Category Archives for "Free Content"

Sell-off continues

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:25 EDT

The markets opened higher, but quickly turned those gains into losses as they reversed lower in the first 20 minutes of trade.  It seems eager speculators were trying to catch a falling knife after Friday’s massive sell-off, but after that temporary support, the markets resumed their slide due to a lack of follow on buying from a wider pool of investors. In fact, some larger money managers most likely used the early strength to sell even more of their positions, causing that quick reversal just 10 minutes after the open.

The one positive through late morning is the selling is fairly orderly and there has not been a mass rush for the exits as we are down a manageable ~0.5%.  But that could easily change this afternoon if the markets fail to find a floor and this weakness triggers even more selling.  It will be interesting to see how many potential sellers are left in the markets after the two-month decline and Friday’s steep sell-off.

The question we are left to ponder, “what is greater, the fear or the reality?”  Has the market underpriced the risks ahead of us, or is it irrationally fearful of what is over the horizon?  The problem in 2008 was the markets grossly under-appreciated the risks associated with the banking sector, leading to a massive crash in Oct 2008 as the world finally woke up to just how dire the situation really was.  Are we in a similar position where Greece, the Euro, and US economic recovery will also catch investors off guard?  Seeing how the media has obsessed over these headline issues for the last two years, it would be hard to make a case these events are still flying under the radar.

But that doesn’t mean the selling will stop since fear and selling begets more fear and selling.  It is a highly contagious disease that spreads quickly with devastating consequences for anyone standing in the way.  Crashes need a trigger to get kicked off and Friday’s jobs report could easily qualify.  But how much fuel, ie weak holders, is left in the markets?  Are there enough to trigger another 20% plunge like we saw last summer?  Anything can happen, but I expect we are closer to the end of this correction.  There is only a 1% cushion remaining from this year’s first quarter rally in the S&P500.  Is this the magic value the market is magnetically drawn toward?  Often the markets target obscene values before finally reversing.  Is 1257 that bogie?

Speaking of which, it is crazy how quickly the markets can unravel the best first quarter in 30 years.  Easy come, easy go.  It is simply another example why the savvy trader always harvests his profits when the sun is still shining.  The markets peak when everyone is most optimistic, so when everyone is bullish, it is time to start trimming positions.

But back to the previous discussion, using the above logic, it seems ~1250 is our line in the sand.  Find support there and it could make for a good swing trade as the market rebounds.  Crash through this level and we could see a cascade of selling push us down to and through 1,200.  But from what I see, there is a lot of fear in the markets right now, meaning we could be close to the end of this move.  But remember, only impulsive traders try to pick the bottom; disciplined traders wait for the follow through day before jumping back in.  Given how far we’ve come, I expect the next follow-through-day has a high probability of being the real thing.  While I don’t expect it will lead to new highs in the indexes, it will make for a good swing trade as we bounce to the upper end of the summer’s trading range, most likely near the 50dma in the mid to upper 1,300 range.

INVN daily @ 2:26 EDT

As for individual stocks, I’ve been neglectful of maintaining my watch list as I am simply waiting for all the shoes to drop and see where leading stocks stand when the market finally finds its footing.  As an example of how hard the leaders can fall, 1/2 of my old watch list is down 20% or more from its 52-week high, with 1/3 down over 30%.  Most scary is INVN and FOSL who are down over 50%.

In the rebound, the best short-term trades will come from the high quality stocks that got smacked down hard due to irrational selling.  Once the broad market pressure lifts, many of these stocks will pop like a cork.  The better longer-term trades will come from the high quality stocks that resisted a sharp sell-off and held up better than most.  But because they were not subject to an irrational sell-off, their near-term upside will be more limited in comparison.

Stay safe

Fresh lows on disappointing jobs report

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:04 EDT

The jobs report came in far under expectations and the markets sold-off hard at the open.  Both the S&P500 and NASDAQ made new lows in early trade, putting an end to the rally attempt dating back to May 21st.  This means we are at least four days from a legitimate buy-point.  But given the headlines, I don’t expect market participants are ready to start buying equities with reckless abandon any time soon, so patience is the key.

The more interesting debate is if the market is shortable on this news.  Are we on the verge of a cascade sell-off, or has a lot of the selling already occurred and we are in the process of forming a base before heading higher?  The two things to consider are 1) has European turmoil and the feeble US economy actually caught anyone off guard and 2) is the market extended or compressed?  The answer to those two questions will give us strong clues about the potential for a cascade sell-off.

Maybe I’m off base, but it seems like the news has reported Euro troubles and a pathetic domestic recovery for at least a couple of years, so I doubt the recent headlines are catching anyone off guard.  The second aspect is we have long since sold-off from our March peak.  Looking back to last July’s crash, we were coming from 52-week highs prior to the plunge.  The sell-off over the last two months has taken a lot of potential energy out of the market.  Many of the weak holders have already sold, leaving far less fuel for a sell-off this time around.  Of course the thing about a panic sell-off is it can turn resilient bulls into weak-kneed worrywarts over a matter of days as the market crashes through support levels and triggers additional stop-loss selling.  But so far I am encouraged by the floor the indexes are finding at the 200dma, indicating traders are not rushing for the exits…….yet.

But as we flirt with the 200dma, it wouldn’t surprise me to see the market dip under, triggering all the stop-losses sitting at this level.  The question is how much lower do we go if we break through.  Do we just poke our head under?  Do we drop to 1257 to go flat for the year?  Or do we fall all the way to 1200?  I find 1200 the least probable outcome without a new catalyst pressuring the markets.  A slowly growing US economy and European infighting is already priced in the markets.  But actual US job losses and economic contraction could spook traders.  Same goes with a fatal breakdown of European negotiations.  But for the trader, both of these would most likely trigger temporary dips as it flushes out all the pessimists and weak holders.  The lower we go, the bigger the bounce will be.

As for Greece, booting them out of the Euro might initially trigger a sell-off, but it could bounce shortly after as the initial panic transitions to relief that the Euro is actually stronger without Greece.

SWI daily @ 12:04 EDT

As for individual stocks, the best performing stocks as of late are getting smacked down.  LQDT, SWI, CRUS, and TRIP are all selling off hard after making recent 52wk highs.  During a market correction, resist the temptation to buy stocks showing great strength because they are far more vulnerable to broad market weakness.  All of these stocks have shown unusual strength recently, but in a market correction that simply makes them good watch-list candidates, not buy candidates.

Stay safe

More weakness

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:26 EDT

We continue selling-off after Tuesday’s “breakout”.  It seems fairly safe to call Tuesday’s strength nothing more than a short-squeeze.  Imagine the pain all the bears who were shaken-out as we broke above the consolidation or the bulls who bought the “breakout” are feeling today as the market reversed course.  If there is one overriding truth we can count on is the market’s propensity toward humiliating as many people as it can at any one time.  And more often than not, it crushes and humbles both bears and bulls before finally revealing its hand.

The market testing 1300 as we push toward the lower end of the recent consolidation.  Will we bounce off of the recent lows?  Will we plummet in a cascade of selling?  For those in cash it really doesn’t matter.  In fact, the lower the better because irrational selling creates more upside potential.  But for those trying to play the short side, it helps to have profit targets.

Tomorrow we’ll get the monthly employment report.  Expectations have been dramatically lowered after the last couple misses and the deceleration in hiring we’ve seen in recent results.  Will this trend continue, or will the lowered bar make it easier to surprise to the upside?  While employment numbers were a big driver in 2009 and 2010, they have become less of a market moving data point recently.  No doubt it will make waves, but as long as the number isn’t too shocking in either direction, the effect will be short-lived as the market quickly returns to its obsession over Greece and the Euro zone. But one thing to consider is we are still holding above the lows of the recent consolidation, meaning the current rally attempt is still alive and a strong employment number could trigger a follow through day tomorrow if we have a 1.4% pop on strong volume.

While there are a lot of IBD50 stocks holding up during this correction, the thing to note is the difference in names between this week’s IBD50 and those form March.  Many of the favorite stocks of the Q1 rally have completely fallen off the list.  Often the higher they rise, the harder they fall. Most of IBD’s top groups are defensive, coming from the medical and banking industries.  Are these stocks showing potential as the next big thing, or are they simply hiding places for long-only mutual funds trying to lose the least amount of money in a market correction?

Stay safe

Giving back yesterday’s gains

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:43 EDT

Stocks opened lower, giving back all of yesterday’s gains and then some.  Good news one day, bad news the next, typical action for a consolidation.  The interesting thing to watch is if this consolidation is the bottom of the range, or if it is a pause halfway down as part of a three wave correction.  As I shared earlier, I expect at the very least we’ll retest the lows of the range and more likely than not make new lows before this is all said and done.  The question is if the lows will be 1290, 1280, 1257, or lower.

For the time being the market is reading too much into each headline coming out of Europe or China.  One day the market is excited and the next it is dejected.  No doubt the news will go both ways for a while and as a result the market will get whipped around. One thing to put all of this in perspective is no matter what the economy is doing, there will always be both good and bad headlines at any given time.  What really matters is how the market responds given what the masses are inclined to gravitate toward.  Is the market optimistic, pessimistic, or confused?  Right now we are in a choppy consolidation because the market is swing back and forth between bullish and bearish biases.  While it seems like the market is chaining its mind on a daily basis, what is really going on is neither the bulls nor bears have the strength to sustain a breakout and after a flurry of bull or bear activity, it quickly fizzles and the market swings back the other direction.

Breaking the upper side of the recent consolidation shook out many bears and tempted premature breakout traders to go long.  But this was nothing more than highly speculative buying and there is no substance to these traders as they come and go with the prevailing wind.  To sustain a move higher we’re going to need buyers with conviction that are willing to hold for extended periods of time.  With all the headline risk facing the markets, many of these longer-term traders are waiting out the uncertainty before committing more capital to the markets.  Many of these savvy traders have the view they would rather buy several percent higher and forgo those profits if it means they have less risk of the market reversing on them. And this is why each breakout fails to gather the critical mass it needs to continue higher.

CRUS daily @ 12.43 EDT

CRUS is trimming yesterday’s strong breakout gains.  This demonstrates the risks associated with buying even the strongest stocks during a correction where very few stocks can overpower a declining market.  And even the best performing stocks only notch modest gains during a correction, giving a very low risk to reward.  As pointed out during our monthly IBD meetup, if WON makes all his portfolio managers hold cash during a correction, what makes us think we can do better?  The goal isn’t to make all the money, but to capture a chunk of highest-probability profits when the wind is at our backs.  Using leverage on the way up and sidestepping the pullbacks will produce great results even when buying late and selling early.  And back to CRUS, yesterday’s breakout is highly noteworthy and the stock should be added to a ready list for consideration when the uptrend resumes.

Stay safe.

Early gains fizzle

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 2:16 EDT

Stocks are higher in response to global headlines and strength seen in overseas trading.    Given the extremely low holiday volume on Friday, a technical follow-through-day seems plausible if the indexes close with 1.25%+ gains.  Of course we should be suspicious of any follow-through-day that takes advantage of a holiday comparison.  A more reliable benchmark is Thursday’s volume or the 50-day average volume. But as I write this, the markets have given up 1/2 of the early morning gains as the euro is plunging against the dollar.

Part of the headwind equities are facing is the inverse relationship between the strength of the US dollar and the US stock markets.  Weak dollar = strong stock prices, strong dollar = weak markets.  Much of this relationship occurs because most companies in the indexes derive a large portion of their sales and profits from overseas.  When foreign currencies are weak relative to the US dollar, those overseas revenues and earnings lose value, lowering a domestic company’s profits, and thus valuation.  In addition, a strong dollar means domestically produced products and services become more expensive in foreign countries and those higher prices put further pressure on international sales and earnings.  Given how close this relationship has been, the US dollar is worth keeping an eye on as part of your market routine.

No doubt a lot of bears are running for cover as today’s price action broke above recent trading highs.  Many of the late bears who shorted the market long after the decline was obvious are feeling a lot of pain as most of their positions are in the red.  To stop the bleeding, they are buying back their positions, contributing to this move higher as part of a classic short squeeze.

Now the question is if there will be follow-on buying from value investors after the temporary lift from the short squeeze dissipates.  To continue rallying from here, the market will need to conclude the reasons for the recent sell-off were unjustified.  That means getting over our renewed fear of headlines.  What are the chances of that happening over the next several days?  And late morning trade gave back many of those early gains, showing not many traders were eager to follow the short squeeze.

But while I don’t see a lot of reason for us to sustain a rally from here, the downside risk is equally suspicious.  As we  find ourselves in a headline obsessed market, the thing to remember is we can safely ignore what everyone is talking about because it is already priced in the market.  The markets are the most efficient discounter of information ever conceived.  As soon as a material number of people become are afraid of a Greek default or a Euro breakup, they either immediately sell their positions that would be affected, or lower the price they would be willing to pay for those vulnerable  assets.  This shift in sentiment moves markets prices to the exact point where there is just as much optimism as pessimism and the scales are perfectly balanced.  Existing fears or hopes cannot drive the market because they are already priced in.  It takes chances in expectations to move markets as traders change their mind and either bid up or sell assets to reflect their new expectations of the future.

I expect we’ll continue to trading in this range as the market sorts through its feelings toward the economy in the US, Europe, and China.  From here it will take a material shift in sentiment either due to new information or fatigue over the same fatalistic headlines failing to crash the market (ie Chicken Little effect).

The stock market is one of the few places in the world where people are excited for the opportunity to buy merchandise at inflated prices and turn their nose up at buying anything at a discount.   You don’t need to look any further than FB to see this phenomena.  Two-weeks ago people were excited for the opportunity to buy FB at $45.  Yet here we are just a few days later and what was a screaming buy at $45 is now an untouchable pariah at $29.  What gives?  It is the exact same company with the exact same balance sheet and future as it had two-weeks ago, yet it went from being a must have stock to a complete embarrassment that no one is willing to admit to owning.

This is a perfect example of clustering.  People’s views on FB are based entirely on what other people think, namely the aggregate’s view as reflected in the stock price.  When the group likes a stock, they bid up the price and everyone loves it.  When the price falls, everyone hates it.  But the thing to remember is the more people who end up clustered around a single view, the less independence and balance there is in the market and the more likely the price will make a big move in the opposite direction.  We saw this when FB was the must have stock and was bid up to a $100b valuation and we are now seeing the pendulum swing the other way as FB is the laughing-stock of the market with its $60b market cap.

LNKD weekly

FB continues to get pounded today as it sliced through $30 with the initiation of options trading today.  But this shouldn’t surprise anyone as it continues to shakeout irrationally euphoric bulls.  Using GRPN and LNKD as benchmarks, both traded lower for 4-5 weeks before bouncing higher.  We should expect to see something similar with FB before it bounces.  For swing traders, we want the stock bottom before buying because anything else is trying to catch a falling knife.  Day traders who watch each tick of the day can get away with trading short-term moves as they jump in and out of a stock over a period of hours, but the rest of us would be better served by waiting for the stock to bottom and rebound first.   Anyone contemplating a trade on FB, keep your price target under $38 because of all the regretful IPO buyers who are praying to the stock market gods so they can get out of their bonehead trade without losing money.  This selling pressure at the IPO price will create a headwind for the stock, slowing further gains.  But for the breakout trader, seeing a high-volume break above the $38 level would make for an interesting buying opportunity.  Remember this is an advanced trade and most would be better served waiting for a follow-through-day and buying more traditional CAN SLIM stocks showing the strongest fundamentals and charts.

Stay safe.

Quiet pre-holliday session

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:02 EDT

It’s a quiet pre-holiday trading session.  The market has been trading around breakeven all morning as everyone is far more focused on what they are going to do over the three-day weekend than what is happening in Europe.

The market continues finding support in the 1300 region, moderating the anxiety of a cascade sell-off as investors are getting more comfortable with these new levels.  There might be a little more upside left in the bounce, but no doubt we’ll test the lower end of the range over the next couple weeks.  The market will need to chew through both bulls and bears as we consolidate and search for the next move, either up or down. But for the time being, I think most of the traders who wanted to sell have already sold, so it will take new and unexpected bad news to trigger another big leg down.  (For the purposes of this discussion, I’ll consider a move down to 1250 as part of the original sell-off and consolidation, not a new leg down.  A new leg down would be a dramatic plunge to 1200 or lower.)

The thing we need to realize about Greece is by itself, a default or eviction from the Euro will have little direct effect on the banking system since all Greek debt is already viewed and booked as near worthless.  No doubt it will hit some speculators and hedge funds making big bets on the outcome in the pocketbook, but we should not fear global contagion and banks falling like dominoes.  Most major banks have either gotten rid of their Greek debt, hedged it, or written it down and already booked the loss.  Greece losing the Euro will be a major disaster for the local region, but it will not be a material issue for the global financial sector.

The fear in the markets has never been about what happens if Greece fails, but about the bigger dominoes like Spain and Italy, situations not already priced in the market.   No doubt Germany could make an example out of Greece to get Portugal, Ireland, Italy, and Spain to tote the line, but ultimately I expect the Euro to hold together through a combination of all the ideas being thrown out there, namely a hybrid of bailouts, Euro bonds, money printing, and austerity.  There are major negative consequences to each of these, but doing all in moderation will lead to the least bad resolution.

Survey from Yahoo Finance on 5/25

Who wants to buy FB?  Anyone?  Anyone?  Being a contrarian, seeing the humiliation suffered by early FB investors makes for an interesting counter-trend opportunity.  No doubt the stock could decline a lot more from here and there is a very real risk of decelerated growth crushing its high-flying valuation, but all the highly bearish sentiment forming around this story makes me far more intrigued by this name.  I continue to be skeptical of its long-term prospects because consumer tech companies have a limited shelf-life (just ask PALM, RIMM, AOL, MySpace, etc), but this highly skewed sentiment in FB could setup for some short-term trades.  Regardless of which way FB eventually goes, no doubt there will be some tradable swings like we’ve seen in LNKD and GRPN.  Obviously this is the deep-end of the pool, so only try something like this if you know what you are doing and understand the risks.  The key to managing these kind of trades is capturing profits early and not allowing yourself to hold too long and get whipped around by the inevitable volatility.

Have a great weekend.

Did you see the olds?

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:32 EDT

The markets bounced around modestly all morning and are currently lower with no new headlines to push the markets decisively one way or the other.  For the time being the correction found footing around 1300 as the selling pressure moderated and value buyers are finding these levels attractive.

Today is the first day that could qualify as a follow through day from Monday’s rally attempt.  The thing to be careful of is while there are such things as V-bottoms, they are typically associated with frantic sell-offs that are emotionally charged and lack fundamental merit, thus the extreme plunge followed by a quick rebound.  Further these are most often found in individual stocks, not the indexes.  Based on history, if we do get a FTD in the next few days, it is unlikely the market will take-off and resume the previous uptrend, if for no other reason than we have a fair bit of overhead resistance from regretful buyers over the last three months who are praying for the chance to get out at breakeven.  So while this pullback is constructive in the big picture, leave the raging-bull hat in the closet for the time being.

As for headlines, it seems like we are stuck in the movie Ground Hog Day as we continue seeing the same economic stories recycled from last year.  We should start calling it the “olds” because there is nothing new about it.  As it stands everything should already be priced in the market fairly well given we just reset for the Q1 Teflon rally that was completely oblivious to ominous headlines.  Not to say we can’t dip a bit lower over the coming weeks and months through the market’s typical gyrations and head fakes, but it will take something genuinely new and unexpected to crash the market from here.  Maybe this is Greece actually getting kicked out of the Euro instead of just idle speculation and debate.  Or some kind of irrefutable proof that China has been manipulating their economic numbers and the situation is far more dire than we are lead to believe.  But as long as we are simply fretting over a sluggish economy or a Greek default, that is already baked into the cake and accounted for.

FFIV daily @ 1:32 EDT

In individual stocks, FFIV is getting crushed today and is 20% off of its 52-week high.  This is just one of many recent examples of why every great investor preaches never fall in love with a stock.  Date them and then take your money and run while the sun is still shining.  The idea of home-run hitting is extremely seductive, who doesn’t want to hold a great stock through an entire 1,000% run?  But while it is easy to identify the biggest winners at the end of each year, the thing we fail to consider is the hundreds of stocks that had the exact same fundamentals and chart patterns that crashed and burned.  This phenomena is called survivor bias because we only study the successful and ignore similar examples that plunged into obscurity.  In trading, the best way to hedge against this is to take your 20% profits and move on to the next hot trade.

Indecision

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:56 EDT

The markets are facing another bout of weakness after a strong showing on Monday and early Tuesday.  Almost all of those gains have been wiped out as the S&P500 is flirting with 1300 again over renewed Greek concerns.  But so far we continue holding above Friday’s low, keeping the rally attempt alive.  If we honor Friday’s low, starting tomorrow we could have a follow through day if there are nice price gains on higher volume.

While there are a lot of similarities between this year’s sell-off and last year, the big difference is this market don’t seem nearly as frantic.  Last year could easily be described as bi-polar as the market whipped from one extreme to the other, but this time around things seem far more orderly, lacking those violent changes in sentiment.  If last year was bi-polar, the current market is simply indecisive.  Similar Euro and economic headlines are weighing on the market’s mind, but the market is no longer fearing the end of global civilization and is doing a better job of keeping headline risks in perspective.  These unresolved issues will continue to haunt us for a while, but the market is acting far more rational and that is giving the market more stability.

Even if the indecision continues through summer, I expect we’ve already seen the bulk of the sell-off.  We’ll probably dip under the 200dma or 1257 to go flat for the year at some point, but that will most likely be the process of building a solid foundation for this correction to bounce off of and that violation of support will not be a trapdoor triggering a massive sell-off.  Of course this assumes a fairly orderly resolution to the Euro debt problem and modest economic growth.  No doubt the markets will unravel if the Euro comes apart, China crashes, or conflict in the Middle East threatens oil supplies.  But barring those unlikely events, the market should be fairly stable going forward.  Of course there is a big difference between stable and rallying.  It will take a period of price consolidation to find suitable resolutions to these headline issues and that will delay the indexes from making new highs for a bit.  But while the market might trade sideways, there will be opportunities to locate leading stocks making big price gains once the market headwinds stop knocking them down.

Not a lot to say about individual leading stocks right now as most of the favorites continue trading under their 50dma.  But standard bases take at least two months to form, so we shouldn’t be expecting many of these CAN SLIM stocks to start making new highs any time soon.  Patience is the name of the game and we just have to wait for the market and individual stocks to move back into buyable positions.  If we were being optimistic, we should hope for a tradable fall rally to help end the year on a strong note.  If someone has problems sitting on their hands for the next couple months, you’d probably do better buying the dips and selling the rallies.  In a sideways market, buying breakouts can be a frustrating and expensive game. No doubt there will be a handful of strong performers, but these will be the exception, not the rule.  So be very selective and disciplined with any buys for a while.

And of course I reserve the right to be 100% wrong and revise my opinions as the conditions warrant.

Stay safe

Up, down, or sideways?

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 11:54 EDT

The markets opened flat, but rallied out of the gate in continuation of yesterday’s strength.  While yesterday’s price gains were impressive, the lack of volume demonstrated a reluctance of people to jump on the bandwagon.  Of course this is not a red flag by itself since most traders are late when recognizing a a reversal.

Part of the reason I’m suspicious of this most recent rally attempt is I would feel better if it undercut a major technical level in order to flush-out a large number of holders on huge volume before bouncing higher.  Potentially 1300 could be that obscene level the markets often trade to before reversing, but it just doesn’t feel like the dip under 1300 triggered that huge, emotion driven sell-off.  No doubt Friday’s volume was high, but given it coincided with options expiration, the volume was fairly mediocre when compared with previous options expirations.

The other thing is the sell-off hasn’t been drawn-out enough for traders to grow numb to headlines the way they did last fall before kicking-off our most recent Q1 rally.  Traders continue to be fairly sensitive to headlines and any bad news could trigger a new wave of selling, hampering a sustained rally.  Plus I don’t think the sell-off has reached obscene valuations due to irrational selling that provide such a compelling value that stocks can bottom and rally in the face of dire headlines.

But a lot of what we should expect depends on what direction the market is headed.  There are three general market directions; up, down, and sideways.  And based upon where we are headed will determine what kind of price action we should anticipate.  Much of the above expectations of a huge volume undercut is based on forming a bottom and resuming the previous uptrend.  This shakeout of weak holders is what clears the way for a move higher.  But if we don’t get that flush-out, the bottom is less solid and will more likely lead to a sideways range until time and repeated pullbacks demoralize and humiliate weak holders, thus setting the stage for a continuation of the previous rally.  And finally we could be experiencing a temporary bounce on our way much lower.  But given how far we have come already, a large portion of the correction has already occurred and barring a huge shock to the system, I expect we are fairly close to this move’s lowest point.

Given the headlines, economy, and forward looking nature of the market, it is not surprising the market got ahead of itself with the Q1 rally and needed a rest.  Of the above scenarios, I expect trading range is where we are headed until the market can sort through some of these headline risks and then ultimately finish the year with a nice rally.  Now, I don’t expect last Thursday was the bottom of the trading rang and the one of the follow-on dips will likely test the 200dma or 1257 area before bouncing.  For an example of how this might look, refer back to last summer’s trading range.  I don’t anticipate the same volatility we saw back then, but the we could trade sideways in a similar fashion through this summer.

If we are transitioning into a trading range, the best way to trade this is to buy the dips and sell the rallies, capturing profits early and often before the market has a chance to take those back.  It could be months before we switch into rally mode where you can hold stocks for extended periods of time.  Of course trading sideways does allow some of the strongest stocks to sustain a rally, but these will be the exception, not the rule, so plan on capturing profits on most of your trades and avoid taking round-trips on your trades.

But these are just my opinions and I could easily be wrong, so we need to follow and trade what the market gives us.  In the markets, it is okay to be wrong, but it is suicidal to stay wrong.

Poor FB was again getting destroyed this morning, down 7% in early trade.  Even more interesting given how difficult it is to locate shares for shorting, meaning most all of the selling pressure is coming former FB bulls dumping shares by the truckload.  This could be setting up an interesting buying opportunity if the selling becomes too overdone.  And even as I write this, the shares have rebounded and are only down 2% by late morning.  Given the volatility, I would only view this as a trading opportunity because I remain skeptical of FB’s future growth opportunities since they already have 1/2 of the planet’s internet users.  I have little doubt subscriber growth is will decelerate and to plateau as they reach the saturation point and growth tapers to population growth and global internet adoption rates.  But regardless, the stock presents a great trading opportunity for the nimble given the high volatility in the name.

LNKD daily @ 11:53 EDT

LNKD is recovering nicely from the FB induced sell-off as investors are recognizing the difference in growth and revenue potential between the two companies.  In addition, some of the liquidation pressure on LNDK in order to make room for FB in investor’s portfolios has relented and this relief has allowed LNKD to bounce back.  It was a nerve wracking ride, but LNKD has recovered its 50dma.  But that is the volatility home-run hitters should expect when trying to hold high-beta stocks through a correction.  I don’t have those kind of nerves and why I prefer selling on the way up even if it means giving up some upside potential.

Stay safe

Waiting for the bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:25 EDT

The indexes rose nicely in early trade, a welcome sight given the streak of six consecutive down-days and 11 losses in last 13 trading sessions.  Is this finally the bounce everyone has been talking about, or the inevitable up-day that is part of most larger sell-offs?  And lets not forget many of the previous down-days were up early too.  Of course the difference today is the markets are up far more than those more modest rallies that quickly fizzled.  Either way, I think buying today’s bounce still counts as catching a falling knife and is best avoided by any prudent trader.  One day does not make a trend.

The news driving today’s rally is word from European leaders they want to keep Greece in the Euro.  Glad to hear that Euro problem is finally solved and we can move on.  (sarcasm)  If I were a wagering man, which all stock traders are, I would say a sizable portion of today’s rally is driven by short-covering.  By itself short-covering is unsustainable without real buyers stepping in to support the new move.  From here we need to wait and see if a meaningful number value buyers are ready to venture back in.

On Friday the S&P500 closed under 1300, while not an important technical level, it is a key psychological mile-marker and no doubt got people’s attention.  The 200dma is the next major target at ~1280 and also coincides with some technical levels dating back to last fall.  1257 is another major psychological milestone on the horizon since it represents giving back 100% of the Q1 rally.  Will we bounce off of this region?  Break through it and then bounce?  Or will it simply be a speed bump on the way to lower prices?

Sentiment in the market is getting precarious and any further declines creates the very real risk of triggering a irrational, fear based sell-off.  People have been able to rationalize most of the recent decline as normal pull-back and and part of a healthy refresh of the phenomenal Q1 rally.  But what was supposed to be a 3-5% correction is quickly becoming uncomfortable. Regret is mounting, as is the fear of greater regret by allowing additional losses to pile up.  No doubt today is a relief rally for those still holding, but to have the market turn back around and make new lows will push many traders to the point of selling simply to make the pain of stop.  And of course that whoosh-down will be the capitulation point that often signals market bottoms.

Part of the reason I suspect we haven’t seen a mad rush for the exits yet is the powerful Q1 rally has left many people sitting with winning trades even in the face of the recent sell-off.  As any of us know, it is one thing to see profits dwindle, yet an entirely different feeling to watch your account go into the red.  Maybe this lack of significant panic selling is because many traders are still up for the year and this is acting as a stabilizing factor keeping the markets more rational during this correction.  But it is something to be aware of if we continue to fall and that pushes more traders into the red for the year.

FB intraday @ 12:24 EDT

FB is providing a lesson in market sentiment and supply and demand as the most assured IPO pop in history is plunging 12% instead.  And no doubt FB could have crashed on Friday had the underwriters not dumped a ton of into the name in order to avoid a an ugly first day sell-off.  Yet again the market proves that the best move is to trade opposite of what everyone else thinks.  Of course this doesn’t mean the stock is dead and it could easily rally after forming an IPO base.

And so this brings us back to the indexes again.  How many people are saying the market is set up for a great short vs how many say the sell-off is overdone and ready to bounce?  There are no numbers to gauge this in real-time so we need to go with our gut based on the clues around us.  Now this is simply my opinion, but it seems like not enough people have been demoralized yet to justify a turnaround from this aggressive sell-off, leaving me highly suspicious of today’s rally.  No doubt today’s strength could continue for a couple days, but that is how a sawtooth decline looks.  But regardless of bear or bull outlook, the disciplined CAN SLIM trader is waiting for a follow though day to avoid falling prey to a sucker’s rally. And when we do get that follow through day, we need to be ready to start buying the market.  Often the more reluctant you are to buy the follow through day, the more likely it is to work.

Stay safe.

Facebook

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:45 EDT

Markets opened slightly higher as everyone was eagerly anticipating the public trading of FB scheduled for 11am.  But the early strength was fairly constrained given all the other things on the market’s mind.   And when FB finally started trading, it could only be described as underwhelming.  It opened a few dollars higher, but quickly retreated to the offer price where it found a floor, no doubt a result of many traders putting in limit orders at $38 and the stock will continue finding good support there until all those limit orders are filled.  But given early trade, it seems like the FB IPO generated far more smoke than fire as the frenzy was more more manufactured by the press than a real phenomena among traders.

LNKD daily @ 12:45 EDT

The big loser with FB’s tepid IPO seems to be LNKD as it sliced through the 50dma on the less than enthusiastic reception of FB shares.  No doubt there was a FB premium built into LNKD since they close cousins and this let the air out of LNKD shares.  Just another example of a strong leader stumbling and falling victim to the recent weakness.  But there is still a lot of trading left in the day as IPOs are often volatile out of the gate.  In fact, as I write this, LNKD has bounced off the lows and FB has also moved above the offer.  Who knows, we could still see the FB rush this afternoon as many traders were afraid to buy at the open.

Back to the markets, the good news about the recent sell-off is it has created attractive levels in many leading stocks.  Of course the challenge for the savvy trader is figuring out when the storm has passed and it is safe to move his chips back in.  It is interesting to hear many professional traders mention how attractive prices are and they are wading back in on the long side.  Are these savvy traders getting ahead of everyone else, or are they simply representative of sentiment felt by a large number of traders?  If too many people think these are attractive levels and are buying right now, this will lead to short lived support because once they are done buying, the market will resume its previous trend.

The structural problem facing the markets right now is typically it takes enthusiastic buyers to move a stocks price higher and they fight each other as they bid up the price.  And no doubt enthusiastic sellers will also drop a stock.  But that is not the only thing that causes a stock to fall.  Lack of buyers can also pressure prices as they fall under their own weight due to a dearth of buyers.  Why this is important is even if we have exhausted enthusiastic sellers, we could still continue to decline if buyers remain gun-shy over headline risk.  So while a rising stock will typically reverse when it runs out of buyers, the opposite is not true with sell-offs as the market can continue declining even after it runs out of sellers.  And compounding this is many experienced traders have long ago learned defense is an important part of successful trading and declining prices can trigger automatic stop-losses, which in turn pushes the market down and triggers yet another wave of stop-losses.  This continues until either we run through all the stop-losses or the prices become so tempting to value investors that they rush in and prop up the market.

Back to FB related trades, could the pressure we’ve seen in AAPL and other leaders be liquidations by big money in order to free $16+ billion of capital necessary make room for the FB IPO?  It is an interesting thesis and we’ll see how these stocks trade going forward.  Of course there are several components to a stock’s price: 1) Fundamentals  2) Technicals  3) Supply and Demand and  4) Sentiment.  AAPL’s fundamental story is still intact, so that is not the source of the correction.  Selling to make room for FB falls under supply and demand, so once that phenomena stops today, it will remove that downward pressure.  But the wildcard is if AAPL’s slide dented the euphoric sentiment and technicals that lifted it in the first quarter.  These two factors could turn into a headwind going forward.  Time will tell.

Stay safe.

Thin ice

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:20 EDT

Markets moved lower in early trade, continuing recent weakness.  The question remains how much longer can this continue?

One thing to remember is the current price is a balance between bulls and bears.  Moves occur when a slight imbalance occurs between bulls and bears due to new information or changes in sentiment.  The result is prices adjust to relocate that precise point where exactly half the money is on each side of a trade.  So while you have an opinion one way or the other, 50% of the market has the opposite view and this disagreement is what makes markets work.  The challenge for a successful trader is figuring out which side to pick.

The interesting thing to ponder is if this sell-off has become too obvious as we clearly broke support?  Most often profits go to those who get on a trade early and those showing up late are stuck with the bill.  Keeping this in mind, can we continue assuming the upward bias and overbought condition remains in the face of these horrible technicals?

Using an analogy, it seems the market is on thin-ice.  Apprehension has been building as prices decline and renewed fear of headlines is haunting traders.  But the thing about thin-ice is you only get in trouble if it breaks.  The market could easily skate past this thin patch unscathed and come out the other side ready to rally.  If this is the case, we might see the market begin bottoming soon.  But the danger with thin-ice is we are one bad headline away from a plunge where everyone panics at the same time.

Last summer we found ourselves in a similar position with lots of storm clouds on the horizon leaving investors fidgety.  Then the one headline hit that sent everyone running, S&P downgrading US debt.  The downgrade was telegraphed for months and the actual result of the downgrade turned out trivial as the Treasury market rallied in the face of the downgrade.  But once the selling started in the equity market, it quickly spiraled into a two-week free-fall as the S&P500 lost 17%.  The market was in the mood to sell-off and it found its excuse.  Could this market be setting up for the same thing right now?

The silver-lining to our current sell-off is it has been fairly orderly and so nothing like the fall-off-the-cliff we experienced last summer.  Further, traders who saw the world did not come to an end due to Euro contagion last fall will feel a sense of been-there-done-that and won’t be as panicky this time around.

All of this is a long way of saying, I think we are one bad headline away from a material sell-off, but baring that, the market could find support soon.  But if the latter case plays out, the rebound won’t signal an all-clear as any rally still has significant technical and sentiment resistance to breakthrough before moving to new highs.

As for how to trade this, the short is a bit long in the tooth as it has become fairly obvious and the market doesn’t like being obvious.  Anyone putting on new short now is a late to the party unless their game plan is entirely based on a waiting for that backbreaking trigger to send the market tumbling.  But when comparing the risk/reward, the short continues to be the more attractive trade because on the long side you are currently risking ~$3 of downside to make ~$1 of upside.   With that skew, the best play continues to be waiting.

AAPL daily @ 1:20 EDT

AAPL is dragging down the NASDAQ and its relative strength line is breaking under recent lows as it continues its trend of under performance after its awe inspiring rally last quarter.  There doesn’t seem to be much technical support because the previous rally was nearly straight up without much consolidation.  This could be hindering the stock from arresting its slide.  And much like the gold trade, sometimes overbought/oversold sentiment overrules fundamentals.  By all measures, AAPL continues to be a great company, but the trade appears too crowded and it will take some time to rebalanced sentiment before it can resume its move higher.

LULU is selling off aggressively as it is breaking support at the $70 level.  LNKD is also dropping 5%, but it is still remains above its 50dma.  These are reminders no matter how strong a stocks, very few can make progress in the face of a weak market, and high beta stocks feel the pressure more than most.

Stay safe.

Bulls struggle to hold gains

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 12:10 EDT

Markets opened up and pushed higher in early trade, but  have since given up most of those gains by late morning.  It doesn’t appear the recent selling in the indexes could be described as irrational panic selling with the tell-tale giveaway of wild moves on high volume.   But if it isn’t panic selling, is it real selling?  And if it is real selling, should we be concerned “smart” money is moving for the exits?  Could this be what we are seeing as every attempted rally is exploited by big money to liquidate even more of their long positions?   Like the tortoise and haire, quick sprints down are unsustainable and often signal a climax, but the slow and steady tends to grind down for a while. No doubt we’ll see up-days here and there, but will they have the conviction and support to reverse the new trend and sentiment taking hold in the markets?  And of course the thing to watch for is when the scale tips and complacency turns to fear as market participants start rushing for the exit en mass.  That tipping point will be a good setup for a reversal, but it will lead to some sleepless nights for anyone still trying to hold equities.  The advantage of this scenario for the nimble trader is these oversold conditions present great buying opportunities for those in tune with the market.

No doubt the above scenario is just one of several possible outcomes for the market and we need to watch closely to identify and trade the one that is playing out.  This could be nothing more than a quick shakeout to refresh the recent rally and we continue higher from here because not all sell-offs need a climax to rebound.  We could simply see the selling pressure exhaust itself and the correction ends with whimper as the market resumes higher.  But using history as a guide, a sustained 12-month rally is exceedingly rare and we should expect some gut-wrenching volatility even in the most bullish of years.  If trading stocks was easy, everyone would be rich, and as we all know that isn’t the case.  We should always expect the market to throw us curve-balls that rattle our resolve and tempt us into doing something stupid and the key to making big money in the markets is resisting the markets deception. Unfortunately that is a lot easier said than done.

GLD daily @ 12:11 EDT

FB bears are coming out of the woodwork demonstrating there is some counterweight to this seemingly euphoric trade.  I’m not sure how many are simply skeptical vs how many will actively attempt to short the stock, but a certain level of skepticism is necessary for any stock to move higher because structurally if everyone is bullish, then there is no one left to bid up the price.  The one significant headwind for a FB investor is it takes far more buying to push a $100b market cap stock to $200b than it takes to move a $2b company to $10b. This is simply the laws of diminishing returns.  The unfortunate thing for us retail investor is FB didn’t come public years ago to give us the opportunity to ride that wave up to $100b.

It is interesting to see gold selling off in the face of renewed Euro troubles.  Wasn’t this supposed to be the safe harbor to protect investors from money printing and inflation?  It might ultimately play out that way over the long-term, but it seems like gold is at the very least temporary correcting from an overbought condition.   Too many people were seeking refuge in gold and that imbalance invariably leads to a reversal.

Continued indecision

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 11:36 EDT

Stocks traded higher in the premarket, opened flat, rose early on and then retreated back to the opening levels.  The indecision is a symptom of the political uncertainty as we are moving back into a headline fearing market.  The thing to be wary of is one bad headline can do far more damage than an equally positive story will move the markets to the upside, presenting a fairly skewed risk/reward.  Further, it is almost comical to hear pundits talk about how oversold the market has become after a ~6% pullback.  Maybe I’m missing something here, but it takes a raging bull to label a 6% pullback oversold.  The interesting thing is many experts were calling for a 3-5% pullback in the markets to refresh the recent rally.  But most often the expected outcome is the least likely to occur.  So if we discount a 3-5% pullback, that leaves us with more than or less than 3-5%.  Since we’ve already sold off more than 3-5%, that eliminates less, so it looks like we are facing more.  Will it be 7-10% or 10-15%?  Who knows and only time will tell.  As I shared earlier, I would prefer to see us refresh by dropping to the 200dma before bouncing to finish the year higher because as a directional trader, I make all my money when the market is moving and the sideways chop is simply frustrating.  So here is to hoping some Euro headlines spook the market into a panicked sell-off and after the dust settles, the market comes to its senses and rallies strongly, giving us the opportunity to buy discounted shares for a quick profit.

FRAN daily @ 11:46 EDT

Seems FRAN has gone the way of INVN and turned into a wild speculating stock more suited to gambling than disciplined investing.  But breakdowns in leading names are not uncommon in corrections and what really matters is how they respond after the broad market pressure lifts.  Will these stocks remain broken, or will they form the right side of a base and present good entry points?  That is what will separate the wheat from the chaff.  There is no way to know ahead of time and we simply need to wait for the leaders to re-exert themselves and rise to the top before we pick stocks to buy in.  Bottom picking is a riskly game and is why disciplined investors don’t play it.

LNKD is one of the few leading stocks still holding up in this correction, but it will be interesting to see how it trades once it’s big brother goes public this Friday.  Will LNKD ride on the coattails of FB, or will it be cannibalized as a source of funds as it competes directly for the same pool of investors?  And what happens if FB sells-off and forms a base after the hugely hyped-up IPO frenzy dies off?  I’m actually constructive on LNKD and expect it will continue to do well even in the shadow of its much bigger brother, but there is no grantee and is why we still follow our rules no matter how much potential we see in a stock.

And a follow up to my Greece/Euro posts, just because it doesn’t make sense for Greece exit the Euro doesn’t mean it won’t happen.  Politicians and common sense mix like oil and water, so anything could happen if politicians bow to populist pressure from the ignorant masses. But we need to be extremely cautious if we see Greece and the EU making moves to remove Greece from the Euro, knowing this will be the start of the mess, not the end.  With an overnight devaluation of the Drachma in the range of 60%-70%, it will renew solvency issues for banks in the region and fan fears of more widespread contagion.  No matter what happens, we’ll get through it, but the near-term volatility will make it a rough time to be long equities.  The silver lining is the Drachma will make it super cheap to sail the Greek Isles.

Fresh undercut

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:23 EDT

The indexes undercut their recent lows in early trading, resetting any rally attempt from last week.  But rather than trigger a cascade of stop-loss selling, the undercut quickly reversed and bounced higher, cutting the losses in half.  It is to early to say if the buyers that rushed in and propped up the market are geniuses or fools, but bottom-picking is a bold game and any disciplined CAN SLIM investor will wait for the follow through day confirmation.

The VIX continues to trade at a modest 21 and the lack of stop-loss selling triggered by a new low demonstrates most market participants are fairly comfortable at these levels and willing to hold on for the expected rebound.  So this leaves us wondering if the crowd is right or if we should take the opposite side.  No doubt I am skewed toward the contrarian view, but the truth is the crowd is more often right than wrong as sustained moves are far longer in duration than reversals that tend to happen rather quickly.  So when deciding whether or not to trade with the crowd, we first need to decide if the recent price action is part of a continuation or a reversal.  And of course time-frame matters a lot in this debate because it could very well be a short-term reversal within a longer-term continuation.

VIX daily

Again my bias continues to be for more near-term downside and I have a leveraged bearish index trade on.  I’ve been looking at struggling high-flyers for a shorting opportunity, but the volatility in both directions scares me and since I expect a more controlled pullback, an index play seemed to provide the best risk/reward.  Of course if the sell-off picks up steam, I’ll get more aggressive in individual names, but for the time being, picking up a few bucks on the downside is keeping me engaged.

Stay safe.

More thoughts on Greece

By Jani Ziedins | Intraday Analysis

The problem in the Eurozone is there is no way Greece, and others, can make good on their debts and European leaders are simply figuring out how Greece, and others, are getting off the hook.

• The simplest and most straight forward is for Greece to give its creditors the middle finger. That is how most deadbeats handle it, so what is the big deal? But economic experts are petrified of the consequences for the stiffed creditors as they become insolvent without Greece’s repayment and that will kick off a series of dominoes leading to a global depression. That sounds ugly and is why smart people are desperately looking for an alternative.
• One option is having a rich benefactor swoop in and pay off all their debts. But since no one has enough money outright, they’ll simply print it and hand it to the creditors. This lead to inflation, but that is tomorrow’s problem. But the political ramifications for this option is it appears like Greece is getting a free pass as they are bailed out by all the other hard working Europeans, making this a politically challenging option.
• An alternative is letting Greece default, but then bailing out the banks that are on the verge of collapse, heading off financial contagion and global depression. Again more money printing and the only difference between this one and the previous is whether or not Greece defaulted, but in reality, this is purely semantics because the effects of money printing will be the exact same for the Euro-zone economies. But it might be slightly more palatable to Euro citizens because it doesn’t give Greece a free-pass. But at the same time it turns into bailing out fat-cat bankers who are even less liked.
• The most extreme of the options is to shred and rewrite every single contract in Greece or pertaining to Greece as they drop out of the Euro and re-adopt the Drachma. The advantage is it give Greece the independence needed to print as much money as they need to pay off their debts. But this will be sheer contract-law chaos as everyone fights over what debts and assets stay Euros and which are converted to near worthless Drachmas. Dose Greece have authority over European creditors to force them to take Drachmas for their citizens debt, or can the foreign creditors insist on repayment in Euros? What about Greeks who have money in foreign banks? And of course the problem of financial contagion and bailout remains as creditors who are repaid with worthless Drachmas will still face insolvency as they are unable to repay their creditors with a worthless currency they received as payment.

The last item barely hints at what a monumental challenge breaking up the Euro will be because it affects every single contract written in Europe. Even separating a single nation will be a huge, tangled mess and lawyers will feed generations of their heirs with all the money they make over litigation of these existing contracts. And it doesn’t even address the financial solvency problem since Greece will still be defaulting in spirit by paying off their debt in a worthless currency.

But no matter what poison you chose, default, money printing, or breakup, the ultimate goal is to avoid paying the debt incurred either through an outright refusal to pay or some kind of inflationary devaluation where the value paid back is worth far less than the value borrowed. But the thing to realize is no matter what route is taken, the end result will always end up with the tax payers bearing the brunt of their politicians fiscal recklessness. So if all three roads lead to the exact same place, why not take the easiest one and just get it done with? And no doubt this is what will happen once the rubber hits the road and the time for action has eclipsed political posturing.

No doubt I didn’t do a great job of explaining the above logic, but the fact remains that it is next to impossible to un-bake the Euro and for better or worse that continent is stuck with it. But hard lessons were learned and going forward there will be more fiscal unity in addition to the monetary unity and we’ll see more centralized fiscal and monetary policy like we see here in the US as a collection of states under a fairly powerful central govt.

Still finding support

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:45 EDT

Stocks are in positive territory this morning in the face of JP Morgan’s pressure on the financial sector.  The bank reported $2b in ‘hedging’ losses.  How that happened is anyone’s guess, but lack of risk management and oversight of the trading operation seems to have crucial role.

As for the indexes’ price-action, they continue to trade slightly above recent lows.  It is nice to see we have not triggered an avalanche of sell-orders, but the buy-the-dip crowd is also unable to move the market higher.  The one thing that remains intact is the series of lower-highs and lower-lows and it will take a material move from here to reverse this pattern, requiring the markets to break multiple layers of resistance before reclaiming the highs of two weeks ago.  We have the former support at 1360 that is now acting as resistance, the 50dma, and then finally moving through the 1415 and 1422 highs.  Not that it can’t be done, but these are several speed bumps along the way that will potentially slow down any move higher.

The thing that still concerns me is the lack of panic selling.  Typically the market bottoms by flushing out weak holders as it becomes irrationally over-sold.  It is this emotionally impulsive selling that lets savvy contrarian traders step in for quick profits.  In many instances orderly sell-offs are far too rational to form solid market bottom.   The lack of panic selling indicates there are still a lot of optimistic bulls out there and sentiment needs to come down a notch or two before we can bounce and head higher.  Of course I don’t have a crystal ball and the market is going to do whatever it wants to do regardless of what I think, but using history as a guide, it seems like we still might have more room on the downside.  But either way we need to take our cues from the market and respond accordingly.

Stay safe.

How do you un-bake a cake?

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 12:51 EDT

The market is finding modest support after the recent sell-off.  It opened higher, but has since retreated from the opening levels.  Even for the bull these up-days should be met with skepticism since it takes four days to confirm a rally.  If a person counts a down-day with an upside reversals as a rally attempt, today’s price action would only be day two.  With that in mind, any bull should wait for the confirmation before jumping on any potential rebound so they don’t get caught up in a suckers’ rally.

It is interesting to hear experts talk about Greece pulling out of the Euro.  I find it shocking that experts actually think this is a realistic possibility.  Everything is so intertwined it would be like trying to separate the sugar, flour, and egg from a baked cake.  It just can’t be done.  Since everyone’s bank deposits, loans, and salary is currently based on the Euro, how do you decide what money gets converted to Drachmas and what stays in Euros?  What if a Greek homeowner took a loan from a Spanish bank?  Euro or Drachma?  And even between a Greek borrower and a Greek bank?  Is the bank really going to keep the same interest rate between a Euro loan and a Drachma loan?  And for depositors, you’d be crazy to leave your money in a bank that will convert Euros to Drachmas.  Knowing that, everyone will cash out their savings and the banks will implode because they don’t have the reserves to let everyone cash out.  If you hear anyone mention Greece pulling out, that is a sign they just don’t understand what they are talking about.

The far simpler remedy is to preserve the Euro and have rest of Europe to pay Greece’s debts, or alternately let Greece go bankrupt and walk away from their debts.  And of course this might need to be repeated for most of the PIIGS, but hey, that is what money printing presses are for.  Its worked well for the US so far, so why not Europe too?  The funny thing is how opposed Germany is to money printing.  As one of the largest global exporters, a weak currency would benefit their export economy as it becomes more competitive globally.  Who would buy a Ford if you could get a BMW for the same price?

Anyway, there is a lot more to this story and it will play out over the next year.  The thing for the investor to be wary of is how this will effect sentiment and prices.  The rally over the last 6 months occurred because the markets largely discounted the Euro crisis as old and inconsequential news.  The rally in effect removed the risk premium associated with the Euro mess.  So where does that leave us right now?  With the risk premium taken out, that means a positive resolution will have little impact since it has already been accounted for.  But a Euro crash landing could hit the markets with a 50% haircut if the worst plays out.  Taking this into account, the Euro crisis effect on the markets ranges from +0% to -50%.  And for the +0% event to occur, it would require a very civil, orderly, and quick resolution to the problem.  Something that is highly unlikely to occur. Looking at those odds, it seems like the risk/reward is not in the bulls favor and they should proceed with extreme caution.

But don’t get me wrong, I’m not predicting doom and gloom for the global banking system or economy.  There is little reason to expect the Euro will unwind the global economy and I fully expect a reasonable resolution to this crisis, but the market will fret over the risk and this will pressure equity prices over the near-term.  Success for a trader is not about making economic predictions, but anticipating how other traders will react to the renewed uncertainty.

How I expect this to play out is the new leaders in France and Greece will make lots of noise to appease the base that pushed them into office, but once they come to the nitty-gritty details of hashing our a resolution with the rest of Europe, they’ll come to a similar conclusion as their predecessors because any other outcome will be even worse.  As we’ve seen in this country, it is far easier to criticize and make promises as an outside challenger than it is to lead and take responsibility for the outcome.  It will take some time for reality to set in for these new govts, but at this point they have little other choice.  But the period between now and then will be filled with landmines for the markets just like it was last summer.

Anyway, back to the markets and how to trade these insights; most likely any strength should be used as an opportunity to get out or initiate shorts.  Wait for the market to get overly bearish before looking to get back in.  And of course we might already be at that point if there are too many people with views like myself.  If that is the case, we could bounce any time now.  But either way, I’d rather be late than risk getting in too early.  Profit opportunities are like a city bus, if you miss one, another one will be along any minute, but losses are forever.  A similar saying, it is better to miss the bus than get run over by the bus.

Stay safe.

Bulls putting up a fight

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 1:07 EDT

Bulls are not rolling over dead and they continue putting up a good fight.  Yesterday the market rallied off of lows and closed in the upper end of the day’s range.  Today the market gapped down at the open, but has since bounced strongly off of the lows.  Is this resilience an encouraging sign, or a symptom of stubborn denial?

Often market participants are slow to identify shifts in the market’s personality as they cling to strategies that have been working.  This is the classic case of chasing last year’s big winners hoping for a repeat performance, but this approach is often a day late and a dollar short as it fails to account for changing conditions and sentiment.

For the last 6-months, anyone who bought the dips made good money.  And it seems a lot of traders are continuing with this same strategy as they try to bottom-pick this decline in anticipation of the next rally.  But in the markets, things work until they don’t.  And with every successful event, we move one step closer to the one that fails.

In the markets nothing is certain and to be successful we must anticipate and trade probabilities as we balance the risks and rewards.  No doubt we could bounce higher from here, but given how long the previous rally was, we need to be on alert for a shift in market personality.  Rather than chase the market, our goal should be to get in front of it as we anticipate these transitions.  For example, a great time to close positions and take profits is when you feel on top of the world and start daydreaming about what you will buy with all your expected profits.  And on the other side, when you have given up all hope and are convinced the market is about to plunge even further is when you need to start looking for stocks to buy.

Given the bounces over the last couple days, I expect we still have more room on the downside because the bulls and buy-the-dip crow has not been completely demoralized.  Once we reach that point of maximum pain, they will all run for the exit, and that capitulation will signal the end of the sell-off.  If we continue to get spooky headlines out of Europe, that point might not come until we break 1,300 on the S&P500.  This is not a prediction, but simply listing one of several possible outcomes.  And even if we fall down to 1,300, it might not be a straight line and we could saw-tooth our way lower as the buy-the-dip crowd continues to put up a fight.

As for leading stocks, they are dropping like flies as speculators are losing their appetite for risky investments.  Some of these high-fliers were holding up well, only to get whacked days later.  Little doubt these are exceptionally risky places to hideout in a correction.  And even if some of them will make it through this, if you hold 5 stocks, will the one strong stock make up for the losses in the other four that implode?  The deck is clearly stacked against retail investors in terms of knowledge, skill, experience, information, and resources, but the biggest and clearest advantage we have is our nimbleness.  We can get in and out of positions in seconds, something big money is extremely envious of.  If we fail to take advantage of our nimbleness, then we give up the only advantage we have in this game.

Stay safe.

Broken Neck

By Jani Ziedins | Intraday Analysis

S&P500 Daily @ 1:37 with Head and Shoulders

A horrible day to own speculative growth stocks as the IBD50 is getting crushed, down over 3%.  RAX ‘s 12% haircut looks modest in comparison to FOSL’s horrifying 37% plunge!

European political discord has pushed the broad markets under previous support and broken the neckline of a head and shoulders, a common reversal pattern.  Given negative headlines/fundamentals and now technicals, the bulls have little to hang their hat on as the pendulum is swinging solidly into the bear camp.

It is periods like this that challenge the home-run hitter’s resolve as they try to stomach these precipitous sell-offs in their core positions.  These are the times when following your portfolio daily can be a hindrance to a buy-and-hold investor’s performance because moves like these tempt them to sell at the wrong time due to emotional weakness.  The only way to make good money in this game is to sell on the way up or hold through the pullbacks.  Getting shaken out during normal pullbacks is the exact wrong thing to do and is what prevents most amateurs traders from capturing worthwhile profit from their good ideas.

No doubt the market could go either way, but it sure feels like this move has more room on the downside as the market demoralizes the buy-the-dip crowd and former bulls turn tail and run for cover.  Often dips make for great entry points, but this doesn’t feel like the time or place for that kind of contrarian thinking.  The best short-term trade continues to be moving to cash or for the bold, shorting.  Of course for the home-run hitter, my longer-term prognosis is for this weakness to pass and the market to resume higher in the second half of the year.  But for my nerves and account balance, I’d rather sit out the decline and wait for the rally to get back in.

Stay safe.