are selling stocks. When supply is tight, it doesn’t take much demand to keep us levitating near record highs.

At this point it seems many traders are watching 2,155 and 2,170 levels and waiting for prices to breach either of these benchmarks before making their next move. A wave of profit taking will hit us if we slip under 2,155 and jumping above 2,170 will trigger the next round of chasing. But since we remain in the low-volume summer months, we shouldn’t expect either of these moves to get too carried away. The breakout will likely stall near 2,200 while a dip would most likely bounce before testing 2,100 support.

Even though we broke out to all-time highs, for short-term traders we are better off trading against these moves. That means buying weakness and selling strength. The sustainable buying won’t officially begin until big money managers return from their summer vacations this fall.

Jani

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Trading Plan for Wednesday, July 6th

By Jani Ziedins | End of Day Analysis

End of Day Update:

Tuesday the S&P500 stumbled modestly following last week’s shocking rebound that recovered nearly all of the Brexit losses. We lost 100-points in the two-days after the Brexit, but bounced back over the successive three-days as if nothing happened. That dramatic whipsaw leaves most traders confused and wondering what comes next.

It is fairly obvious why the market sold off after the widely unexpected Brexit vote shocked the world, but even more unexpected was the powerful recovery that pushed us back near all-time highs. If the world is falling apart, shouldn’t the market be reeling? While that was the initial reaction, it didn’t take long for opportunistic traders to realize central banks would respond to this political calamity by pumping even more stimulus into the economy. Any talk of rate hikes was quickly replaced by reassurances of further easy money. It seems market thinks this medicine is more attractive than the Brexit is bad.

But the above analysis assumes all of last week’s buying was thoughtful and rational. While it would reassuring to think that’s the case, the size and speed of the rebound reeks of emotional, reactive, and desperate buying. Anyone who sold or shorted the Brexit headlines quickly came to regret that decision and was forced to rush back into the market. Shorts were squeezed and the imminent close of the second quarter forced money managers to buy back their books ahead of their quarterly reporting. They certainly didn’t want to be the guy who had to explain to investors why they reactively sold at the exact wrong moment. Further proof of this quarter-end phenomena is the frenzied buying ended on the last day of the quarter and July’s prices have been floundering without fresh buyers. Given the way overnight futures are trading, it doesn’t look like things will get any better Wednesday.

None of this should come as a surprise to experienced traders. One-hundred point moves over three-days are clearly not sustainable and bound to run out of steam at any second. Tuesday seemed to be that day for this rebound. Now that we stumbled back under the widely followed and psychologically critical 2,100 level, expect profit-taking and defensive selling to continue replacing last week’s reactive buying. I don’t foresee this turning into a big crash, just a bit of consolidation following last week’s dramatic swings. Two-steps forward, one-step back. Nothing unusual about that.

I shared the following analysis with subscribers early Friday afternoon when the market was up, but the momentum was stalling:

“the time to buy the dip was earlier in the week, not now that we’ve raced 100-points in three-days. If anything, I’m more interested in shorting this strength because over the near-term, moves like these are not sustainable. Most of the short-squeezing and chasing has already happened. Any bear who had a reasonable stop-loss has been chased off by this relentless climb higher. And this afternoon we are running out of momentum as we struggle to find new buyers at the upper end of the Spring’s trading range.

I have zero interest in buying the market after we’ve run this far. But a short here could be interesting. Not because I’m bearish this economic environment, but because we priced in an awful lot of optimism the last few days. Invariably sentiment will swing the other way when someone important says the wrong thing. The long-three day weekend means there is even more time for us to stub our toe.”

Looking forward to Wednesday and how to trade this, we tested and held 2,080 support and the 50dma Tuesday. Unfortunately these things are rarely one-day events and if overnight futures accurately predict tomorrow’s open, we will find ourselves slipping under this first line of technical defense. From there the next key level is 2,050 and expect at least temporary support. If we trade sideways in this area for a couple of days, that counts as our step-back and things start looking more optimistic. But if we cannot hold this level, expect another wave of defensive selling to swamp the market and the next stop is the 200dma near 2,025.

Jani

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Trading Plan for Wednesday, June 29th

By Jani Ziedins | End of Day Analysis

End of Day Update:

It’s been a dramatic few days for global markets as the near universally expected “Bremain” turned out to be a shocking “Brexit” instead. The S&P 500 was complacently resting near all-time highs the night before the vote, but a few short hours later we found ourselves in the middle of a panic driven selloff. Friday’s selling extended through Monday morning, but by Monday afternoon we were running out of fearful sellers and found support near 2,000. Then Tuesday we surprised nearly everyone when we rebounded 1.8%. The question on everyone’s minds is what comes next? Is this a dead cat bounce before tumbling lower, or is the worst already behind us?

It’s been analyzed to death from countless other sources, but the Cliff Note’s version is the Brexit is more political than economic, especially when viewed from U.S. shores. A strong dollar, weak oil, and potential economic slowdown in Europe will be headwinds for our energy and export companies, but this is nothing new. Our service based and import heavy economy survived these headwinds all year and this is largely more of the same. This means the “Brexit” selloff is a buying opportunity, not a precursor to something much worse. If anything, this political uncertainty delays a Fed rate hike on the short end of the yield curve and the flight to safety is pushing down yields on longer end. Low interest rates leads to investors bidding up the prices of stocks and the risk to the markets from increasing rates gets put off yet again.

That’s the big picture. But what we really want to know is how to trade this and for that we need to zoom in. The Brexit is a large, ambiguous mess that no one understands because nothing like this has happened before. It would be a mistake to assume two-days of selling is all it took to fully price in the risks and headlines that will come out over the next weeks and months. While it was nice to see global markets bounce Tuesday, it is premature to call this thing over. Currently the market is expecting a rather smooth and painless transition for Britain. But all it takes is for one loud-mouthed politician to start spouting off that now is the time to reconsider and renegotiate these free trade agreements. Or another from Europe to say that London won’t get a free pass and needs to suffer the consequences of their decision. Right now politicians on both sides of the English Channel are humbled and meek from this gigantic rebuke. But give it a couple of days and soon they will find their big mouths again. When they do, expect the market to shutter and reel. At best we should expect the market to remain range bound for a while. That means these pops should be sold, not chased. We will survive this and pull out of it this fall, but expect it to be a bumpy ride between now and then.

What can we learn from this? Was the vote as unpredictable as people are claiming? I’ll be the first to admit I fell for it. I was nearly certain Britain would vote to stay in the EU. But just because that was the most likely outcome doesn’t mean it was a good trade. The previous runup in price ahead of the vote created a very poor risk/reward and is why I chose to be in cash ahead of the vote.

Quoting last Thursday’s Premium Analysis sent to Subscribers the day before Britain’s historic Brexit vote: 
Traders are fixated on Thursday’s Brexit vote and this drift up to 2,100 resistance tells us the crowd is optimistic and expecting a favorable outcome. This positive outlook is somewhat unusual because more often than not the market fears uncertainty and typically prices in the worst, but this time traders are buying ahead of what they think will be a Stay result. Unfortunately for those positioning for pop, they will be disappointed because a big chunk of this buying is happening ahead of time. If no one is left to buy the headline, we could actually stumble into a sell the news situation. The market hates to be predictable and right now the least expected outcome would be a selloff following what most bulls are hoping for.

While I agree with the crowd that a Stay vote is the most likely outcome, I don’t want to buy ahead of the vote because much of the upside has already been realized. Since this Brexit drama never really pressured prices, there is not a lot of upside to be realized once this weight is removed. While we could surge 20-points in a knee-jerk relief rally, we could also open down 40-points if the Leave crowd surprises everyone. That is a poor risk/reward even if the reward is a higher probability outcome.

Jani

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Trading Plan for Wednesday, June 14th

By Jani Ziedins | Intraday Analysis

End of Day Update:

Tuesday morning the S&P 500 extended its selloff, crashing through 2,080 support and the 50dma on its way to the mid-2,060s. But by late morning we exhausted the supply of sellers and closed 10-points off the intraday lows. Justifications for this week-old selloff come from two sources, oil pulling back from its highs and growing fear of a Brexit.

Last Tuesday evening I warned readers to be wary of a near-term pullback in oil and equities and that is exactly what happened. We don’t need be psychic to know what the market will do next, all we have to do follow the swings of sentiment and supply and demand. Last week traders were giddy as oil broke through $50, leading many to predict $60 oil wasn’t far away. Instead of surging higher, oil prices peaked and stumbled back into the $40s. So much for the wisdom of consensus. Stocks followed the same flight plan when it looked like we were headed to all-time highs, yet found ourselves stumbling under the 50dma instead. But that’s the way this works. One week’s giddiness gives way to the next week’s pessimism.

This week oil prices have been bumped off the front pages as the financial press fixates on next week’s Brexit vote. This was supposed to be a slam dunk for the “stay” vote, but the Brexit camp has surged in recent polls. That uncertainty is unnerving markets as traders start to fear the unknown. While this will be a hugely disruptive event if Britain votes to leave the EU, the economic consequences will be less bad than most fear. This is a referendum on refugee immigration, not trade. British citizens want to close their borders to Middle East refugees and given EU laws, the only way they can do that is by pulling out of the union. This isn’t a dispute over trade and no one wants to start a trade war since both sides are so dependent on the other. This means we should expect British and EU politicians to quickly sign into law comparable trade agreements to replace the previous EU ones. This will take place within weeks if not days because both sides want to minimize the economic disruptions. But politicians are not promoting “Plan B” because they are trying to use fear of economic calamity to persuade people to vote “stay”.

A Brexit vote would send the S&P 500 down a few percent because it is not currently priced in. But this will be a buyable dip for those who have the courage to be greedy when others are fearful. A week or two after the Brexit vote, many of the unknowns will have been ironed out and we will move forward with a plan. Norway and Switzerland survive quite successfully without EU membership and instead are part of a European Free Trade Association. Britain will do the same thing and life moves on. Since Britain never adopted the euro and still used the pound, there won’t be any of the financial entanglements that drove concern over a Grexit a couple of years ago. All the Brexit is doing is shifting from standardized EU trade agreements to ones made separately. Six one-way, half-a-dozen another. For all intents and purposes it will do the same thing no matter what the document is called.

As for how to trade this, Tuesday’s dip undercut popular technical stop-losses, purging a good bit of that supply from the market. The relentless slide under 2,070 also combined with the Brexit headlines to convinced emotional traders to get out “before things get worse”. Unfortunately for them reacting emotionally doesn’t pay very well. While the Brexit story isn’t done, we are closer to a buy-point than a prudent place to sell defensively. The best profit opportunities come from trading against an emotional crowd and the anxiety is ramping up as the VIX surges above 20 for the first time since February. Those with cash, get your shopping lists ready. Those with buy-and-hold stocks, don’t let the fear-mongering convince you to sell at a discount.

Jani

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Trading Plan for June 8th

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P 500 carved out fresh 2016 highs Tuesday, a long way from the February doldrums that lead to widespread predictions of doom-and-gloom. The biggest question is if we should buy this breakout, or short the upper end of a summer trading range.

The day’s other big headline is oil closed above $50 for the first time this year. A nearly 100% gain in a few short months persuaded many to predict a continuation straight to $60. The problem with consensus is it’s rarely right. If everyone is convinced oil has another $10 of upside, then it seems like an easy buy. Unfortunately for us, very few things in the market are easy. This nearly universal bullishness makes me suspect a near-term top is just around the corner. No doubt we can get to $60, but most likely it will be bumpy ride with many confidence shattering gyrations along the way. Since oil’s breakout above $50 is an obvious buy-point, many oil traders have already bought and incremental demand will be harder to come by. With a scarcity of new buyers, what is going to push the price higher?

The story for the S&P 500 sounds a lot like what I just described for oil. While we’re near all-time highs, what catalyst is ahead of us that will convince people to buy stocks at record highs? A lot of institutional money managers are on summer vacation, leading to the typically lower volume we see this season. If big institutional money isn’t around to buy, who else has the firepower necessary to sustain a continued move higher? If we cannot answer that question, it is hard to get excited about this breakout.

This week the stock market rebounded from the slowest hiring numbers in half a decade. Rather than fear economic slowing, traders cheered the Fed’s postponed interest rate-hike. I don’t know about you, but I would more bullish if the Fed hiked interest rates because the economy was doing well, not the other way around. This excitement over a stagnant economy doesn’t make a lot of sense and is most likely only a reactionary phenomena. Delaying the second rate-hike a few months isn’t going to do much to improve corporate earnings and thus will have a limited impact on longer-term equity prices.

As for how to trade this, the last couple of days looked more like short covering than sustainable breakout buying. Shorts were forced to cover when we rose above their stop-loss levels. But often the point of maximum pain is where the market reverses. Surging to 2,120 would have led to widespread capitulation as most bears gave up ahead of the “inevitable” runup to all-time highs. But this afternoon the air was let out of the breakout as most of those early gains fizzled and we returned to near break-even. That lack of follow-on buying is a big red flag for bulls. We want to see people chasing this breakout, not taking profits. If we hold above 2,100 through the remainder of the week, then the situation looks good for bulls. But if we stumble back under 2,100 so soon after the breakout, look for a return to at least 2,080 and more likely 2,060. Trade accordingly.

Jani

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