Feb 01

Is the rally back on?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 bounced back Monday, recovering a respectable chunk of last week’s 3.3% tumble.

There were not any clear or obvious economic headlines driving last week’s selling and the same applied to today’s bounce. This was little more than a fleeting swing in sentiment as investors digested last week’s frenzied buying of a handful of beaten-down stocks.

Up to this point, investors have been ignoring any and all bad news and chances are good this latest wobble won’t turn out any different. But last week’s buying frenzy of a handful of garbage stocks gave mainstream investors pause. While they were previously okay with moderately stretched valuations in respectable names, they were not ready for the absurd silliness that was occurring in nearly bankrupt companies.

Most likely, this index pullback won’t end any differently than all of the other pullbacks that came before it. This dip went a little further than most of the others, but this bull market is far from broken. If prices continue firming up this week, last week’s dip will actually turn out to be a healthy development. Every sustained move higher needs a few step-backs along the way.

As for trading this chop, sometimes indexes bounce within hours. Other times the selling stretches across several days. When accounting for the market’s mood, it is hard to know exactly how much it will over or underreact to each situation. That is why our trading plan must account for all possibilities.

Sometimes markets are easy to trade and the indexes drift higher without ever seriously threatening our stops. Other times it shakes us out several times before making its next move.

I still believe this market is headed higher over the medium term, but it might squeeze me out at my stops one or two more times before it finally happens. Or maybe we shoot back to the highs without looking back. Either way, my trading plan is ready.

If this keeps going up, I buy. If the pullback resumes, I get out at my stops and prepare to buy the next bounce. It doesn’t get any more complicated than that.

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Jan 28

Why everyone will be right about GME, but still end up losing everything

By Jani Ziedins | Free CMU

Cracked.Market University: 

Everyone is talking about GME, but how can you not when we are witnessing something we will likely never see again in our lifetimes?

If GME at $40 seemed ridiculous, then $100 is absolutely bonkers. And I can’t even begin to think of a word that adequately describes the $483 it hit this morning.

If someone told me a stock would explode 2,463% in four short weeks, surely they just cured cancer, cracked the code for cold fusion, or invented an anti-gravity machine. Obviously, whatever they did, it would change life as we know it.

Yeah, no. GME is a pedestrian company that sells used video games on physical disks. And not only did this company not cure some great ailment, it probably won’t even survive long enough to see the 2024 Paris Olympics.

That probably explains why the stock collapsed 77% in two short hours this afternoon as it tumbled all the way back to $112.

The most fascinating thing about this week’s move from $65 -> $483 -> $112 -> $193 is EVERYONE was right!!! The bulls were right about this “going to the moon.” And bears were right that it would collapse in a gigantic fireball.

Between this week’s 640% surge and subsequent 77% collapse, everyone had the chance to be right. And most GME speculators were sitting on a huge mountain of profits. Some profits even reached seven figures!!!

But as good as this seemed for everyone involved, virtually all of these traders will ultimately lose money. And not just a little money. But they will likely lose all of their money on this trade. (And some will lose even more than that!)

The problem is when these people are sitting on a mountain of profits, rather than thank their lucky stars and lock-in these once-in-a-lifetime profits, they are too busy gloating and taunting the other side. Instead of being satisfied with nearly $500, bulls insist on waiting until this goes all the way to $1,000. And bears that captured a 77% tumble in 120-minutes, rather than jump on this historic move, they demanded it to go all the way to $5.

And you know what, both sides are equally guilty of holding too long and letting these historic profits evaporated before their very eyes. As the saying goes, “bulls make money, bears make money, and pigs get slaughtered.”

Don’t be a pig and take these spectacular profits when you have them. Because if you don’t, they will almost certainly be gone in a few hours.

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Jan 27

Is this finally time for bears to shine?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slumped 2.5% in the biggest one-day loss since the election. While everyone is waiting for the inevitable demise of these frenzied bubble stocks, they were some of Wednesday’s few winners with GME popping 135% and AMC adding a staggering 300%.

While experienced investors are growing concerned about bubble mania, clearly the fringe speculators driving these frothy stocks higher are not heeding the clear and obvious warnings.

As I wrote yesterday, bubbles take far longer to inflate and pop than most people realize. As crazy as things appear right now, most likely we still have a ways to go before this bull market is taken down by valuation worries. But just because higher prices are ahead for the indexes doesn’t’ mean we cannot take a few step backs along the way.

While I still believe higher index prices are ahead, that doesn’t mean I’m holding “no matter what”. As I wrote previously, I’ve been following this rally higher with stops in the mid to upper 3,700s and those stops got hit today. Regardless of what I believe, that’s my signal to get out and reevaluate. As easy as it is to buy back in, there is no reason to stubbornly hold a falling market.

Most likely this is just another false alarm on our way higher, but I’m not willing to bet my money on it. If prices bounce tomorrow, I’ll get back in. If they keep falling, even better, that means I’m entering at even lower prices.

I still like this market but that doesn’t mean I’m blindly following it. These are the times we follow our thoughtful trading plan, not shoot from the hip while overcome with anxiety and second-thoughts.

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Jan 26

Is this bubble about to burst?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 continues hovering near all-time highs. As I often say, something that refuses to go down will eventually go up. And that’s definitely the case here.

With the election behind us, Covid vaccinations finally starting to roll, and infection rates coming down from the post-holiday peak, investors need something new to worry about. And right now bubble talk is taking over the financial headlines with outrageous moves in names like GME, BB, TSLA, and Bitcoin.

I’m equally concerned by these obviously unsustainable moves and am certain they will end in tears for most of the retail investors piling into these trades. But I also know it takes a long, long time for bubbles to burst. The dot-com bubble started in 1995 with Netscape’s IPO and it didn’t burst until 2000. That was five years worth of inflating.

Without a doubt, we are already multiple years into this inflation and the burst is a lot closer than five years. But it is still more than six months out and it might not even happen until next year or the year after. Do we really want to pull the plug on a great rally two years early because a handful of stocks are obviously overvalued?

I don’t condone the buying frenzy going on in parts of the market and it will end poorly for those gullible chasers. But for the time being, there is nothing for index traders to do except keep following this bull market higher. When the time comes, there will be plenty of concrete signals in the indexes’ price action. Until then, stick with what is working.

If there is one thing we know for certain about bursting bubbles, they don’t make new highs.

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Jan 25

What GME’s wild ride is telling us about the rest of the market

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

I don’t cover penny stocks because a lot of unsavory things go down in that shady portion of the market and it isn’t suitable for most investors. That said, I never expected to see penny-stock style manipulation occur in a well-known, billion-dollar company.

No doubt almost everyone is aware of the sheer craziness going on in GME. The stock rallied nearly 1,000% since January 1st, with the biggest portion of that move taking place this morning. But not to be outdone, this morning’s 150% gain was quickly erased by a 50% plunge from the highs a few hours later. Easy come easy go.

While it is tempting to jump aboard this seemingly easy trade, these things are best watched from the sidelines. A lot of people are going to lose a lot of money trading this and you don’t want to be one of them.

That said, I’m not really interested in analyzing the crazy hive-mind driving GME’s wild swings. But I am interested in what something like this tells us about the state of the broad market.

Having been around for the wild dot-com days, there are some noteworthy parallels. While most of the market isn’t outrageously overvalued, there are several companies that have been driven to undeservedly high levels. GME is only the tip of the iceberg. TSLA being the fifth most valuable company despite the fact it hasn’t figured out how to turn a profit selling cars is a concern. (TSLA’s profits come from selling tax credits, not cars.)

By all accounts, the Robinhood crowd has lost its mind. And while it seems like a big pullback in the share price of GME, TSLA, and bitcoin shouldn’t affect the wider market. This fails to take into account stock valuations are a game of confidence. If one segment pops, that stink spreads to everything around it. Given how far we came since the March lows, there is a tremendous amount of air underneath us if sentiment flips from a half-full to a half-empty.

That said, even with all of the warning sirens going off, these things usually go even further before they pop. We might be in the later innings of this game, but we are not at the end and it is most definitely not time to abandon ship simply because a few stocks have gone “too far”.

The greatest strength we have as independent investors and traders is the nimbleness of our size. We can flip from full-long to full-short with a few clicks of the mouse. We don’t need to predict the market when we can react to it in real-time.

Stick with what is working as long as it keeps working. But be ready to get out once the cracks start showing because when this goes, it could get really ugly.

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Jan 22

Weekly Analysis: Can this bull market really keep going?

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis: 

This was another record-breaking week for the S&P 500. The index rallied 1.9% and all-time highs continue getting even higher.

Biden assumed the presidency on Wednesday with far less drama and rancor than we’ve seen in recent weeks, which was a welcome sight. That said, investors were not really concerned and the market rallied modestly on the news of a peaceful transition. But this makes sense. Stocks were not selling at a discount because of this political uncertainty and that meant there wasn’t much room to bounce when reality turned out less-bad than feared.

If we step back and look at the big picture, this was one of the most contentious elections in recent memory and Covid infection and fatality rates are off the charts. How does the stock market react to all of this bad news? By carving out fresh highs.

If this bull market really was as overbought and fragile as the cynics claim, there have been more than enough bearish headlines to send this crashing. Yet here we stand.

As ugly as the headlines have been, these things are old news and already priced in. Investors are always looking six months ahead and no matter how bad things look today, between a highly effective vaccine, warmer summer months, and an endless supply of free money, investors are actually in a pretty good mood.

While it feels like this market has gone too far, it always feels that way at the highs.

Stick with what has been working and that is holding for higher prices. Keep our stops in the mid to upper 3,700s and see how far this goes.

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