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What bad news?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:55 EDT

Intraday Update

MARKET BEHAVIOR
Stocks are holding the recent breakout following a modest test of 1,925 support last week.  Volume remains light in the traditionally slow summer vacation months.

MARKET SENTIMENT
We are holding record highs in spite of negative headlines coming out of Iran and the potential for more political gridlock in DC.  With multiple days to digest these headlines, they are largely priced in and we shouldn’t expect further selling based on what we already know.  Markets crashes typically arrive with a sell first, ask questions later reaction to spooky headlines and the fact we held 1,925 support for a 4th day suggests this market is indifferent toward these concerning headlines.  Barring an unexpected deterioration in the situation, we should expect the uptrend to continue.

These headlines rattled nerves, but didn’t cause many people to hit the sell button.  Five-years into this bull market and nearly three-years since we’ve seen anything resemble market panic, investors have become very complacent.  While we all know this cannot last, in the near-term complacency is bullish because it means most owners are unwilling to sell no matter what is going on around them.  Their confidence keeps supply tight and makes this death-defying really possible.

TRADING OPPORTUNITIES
Expected Outcome: Higher in the near-term
Confounding the skeptics and finding support tells us there is little that will rattle this market.  While history reminds us this cannot last forever, in the near-term this “hold no matter what” attitude among stock owners keeps pushing us higher.  At this point it doesn’t seem like we will find a headline that sends owners running for the exits and instead this market will only top when we run out of optimistic buyers.

Alternate Outcome:
Markets rarely get things right the first time and this leads to over and undershooting.  Fears of Sequester and Fiscal Cliffs were clearly overblown.  This time we are largely ignoring civil war in Eastern Europe and the Middle East.  Under appreciating the risks involved in these situations leaves us vulnerable to a worse than expected outcome.  The higher we go, the harder we fall.

Trading Plan:
Anyone sitting on profits should have an exit plan.  Maybe that is proactive selling into strength or it is a trailing stop, but don’t let complacency cause you to let these profits evaporate when the market rolls over.  Bears waiting for this market to crack need to be patient.  These headlines out of the Middle East were the perfect catalyst, but since the weakness already bounced back, admit defeat and wait for something bigger.

Plan you trade; trade your plan

Holding support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:32 EDT

Intraday Update

MARKET BEHAVIOR
Stocks are bouncing around today as they digest overseas headlines.  We are one percent from recent highs and nearly 50-points above the 50dma.  Prior resistance near 1,925 is acting as support and we are holding this technical level for a 3rd day.  Volume has been below average every day for nearly a month, but this is typical of light summer vacation trade.

MARKET SENTIMENT
Without big money’s steady hand, summer can be volatile as smaller traders have more influence.  This is especially true when the market is trying to digest worrisome headlines coming out of Iraq and a potential flare up of political discord in DC.  While we are only a few points from all-time highs, the market is anything but relaxed.

Ignore the headlines and buy the dip has been the rally call of last couple years and many are sticking to that game plan here.  Buyers showed up to defend 1,925 and so far are preventing any further selling.  Their cause is aided by confident owners unwilling to sell fearful headlines, keeping supply tight.  Last year the market jumped at the sight of its own shadow as we had temporary selloffs on headlines of sequester, fiscal cliffs, Arab spring, and taper to name a few.  This year prospects of war in Ukraine and Iraq are met with cautious optimism.

While it is encouraging to see the market hold up in the face of these headlines, the best profit opportunities come from irrational market moves.  While participants are nervous over these geopolitical headlines, no one is fearful enough to sell their stock at a discount.  After nearly two years of watching every dip bounce back to new highs has trained owners to hold no matter what.  With so few sellers, the future of this market rests on the buy side.  As long as buyers keep soaking up what little selling we have, the market will continue higher.  But every rally reaches a point where everyone who wants stock already has all they can hold and the market stalls on a lack of new money.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold up in the face of these headlines, the less likely they will take us down.  Markets tend to roll over quickly and avoiding a precipitous drop as these headlines break means they are well on their way to being priced in.

Alternate Outcome:
Owners are demonstrating comfort with the risk/reward at these levels.  With such a little discount being offered to hold this risk, the market is telling us it doesn’t expect these events to deteriorate in any appreciable way.  That leaves buyers vulnerable to a worse than expected outcome that is clearly not priced in.

Trading Plan:
The best profit opportunities arise from emotional and irrational moves in the market.  Since no one is offering us a discount to hold this risk, there is little reason for us to own these headlines.  The same goes for shorting the market.  We had the scary headlines and the market didn’t flinch, meaning it will take something larger to crack this market.  At this point it seems we are in no-man’s land and where the market goes from here is a coin-flip.  If I were forced to pick sides, holding these levels suggests we will continue higher, but any degradation of the situation in Iraq could set of a mad rush for the exits.  With such a poor risk/reward, the best trade is to wait and see what comes next.

Plan your trade; trade your plan

Consolidating Gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:54 EDT

Intraday Update

MARKET BEHAVIOR
Stocks slipped modestly as they consolidate near the 1,950 level.  Early weakness brought us down to the low 1,940s, but dip buyers propped up the market and are defending these levels.

MARKET SENTIMENT
Unsustainable breakouts tend to rollover quickly when follow-on buying fails to materialize.  If we continue holding 1,940 for a fourth day, that suggests buyers still see value at these levels.  Of course we need to be extra cautious during the summer’s low-volume since smaller trades have a larger impact and we often see increased volatility.

Recent strength defies the skeptics but from a sentiment POV it makes perfect sense.  We’ve transitioned from a fearful market in 2013 to a greedy one in 2014.  While this rarely ends well, these moves go higher than anyone expects before breaking down.  By itself complacency is bullish because it means most owners are unwilling to sell no matter what the headline or price action.  They refuse to sell because they are confident any dip will bounce and so far they have been proven right.  In a self-fulfilling prophecy, lack of selling keeps supply tight and makes it easy for the rally to continue.

TRADING OPPORTUNITIES
Expected Outcome:
Markets move in waves and the risk of a pullback are highest following a strong move higher.  At best we digest these gains and trade sideways, at worst we retest recent support back near 1,900.  Either way the risk/reward to initiating a new position here is stacked against us.  Give the market a couple more days before rushing in.

Alternate Outcome:
Anything can happen during summer’s light volumes.  The pain trade has clearly been higher as everyone expecting near-term weakness is either out of the market or short.  These bears and cynics are scrambling to buy a piece of this market before it gets away from them and that reactive buying keeps pushing us higher.

Trading Plan:
We trade when the odds are in our favor and buying up here is little more than chasing performance. While this move could easily run toward 2,000 over the next few weeks, the market needs to catch its breath and we will have the opportunity to buy in a few days after the risk of a pullback fades.  If we cannot hold 1,940, then things get interesting.

Plan your trade; trade your plan

Another record high

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks surged into record territory, smashing resistance near 1,925.  Volume was below average, but the highest in a week as today’s gains gives us 12 winners out of the last 14 sessions.

MARKET SENTIMENT
Last year we had a laundry list of reasons to avoid this market, but this year people are struggling to find excuses to stay out.  While that has been bullish as the last of the holdouts buy in, market rallies are typically built on fear and uncertainty not calm and confidence.  After years of fearing a financial collapse around every corner, we’ve reached the point where most are more worried more about being left behind than the sky falling.  While that sentiment reversal pushed us to record territory, a lot of good news has already been priced in and there is little, if any, discount being offered to hold market risk.  While we can skate on thin ice all day long and never fall in, the lack of a risk discount leaves us more vulnerable the next time something rattles the market.

The higher we go, the harder we fall and is why periodic pullbacks are a critical part of every sustainable rally.  While we’ve had modest dips and consolidations along the way, most owners have grown accustomed to buying dips and have forgotten how scary and painful the market’s dark side can be.  While I was expecting summer weakness to refresh this market, it appears like we might climb through the summer, leaving us vulnerable to an even larger pullback in the fall.

2013 was the year of the half-empty market as everyone focused on the risks.  At the end of last year we transitioned to 2014’s half-full market where we embraced the nuggets of optimism and shunned any negativity.  Today we cheered the most aggressive rate policy in ECB history without pausing to ask why such dramatic actions are needed.

TRADING OPPORTUNITIES
Expected Outcome:
We will keep heading higher as long as buyers are willing to throw money at record highs.  This will continue as long as the fear of missing profits trumps fear of losing money.  But once that other shoe drops, the exits will be crowded.  While we all know this market will pullback at some point, no one knows when or why it will happen.  This is simply a waiting game and as long as the market continues heading higher, all is well with the world.

Alternate Outcome:
We are in a secular bull market and we can go many years without a meaningful pullback as long as there is new money waiting to come in.  Given how deep the 2008/2009 market crash was, there is still plenty of money sitting out of this rally.

Trading Plan:
Chasing record highs is the riskiest time to jump in and anyone not already in the market will be better served waiting for the inevitable pullback to at least 1,925.  Those lucky enough to be sitting on profits should move up their trailing stop and be ready to take profits if cracks start appearing.

Plan your trade; trade your plan

Holding gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:14 EDT

Intraday Update

MARKET BEHAVIOR
Stocks are mostly flat in midday trade following yesterday’s breakout.

MARKET SENTIMENT
Those with cash aren’t buying and those with stock aren’t selling.  Contrary to popular opinion, complacency is bullish because confident owners don’t sell and that keeps supply tight.  It only becomes a problem when we run out of buyers needed to sustain these levels.  So far this year market participants have been unwilling to chase stocks above 1,900 and we drifted sideways the first five months of the year.  Here we are again at the top of the trading range and asking ourselves if this is finally the real breakout, or yet another stall near the highs.

Last year’s relentless rally forced fund managers to buy a market they didn’t trust because they were more afraid of being left behind.  This year the market is only up 3% over the first five months and there is very little pressure on managers to chase performance.  In fact we are seeing the opposite in speculative names as everyone is trying to get them off their books.  But while tech stocks stumbled, the S&P500 and Dow are making new highs.  The biggest reason for the disconnect is few of these new issues are old or large enough to have been added to these broad indexes, so their selloffs doesn’t affect them.  But are these canaries in the coal mine and foretell doom and gloom for the rest of us?

It is easy to find bulls and bears in this market.  Depending on who you talk to, things are either great or about to implode.  The most scarce opinion is indifference toward this market.  In 2014, both bulls and bears have been wrong at every turn and the traditional summer doldrums are an unlikely place to break this logjam.

TRADING OPPORTUNITIES
Expected Outcome: At the upper end of an extended trading range
Buying weakness and selling strength has been the trade of the year and there are no signals this will change as we move into summer’s traditionally slow trade.  With the markets largely flat for the year, there is little pressure on managers to buy record highs and this gives them time to wait and see what happens.  Without big money getting behind this breakout, it is hard to see what else will propel us higher.

Alternate Outcome:
If this market continues rallying, that will pressure managers to chase.  While this is a more likely outcome this fall, it could happen earlier if we keep making new highs.

Trading Plan:
Buy weakness and sell strength.

Plan your trade; trade your plan

Finally a breakout

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
The S&P500 surged to new highs, decisively breaking the 1,900 barrier.  Volume was below average, but above last week’s lethargic pre-holiday levels.

MARKET SENTIMENT
Either this is the start of the next rally leg, or one last gasp before demand dries up and we slip into the traditional summer doldrums.  Today’s breakout was largely derived from European strength following expectations of more monetary easing by the European Central Bank.  While easy money is drying up in this hemisphere, the party continues on the other side of the globe.  In reality, this is a half-empty/half-full development.  Markets are addicted to cheap money, but central bankers reliance on stimulus shows these experts don’t have confidence in the underlying economic fundamentals.

Supply and demand wise, lighter holiday volumes make it easier for smaller trades to move the market.  Today we broke through well-defined technical levels, causing many traders to buy the breakout and/or cover their shorts.  Every other time we approached these levels, demand dried up as few buyers were willing to chase these prices.  Will this time be any different?

Market rallies are built on stocks recovering from oversold levels following a bout of irrational pessimism, or they coast higher on complacency and the assumption good times will continue indefinitely.  Its been a long time since trade was dominated by fear and pessimism, meanings this strength comes from the assumption of good things to come.  The best trading opportunities come from going against the herd.  If the herd believes we have nothing to worry about, then we should be worried.  Expectations of clear sailing mean most are fully invested and the lack of fear means there is ample capacity for a wave of panic to take hold.

TRADING OPPORTUNITIES
Expected Outcome: At the upper end of a summer trading range.
Big money managers often take time off in the summer and the junior associates rarely have the authority to initiate new positions.  This lack of demand is why summer volumes are often light and we typically trade sideways.  With so many managers dreaming of the beach, it seems unlikely they will chase this market, especially since we are mostly flat for the year and there is no pressure to keep up.

Alternate Outcome:
Traders have an intrinsic fear of heights and while they are not fretting over headlines, these record highs make them nervous.  That reluctance to own makes the market under owned and will be the catalyst for the second half of the year rally.

Trading Plan:
Buying breakouts and selling weakness has been the surest way to financial ruin in this choppy, sideways market and so far we haven’t seen anything to suggest this breakout will turn out any different.  Until proven otherwise, buy weakness and sell strength.

Plan your trade; trade your plan

Gyrations continue

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks took it on the chin as they crashed through the 50dma in early trade, but just managed reclaim this widely followed technical level by the close.  Thursday broke the string of apathetic trade and finished in above average volume.  This is the third time we tested the 50dma in recent weeks and up to this point buyers have come to the market’s rescue.

MARKET SENTIMENT
The 1,850/1,900 trading range is alive and kicking despite repeated attempts to depart it.  Neither bulls nor bears built the critical mass necessary to sustain a move out of this range.  Every time demand evaporated near 1,900 and supply vanished near 1,850.  Today’s move pushed us into the lower half of the range where dip buyers snapped up shares and stopped the selloff just under the 50dma.  For bulls it is encouraging to see selling stall instead of accelerate after violating an important moving average.  That shows many traders are more willing to buy and hold these levels and few were rushing for the exits.  But selling pressure is only half the equation.

While most owners are content holding stocks at these levels and their confidence prevents days like today from turning into a stampede for the exits, the bigger concern is those with cash remain reluctant to buy 1,900.  Tight supply is always helpful, but lack of demand trumps it every time.  If bulls cannot persuade those with cash to buy these highs, eventually the market will crumble under its own weight.

TRADING OPPORTUNITIES
Expected Outcome:  Falling back into the heart of 2014’s trading range.
While stocks might bounce temporarily off the 50dma as a small contingent of eager dip-buyers dive in, larger pools of money remains reluctant to chase these record highs.  This is further compounded as we move into the slower summer season.  Without buyers, expect this dip to continue.  But don’t mistake these normal market gyrations for a crash.  So far there is nothing to suggest this is the 10 or 20% correction bears have been calling for.  If we cannot hold 1,850 we will likely test the 200dma, but that would be a better place to buy stocks than press a short.

Alternate Outcome:
Every dip this year has been a buying opportunity and each time the size of the selloff shrinks as buyers rush in sooner and sooner.  It was a 100-point dip in January.  April saw a 75-point selloff.  And so far this one has gone 40-points.  If the selloffs continue getting smaller, we likely saw the worst of this move.

Trading Plan:
Expect dip buyers to temporarily prop up the market near the 50dma, but few value investors will be seduced by a 1.6% discount from all-time highs.  We likely need to fall further before those with cash find deals too good to resist.  If the market bounces Friday, it is a better place to close out long positions than buy the dip.

Plan your trade; trade your plan

Struggling with 1,900 again

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks slipped from record highs on ever decreasing volume.  The market closed under 1,890 after topping 1,900 for the first time on Monday.  But just as interesting is how this was the fifth consecutive day of declining volume and finished as one of the lowest volume days of the year.  The market is at the upper end of the recent trading range and still well above prior support at the 50dma.

MARKET SENTIMENT
Stocks continued 2014’s trend of stalling as we push toward 1,900.  The market is clearly attracted to these levels as it keeps coming back to them, but it never mustered the follow through necessary to break past this milestone.

Monday’s historic trade was all the excuses a tightly coiled market needed to explode higher in a frenzy of breakout buying and short covering.  The fact that we stalled and pulled back shows us that the market is not in the mood to explode higher.  This is valuable information for any trader that trades risk/reward.  If we eliminate explode higher, that leaves us with grind higher, grind lower, and collapse lower.  Two of the three are negative and one is extremely negative.  Given the outcome skew to the downside, this is a less favorable place to own stocks, let alone buy them.

Volume remains exceptionally light as few are changing their mind.  Those that own stocks keep holding and those with cash remain disinterested in chasing.  While it is encouraging to see the market continue holding these levels, if we cannot find buyers soon, the market will fall under its own weight.

TRADING OPPORTUNITIES
Expected Outcome:  Stalling at the upper end of a trading range in a traditionally slow time of year
Bulls had the perfect setup to extend the rally, but the market failed to take the bait.  Without explosive upside, at best the market will grind higher and it only gets worse from there.  It is hard to justify owning risk here with such limited upside.  The most bullish outcome will be trading sideways until the rally resumes in the fall.  If that’s the case, we don’t get paid to own risk (ie stocks) over the summer.

Alternate Outcome:
When in doubt stick with the trend.  This is the bull that just won’t die and it is far more likely to continue than reverse.

Trading Plan:
The best trade of 2014 has been buying strength and selling weakness and this market is not giving off signals this is changing here.  Anyone sitting on profits should lock them in and for the aggressive, this is the best shorting opportunity in some time.  But don’t mistake a normal and routine dip back into a trading range for a market collapse.  Counter trend trading is the hardest way to make money in the markets and bears should take profits early and often.

Plan your trade; trade your plan

1,900

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stock broke 1,900 for the first time in history, but only held that level for an hour before settling back into the high 1,890s.  Volume was again lower as fewer people are trading these levels.

MARKET SENTIMENT
The breakout to record highs failed to trigger a surge of buying and the day largely passed with a yawn.  Venturing into social media shows how married people are to their outlook and unwilling to change regardless of the evidence.  There is nothing thoughtful or insightful coming from most people, but the intelligent trader can use these clues to look under the surface.

Markets move when people change their mind.  They adjust their portfolio to reflect their new outlook and this buying and selling moves markets.  But when market participants are so stubbornly entrenched, we trade sideways because no one is changing their mind.  Threats of war in Eastern Europe don’t give bulls pause just like the strongest hiring binge in two years doesn’t sway bears.  This behavior means headlines no longer matter since both sides refuse to acknowledge anything that contradicts their preconceived bias.

If news won’t sway traders, what will move this market?  Boring old supply and demand.  Everyone knows markets go up and down, but most people identify with bulls or bears and assume any move in their direction will keep going.  But the truth is the market trades sideways far more often than it makes directional moves.  While tight supply driven by owners’ confidence and unwillingness to sell pushed us to record highs, dwindling volume suggests few are willing to buy the breakout and this market will likely stall on weak demand.  Summer is a historically lethargic season and the market will likely continue trading sideways for months to come.

TRADING OPPORTUNITIES
Expected Outcome: Running out of steam at the upper end of a trading range. 
Markets broke 1,900, but it didn’t trigger a frenzy of breakout buying or short covering.  At the same time it didn’t set off a wave of profit taking and shorting.  Most likely the market will continue trading sideways until something comes along to shake this gridlock.  Either that will be panic over some kind of economic calamity or buyers will venture back in when nothing bad happens for an extended period of time.  Until then, the best trade remains buying weakness and selling strength.  The move to record highs makes this a better place to lock in profits than initiate new positions.

Alternate Outcome:
Consolidations clear the way for moves higher.  Most often they are pullbacks, but often sideways trade is all it takes to refresh a market.

Trading Plan:
Buy weakness and sell strength.

Plan your trade; trade your plan

Record Close

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks had a good day as the S&P500 made a record close and the NASDAQ continued its bounce off the 200dma.  Volume was restrained and the lowest we’ve seen in recent days.

MARKET SENTIMENT
This move to record highs dumbfounded bears who remain convinced this market should have imploded months ago.  Where does this strength come from when so many distrust this market and Eastern Europe is on the verge of war?  The answer pretty straightforward, confident owners.  Contrary to popular opinion, complacency is bullish because confident owners don’t sell and that keeps supply tight.  We’ve seen a bloodbath in the most speculative stocks, but a 30% pullback in many of these names only drops us back to levels from a few months ago.  When a stock goes up 50% in a short period, 30% pullbacks are normal and should be expected.

While I don’t buy into the doom and gloom scenarios flying around, it is hard to get excited about this market.  We are approaching the summer lull and it will struggle to find strong demand when big money managers are on summer vacation..  The most likely outcome is the market will remain range bound until fall, but since we are at the upper end of the range, we could easily see a 50 or 100-point selloff and still be within it.

TRADING OPPORTUNITIES
Expected Outcome:  At the upper end of a trading range
While we could easily break 1,900 on Tuesday or later this week, how we trade after is what matters.  The most bearish scenario is a frenzy of breakout buying and short covering that launches us through 1,900, but those gains quickly evaporate as wider demand dries up.  Failing to hold the breakout likely means we will retreat back into the heart of the trading range.

Alternate Outcome:
The more people distrust this market, the more bullish a contrarian is.  While there are plenty of reasons for this market to sell off, we cannot ignore its strength.  When the market disagrees with us, we are the ones who are wrong.

Trading Plan:
This market struggled with 1,900 all year and this time will likely not be any different.  Given the limited upside during the traditionally slow summer months and the material downside if we slip back into the heart of the trading range, it is hard to justify the risk/reward of owning here.  This is a safer place to be taking profits than buying the breakout.  If we hold 1,900 I’ll reevaluate, but if it fails to hold this level, I’ll look closely at shorting the move back into the trading range.

Plan your trade; trade your plan

Deja Vu

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks took investors on another wild ride.  This time we surged higher midday but gave it all back by the close.  We are seeing enthusiastic moves, but few last more than a couple of hours as we remain stuck between 1,860 and 1,890.  So far the market is holding above the 50dma, but there are only so many times we can test it before it gives way.

MARKET SENTIMENT
This market has everyone chasing their tails and reactive traders are getting carried out in body bags.  The problem is most of the market is trading with a bias.  Bears sell every dip and bulls buy every rally.  With these whips, that guarantees buying high and selling low.

The reason we are stuck in this range is each side is so entrenched that war with the worlds largest energy producer or the best employment report in years is enough to convince people to change their stubborn outlook.  Bulls are bullish and bears are bearish regardless of what is going on around them.  Why this matters to the rest of us is markets only move when people change their mind and start buying or selling to reflect that new outlook.  I have no idea what will break this logjam, but it needs to be bigger than war or the strongest hiring binge in years.

TRADING OPPORTUNITIES
Expected Outcome: Stalling near the upper end of the trading range
Summer is often a slow time of year because most big-money decision makers are on vacation and the junior traders don’t have the authority to initiate large positions.  Expect the sideways trade to last until everyone comes back in the fall.  But since we are at the upper end of the recent trading range, sideways could include a 100-point dip to the 200dma.

Alternate Outcome:
As turbulent as recent trade has been, the longer we hold these levels, the more likely it is the resolution will be to the upside.

Trading Plan:
Anyone who’s been reacting to these swings has been getting chewed up.  Without an exploitable edge, the best trade is to not trade.  Unless buyers step in to save this market, expect it to fall back into the heart of the trading range, but without a fundamental catalyst this won’t lead to the larger correction many are calling for.

Plan your trade; trade your plan

Intraday Volatility Continues

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
It was another whipsaw day.  We gapped higher at the open, crashed through the 50dma within an hour, bounced back into the green by midday, and finally closed at the high of the day.  We covered over 50-points in this back-and-forth and continue the trend of violent intraday moves.  This was the third dip under the 50dma in the last 30-days.  Each time we bounced back, but there are only so many times a bull can tempt fate.

MARKET SENTIMENT
While it is encouraging to see the market bounce off the 50dma, sustainable rebounds typically explode higher and don’t look back.  This one keeps stalling after the brief dip-buying frenzy abates.  Lack of follow through suggests few with cash are willing to spend that money near record highs.  The market has been buoyant on the confidence of owners who are unwilling to sell regardless of headline risk or weak price-action.  The lack of owners rushing for the exits keeps supply tight and makes it easier for modest dip-buying to prop up the market.  But if we keep running out of new buyers every time we approach 1,900, even tight supply will not be able to save this bull.

This market feels fragile.  We had the best employment report in two years, but prospective buyers were unimpressed and instead focused on the half-full fine print.  If they wouldn’t buy that headline, I cannot think of anything else that would get them excited enough to bid up prices.  If good news leaves us flat, it makes me nervous to think about what would happen when we get bad news.  With so few active buyers, it wouldn’t take much selling to send prices tumbling lower.

TRADING OPPORTUNITIES
Expected Outcome: Stalling near the highs of the trading range
Limited upside and huge downside is a great place hold cash.  Making money in the markets is easy, the hard part is keeping it.  The key to long-term success is not giving back our profits by forcing a trade when we don’t have an edge.

Alternate Outcome:
The longer we hold these levels, the more likely this consolidation will breakout to the upside.

Trading Plan:
It feels like we are skating on thin ice and it is best to leave this market to the gamblers.  The disciplined trader will wait for the odds to fall in his favor.  If something spooks this market, that could finally trigger the selloff everyone’s been waiting for.  But since momentum is higher, it is best to wait for the first cracks to form before trading against the up-trend.

Plan your trade; trade your plan

Sell in May

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks slipped nearly a percent and find themselves just above the 50dma.  Volume recovered from Monday’s lethargic levels and was back near average.

MARKET SENTIMENT
Monday’s bounce off the 50dma lacked broad participation as shown by the anemic volume.  Today we gave it all back when buyers failed to step up and defend these prices.  While most owners are confidently holding stocks and not selling this weakness, it is becoming harder and harder to find people willing to buy near record highs.

Many think the escalating situation in Ukraine will lead to further weakness, but the market has long priced in Ukraine and it is already ancient history.  Anyone who understands politics knows neither Putin nor Europe can afford to impose material economic sanctions or embargoes on each other.  Both sides need each other too much and while these events grab headlines, they will have little consequence to corporate earnings in this country.  The market rallied when Russia invaded and captured Crimea and eastern Ukraine is just as economically trivial.  Anyone who fears these headlines sold weeks ago and there is no one left to sell the escalation.

But just because one thing doesn’t cause something else doesn’t meant they are not correlated.  (causation, correlation, and coincident) While few owners are actively selling these headlines, it is one of many reasons prospective buyers are not in the mood to bid up prices.  Tight supply can hold the market up for a surprisingly long time, but there comes a point when even that cannot compensate for diminishing demand.  Right now it feels like we are approaching that point.

As we creep toward the summer season, many senior money managers at big institutions are getting ready for summer vacation and not in the mood to initiate new positions.  This is why more often than not summer trading is so unremarkable.  While the senior decision makers are on vacation, big money doesn’t buy or sell in material volumes.  This means we will likely drift sideways until they come back to work in the fall.  Of course “sideways” is relative and simply means staying within the recent range between 1,750 to 1,900.  While a 150-point dip still technically counts as sideways, that is anything but boring.

TRADING OPPORTUNITIES
Expected Outcome: Upward momentum stalls as buyers become harder to find
Last Friday’s stronger than expected employment report was more than enough excuse to jump-start this bull if it was poised to surge higher.  The fact that we stalled instead shows few are willing to buy this market no matter how encouraging the headlines, so it appears like prices need to come down a bit before new money will venture in.  This is far from the crash many are predicting and is little more than a normal and healthy dip back into the heart of 1,800/1,900 trading range until this fall.

Alternate Outcome:
Volatility and headline uncertainty is flushing out anyone with a weak stomach.  This churn refreshes the market and leaves us with a solid foundation of confident owners who are unfazed by negative headlines or modest weakness.  When they refuse to sell, that keeps supply tight and props up prices.  Even when demand is light, prices continue to rise if supply is even more scarce.

Trading Plan:
Near record highs is a better time to be taking profits than adding to positions.  Long-term holders should sit through the sideways trade, but they would be better served waiting for better prices before adding to their favorite positions.  Swing traders should already be taking long profits and watching for a short entry.  Shorting a bull market is one of the hardest ways to make money, so be nimble and take profits early and often.

Plan your trade; trade your plan

False sense of security

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks gapped lower at the open, but recovered those losses before midday.  Early weakness bounced off the 50dma, holding this widely followed technical level.  Volume was one of the lightest of the year and shows few were participating in today’s move.

MARKET SENTIMENT
Early weakness was driven by escalating conflict in Ukraine, but so few people sold the news that we bounced back in little more than an hour.  But at the same time, just as few people bought the dip, showing there isn’t much engagement in this market on either side.

Most who own this market are content holding and those sitting in cash are uninterested in buying in.  While the reluctance of owners to sell kept supply tight and propped up prices, we are starting to see signs demand is falling off.  This market has stalled multiple times in the upper 1,800s and has been able to break through the 1,900 barrier since early March.  Normally consolidation is constructive and suggests higher prices, but Friday’s lethargy following one of the strongest employment reports in multiple years shows few are willing to pile into this market near record highs.  While many claimed the headline beating employment numbers were undermined by the fine print, that was just the excuse people used to avoid buying this market.  While the market recently maintained a half-full outlook, the way it responded to this employment report was definitely half-empty.

Contrary to popular opinion, complacency is bullish because it means few owners are interested in selling no matter what headlines come across the wire.  The resulting tight supply is a big tailwind for prices.  But supply is only half the equation.  Weak demand trumps tight supply and there are signs we are approaching this tipping point.  If no one wants to buy, prices fall no matter how confident and optimistic owners are.

TRADING OPPORTUNITIES
Expected Outcome:  Momentum is stalling near old highs.
We are slipping into the frequently listless summer trading season and those with cash seem uninterested in initiating new positions near these record highs.  Without new money, prices will invariably weaken and we will slip back into the heart of the 1,800/1,900 trading range.

Alternate Outcome:
Four months of sideways chop is refreshing the market and building a base for the next move higher.  While flat bases typically take longer to form than more dramatic selloffs, we’re largely unchanged since the start of the year and four months is a decent consolidation, especially one that includes two one-hundred point selloffs.  While it seems likely this market will continue resting through the summer doldrums, there is no reason we couldn’t get an early start to a fall rally.

Trading Plan:
The complete lack of excitement surrounding Friday’s blowout employment headlines is a clear signal this market is not poised to explode higher.  For bulls that means this is a better place to take profits than add new positions.  Swing-traders could use this lack of strength as shorting opportunity if the market stumbles back into the heart of the trading range.  But any short trade here is simply exploiting the natural ups and downs, not getting ahead  of a market crash.  We are in a range bound market and both sides should take profits early and often.

Plan your trade; trade your plan

Awaiting Employment

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
It was a quiet day ahead of Friday’s employment report.  We stayed within a +/- 5-point range and closed flat for the day on light volume.  Today 1,880 acted as support and 1,890 was resistance.

MARKET SENTIMENT
It’s been years since the employment report had a lasting impact on equities.  While we often see intraday volatility, the last couple years the market has continued marching higher on both good and bad employment numbers.  Sometimes good was good and other times bad was good, but it never really mattered because within weeks the market was back to climbing higher.  Now that we are threatening to break 1,900 for the first time, will this one be any different?

As we hold near record highs in the face of slowing economic growth and turmoil in Eastern Europe, the market’s outlook is clearly “half-full” as it ignores the bad and embraces the good.  Recent volatility also did a good job flushing out weak hands and replacing them with confident owners willing to buy the risk.  While a beat or miss on employment might be the toss of a coin, the market’s reaction to it won’t be.  Either traders are looking for an excuse to sell, or they are looking for an excuse to keep holding.  No matter what Friday’s result, they will find a justification to do whatever they want to do before the numbers were announced.  Since the ball has been in the bulls court, expect the market to react more favorably.  Granted anything can happen within the volatile hours and days following the employment report, but after the knee-jerk reaction works its way through the system, most likely the bullish market will remain bullish.

TRADING OPPORTUNITIES
Expected Outcome: Pushing toward record highs but don’t expect a sustained breakout until the Fall
Bears are hoping Friday’s employment will save a losing trade, but if they don’t get their prayers answered, expect short covering to push the market higher.

Alternate Outcome:
Many are predicting an upbeat employment report and missing the mark will trigger a knee-jerk reaction of selling.  If the market crashes through key technical levels, expect the selling to accelerate.

Trading Plan:
There is not a lot to do here.  It is too late to buy and too early to short.  If the market implodes on employment, bears could try their hand at shorting, but be wary of a bounce and take profits early and often.  If we breakout to new highs, that is a better opportunity for bulls to lock in profits than initiate new positions.

Plan your trade; trade your plan

Drifting Higher

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Another calm day as the market rallied modestly following the Fed’s policy statement and continued Taper.  Volume was above average and continues the streak of elevated trade following Monday’s rebound.

MARKET SENTIMENT
Stocks shrugged off shockingly slow first quarter growth before the bell and took the afternoon’s continued Taper in stride.  This further reinforces the notion that anyone who would have sold negative headlines is already out of the market.  Those left either held through Ukrainian drama and economic uncertainty, or bought the dip in the face of it.  These owners showed a willingness to hold risk and that confidence kept them from hitting the sell button today.  If they didn’t succumb to a dip under the 50-dma Monday or 0.1% growth Wednesday, they will likely be hard to shake free regardless of what the market throws at them and the resulting tight supply props up prices.

High-fliers have been hit hard in recent weeks, but blue chip stocks held the larger market near record highs.  Unsustainable markets, like the dot-com bubble, often see people dump safe stocks to chase speculation.  In this situation, we have the opposite.  Traders are fleeing obnoxious valuations and embracing consistent performers.  That is rational behavior, not a prelude to a crash.

TRADING OPPORTUNITIES
Expected Outcome:  Coasting higher on the back of short covering.
The S&P500 is one point from breaking near-term resistance at 1,885 and that will send some bears running for cover.  The rest will be flushed out when we break 1,900 for the first time in history.  But after shorts and breakout buyers finish buying this strength, the market will likely stall as follow-on buying fails to materialize.  We’ve struggled to extend last year’s rally and the summer doldrums are often a poor time to find support from big institutions.  Most likely the “buy weakness, sell strength” trade will remain the best trade through the summer.

Alternate Outcome:
Recent volatility cleared a lot of weak holders from the market, building the foundation for the next move higher.  Sometimes we need 6 months of consolidation, other times less.  If the market holds 1,900 following a breakout to new highs, this market could defy conventional wisdom and have a strong summer season.

Trading Plan:
Dip buyers should already be in and bears are better served waiting for a better entry point.  Long-term investors should continue holding, but wait for better prices to add to their favorite positions.

Plan your trade; trade your plan

Calm returns

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Volatility virtually disappeared on a calm climb 0.5% higher Tuesday, a welcome break following Monday’s 60-point whipsaw.  There was a little movement in the first couple hours, but after that the market settled into a couple of point range just under 1,880.  This level morphed into a ceiling we bumped into several times and were unable to break through.

MARKET SENTIMENT
Everyone who wanted to sell already sold and the lack of reactive trading allowed the market to calm down climb higher without much fuss.  There is a finite supply of owners that can be spooked out by gloomy headlines and near-term volatility, and it seems we reached our limit when Monday’s price-action undercut recent technical levels.  That was the signal for the last of the hopeful holdouts to cut bait and once they finished selling, the market rebounded on the absence of selling.  Reacting to pain often flushes traders out at the exact wrong time and that appears to be the case for anyone who sold the dip under 1,860.

While we ran out of sellers, the next question becomes, who will buy this rebound?  The near-term answer is shorts getting squeezed, momentum traders, and breakout buyers will provide lift to 1,900, but after that it is harder to identify the incremental buyer.  In prior tests of record highs, demand dried up and we stumbled lower.  Are buyers finally ready to embrace these fundamentals and political headlines?  I’m not so sure this is the start of the next rally leg.  More likely the sideways trade will continue until big money managers return from summer vacation this fall.

TRADING OPPORTUNITIES
Expected Outcome: Challenge recent highs, but struggle to find new buyers needed to sustain the move.
While recent predictions of a 20% correction appear premature, not bad doesn’t automatically mean good.  We saw large gains last year and it is perfectly reasonable to trade sideways for an extended period.  Barring some headline catastrophe, the summer will probably be relatively uneventful as we continue trading between the 1,800ish/1,900ish levels.

Alternate Outcome:
The market chopped around since the start of the year and that goes a long way to consolidating last year’s gains.  Fear and respect for the market has returned to relatively healthy levels and those contribute to building a foundation for the next move higher.  While that move might come this fall, it could also be here earlier than anyone expects.

Trading Plan:
Buy weakness and sell strength.  The best time to buy this market was when everyone was scared, not as it breathes a sigh of relief.  As we push toward the highs, this is a better place to contemplate taking profits than initiating new positions.  While we likely have more upside, use a trailing stop to protect recent profits.  Bears need to wait a little longer before challenging this rebound.

Plan your trade; trade your plan

Cleared for takeoff

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
It was a volatile but productive day.  Stocks surged higher in early trade, imploded and sliced through support, and rebounded back into the green by the close.  The volatility saw us move more than 60-points intraday and trading volume was the most enthusiastic we’ve seen in some time.

MARKET SENTIMENT
If someone was bored Monday, clearly they were not paying attention.  The price action was as dramatic as it gets and left both bulls and bears bloodied.  It seduced dip buyers with early strength, crushed their soul with a 30-point collapse, built up the hopes of the bears before smashing them to pieces with a late day rally back into the green.

While it was tough to be optimistic midday, the strong close on high volume was as bullish of a sign as it gets.  The best capitulation bottoms undercut recent support, sending optimists scrambling for cover.  This surge of selling eventually exhausts supply and we bounce higher when shares become scarce.  That was exactly what happened today and likely means 1,900 is easily within reach.

TRADING OPPORTUNITIES
Expected Outcome:  Push toward all-time highs
Today’s move was as bullish as it gets.  We flushed out weak owners and replaced them with confident buyers willing to own this weakness.  If anyone could hold this volatility and fear, there is little that will scare them and they are in it for the long haul.  When the majority of the market becomes uninterested in selling, supply tightens and prices head higher.

Alternate Outcome:
While it is hard to be bearish given how the market traded today, failing to build on these gains will be a huge warning flag.  Undercutting 1,850 over the next couple days means the lows in mid-April are in jeopardy.  We’ve been given the green light to go higher, but if the market cannot rally following this textbook capitulation bottom, then plenty of downside remains.

Trading Plan:
The selloff is over and shorts should cover if they haven’t already.  Swing traders can hold on for a test of old highs, but I’m still not convinced this move will lead to another large rally leg.  Instead, expect the sideways trade to continue into the Fall and take profits early and often.

Plan your trade; trade your plan

Anxiety flares up

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:59 EDT

Intraday Update

MARKET BEHAVIOR
Stocks sliced through 1,870 support and tumbled all the way to the low 1,760s by midday.  The market is still above the 50dma, but this level is in danger if the selling keeps up.

MARKET SENTIMENT
The media claims this weakness is due to tensions in Ukraine and disappointing earnings out of AMZN and F.  I guess that excuse is as good as any, but for all the anxiety this weakness is causing, we have only given up 20-points of a 70-point rebound.  When taken in that context, this move appears more normal and healthy than scary.

The more closely a person follows their positions, the bigger deal these gyrations appear.  For the vast majority of 401k investors, a 15-point decline doesn’t even register, but for the guy who follows tick-by-tick, this is a huge move.  If we pullback from the 5-minute chart and look at the daily, today’s “plunge” hardly shows up.  But markets function by convincing people to overreact.  Every dip feels like the start of a larger selloff because if it didn’t, no one would sell, and without selling we wouldn’t have the dip.

Sometimes markets under appreciate the risk involved.  This happened during the financial crisis when no one had a clue about the huge house of cards Wall Street built.  Is that happening with the Ukrainian crisis?  We’ve known about this unfolding event for a couple of months and the market largely brushed it off.  Was it being naive?  Are things deteriorating?   Last time we went through this, Russian troops invaded Crimea and the market actually rallied.  Now we have Russian troops amassing outside eastern Ukraine.  Is this significantly worse than last time, or is it more of the same?

If we learned anything from the first round, it’s that Europe needs Russia, and Russia needs Europe.  Most of the words exchanged are little more than political grandstanding and it is highly unlikely we’ll see meaningful sanctions put on Russian energy exports or Russia withholding energy from Europe.    The threat of a civil war is escalating, but the market’s proven time and time again over the years that revolutions and civil wars are not a big deal even when they involve oil exporting countries.

For the most part, this Ukraine story is recycled news and anyone who owns the market here either held through the Crimea crisis, or they bought during it.  Anyone afraid of these kind of headlines sold months ago.  The main thrust of this mornings weakness is to punish late dip buyers.  While it felt safe to buy after four or five up-days, today’s price action is proving otherwise.

TRADING OPPORTUNITIES
Expected Outcome: Rebound to the upper end of the trading range.
Today’s weakness is cathartic for the market and clearing the way for a move higher.  The fearful and pessimistic are selling to the confident and opportunistic.  The fewer weak owners we have in the market, the more likely it will rally simply because we run out of sellers.  Confident dip-buyers willing to hold through weakness makes it less likely we will encounter that weakness simply because there are fewer people willing to sell.  Tight supply almost always equals strong prices.  While this weakness could go a little further before it is done, selling off on recycled headlines is typically far more shallow than if the market was blindsided by something new and unexpected.

Alternate Outcome:
Markets go up and markets go down.  If anyone could figure out why, they would be extraordinarily rich.  Sometimes they behave as they should, other times they do the opposite of what we expect.  Last time we rallied on the takeover of Crimea, maybe this time we crash on the takeover of eastern Ukraine.  This game would be too easy if the market were predictable.

Trading Plan:
Buying on the fifth consecutive up-day, when everyone felt good, didn’t turn out to be such a good idea and selling here when everyone is freaked out probably isn’t the right move either.  The trade of the year has been buying weakness and selling strength and that pattern likely remains intact.  Maybe we haven’t found the bottom of this move yet, but it is safer to buy todays weakness than it was after a six-day rally pushed us up to 1,885.

Plan your trade; trade your plan

One Step Back

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:54 EDT

Intraday Update

MARKET BEHAVIOR
Stocks are down fractionally in midday trade.  So far the market is holding 1,875, but struggling with former resistance at 1,880 that stretches back to early March.

MARKET SENTIMENT
The bears identified a mountain of reasons this market should breakdown, but instead it holds within 1% of all-time highs.  There are times the market does what we think it should, and there are times we are wrong.  When the market doesn’t behave as expected, it means our analysis is flawed and there is something big we overlooked.

This morning bears are pounding the table over Ukrainian tensions, earnings, weakness in momentum stocks, head-and-shoulders tops, low-volume up-days, among many other things.  So why isn’t the market cracking wide open?  The short answer is supply and demand.  Most of the problems bears are promoting have been around for a while.  Anyone who fears these issues already sold in the dip to 1,815.  That means everyone left holding isn’t worried about these fears and they are priced in.  While there are scary things abound, we cannot forget markets only move on supply and demand.  When everyone already sold these headlines, there is no one left to sell and the market firms up on the resulting tight supply.

But supply is only half the equation.  For this strength to continue, we need fresh demand.  The last time we were at these levels, buyers refused to step up and is why we slipped to the low 1,800s.  Will this time be any different?  The most obvious near-term buyers are shorts, momentum chasers, and breakout buyers.  All three of these groups react to prices moves, not underlying fundamentals.  The higher we go, the more these guys buy the market.  Until we clear old highs, expect these traders to keep buying this strength.

TRADING OPPORTUNITIES
Expected Outcome: Pushing toward the upper end of a trading range.
All the Chicken Littles running around because of a 5-point selloff need to tone it down a notch.  Two-steps forward, ones-step back.  Everyone knows that, so why do they overreact to the smallest gyrations?  While buying here is late in the game, we most likely still have upside and a shot at cracking 1,900 in coming day.  But at the same time I expect we are still in an extended trading range and this strength will not trigger the next rally leg.  Instead we will drift back into the 1,800/1,900 trading range and stay there through the summer

Alternate Outcome:
Bears might be right.  This could simply be a false bottom and we have a date with the 200-dma in May.  While I’m not a big believer in “Sell in May”, it only matters what other people think.  If they start selling head of summer vacation, that will push us lower.  Once we break recent lows, people start selling for no other reason than everyone else is selling and we continue lower in a downward spiral.

Trading Plan:
It is too late to buy the dip after six-consecutive up days that recovered 60-plus points.  While we still have some upside left in this move, the risk/reward does not favor new positions.  At the same time, it is early to short the market and bears should wait for that last surge higher before trading against this strength.  For those with long positions, start looking for an exit and either sell proactively or use a trailing stop to protect recent profits.

Plan your trade; trade your plan