Dec 04

Weekly Analysis: Why this market is doing so well

By Jani Ziedins | Weekly Analysis

Weekly Analysis: 

It was another positive week for the S&P 500 with the index climbing 0.8% over the last five sessions. While no one is excited by a sub-1% week, given where we could be, this resilience is actually a noteworthy accomplishment.

Covid infection and hospitalization rates are off the charts and setting new records nearly every day. November hiring also tumbled dramatically from October’s levels due to expanding Covid restrictions. Either of these headlines could have triggered a stock crash, yet neither one did. Instead, stocks closed the week at record highs. Funny how that works.

This is another data point confirming this is a half-full market. Rather than sell the disappointing employment headlines, traders bought the increasing prospects of additional stimulus.

We don’t trade the news, we trade the market’s reaction to the news. At this point, there is nothing to do but go along with the trend and keep moving our stops up. Maybe this house of cards will come crashing down at some point, but we are not at that point yet. If this market was vulnerable to a collapse, it would have happened by now. Instead, most investors continue looking toward the future with optimism and that’s the way we need to trade this.

But none of this should surprise anyone who’s been reading this blog for a while. We know better than to trade what we think should happen. Instead, we always focus on what the market is doing. And right now, it is ignoring all of the bearish headlines. As traders, if the market doesn’t care about the headlines, then neither should we.

As with any bearish event, there always comes a point where the stock market has fully priced it in and it starts looking toward what is coming next. Everyone knows how bad this latest Covid flareup is and understands what it is doing to the economy. Yet these same investors keep holding because they know we are getting closer to the end of this mess.

I’m still concerned about the lingering collateral damage affecting the economy next year. But as long as investors are fixated on the recovery, that’s the only thing that matters and so far the recovery is progressing nicely. Once we get past Covid, investors might take a more critical eye of lingering unemployment and damage to corporate balance sheets. But as long as the stock market is not concerning itself over these things, then neither should we.

Stick with what has been working, which is owning this rebound and following it higher with a trailing stop. While we are vulnerable to a pullback at any time, at this point, it seems like most investors want to keep holding for higher prices. As long as this remains a half-full market, expect any weakness to be fleeting and to bounce back quickly.

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Dec 03

The biggest mistake bears are making

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Thursday was an up and down session for the S&P 500. The index rallied modestly after the open only to retreat back to breakeven later in the afternoon. This lethargic, uninspired trade is not a surprise given how far we’ve come since the election.

The rebound off the early November lows is in its 5th week and the big gains are already behind us. Momentum remains higher, but forward progress has definitely turned into a grind. As much as things have slowed down, it’s been an easy hold to this point with very few give-backs along the way. That said, we shouldn’t expect things to remain this easy for long.

Maybe we glid higher into Christmas. Or maybe the index stalls and churns sideways. Either wouldn’t be a surprise. The one thing that’s off the table (at least for the moment) is a large collapse. There has been an abundance of negative headlines regarding infection rates. If this market was fragile and looking for an excuse to tumble, these bearish stories have been more than enough to trigger a gigantic selloff. Instead, most stock owners read about infection rates and shrug. No matter what we think should happen, when the crowd refuses to sell a headline, that headlines stop mattering.

Sentiment could change once the calendar rolls over to 2021, but so far, I expect December to remain on autopilot. What we have now is what we should expect for the next few weeks. The only question remaining is if this keeps inching higher or stalls at current levels.

No matter what we think should happen, we trade based on what is happening. And right now this market is happy hanging out near the highs. If prices were vulnerable to a collapse, it would have happened by now. Up or sideways means the only two choices available to us are to buy this or sit it out.

Anyone trying to short this strength is getting killed and we definitely don’t want to join those ranks. A short is coming, we just don’t know if it will start next week, next month, or sometime next year. But no matter what, we need to see the weakness develop before we jump on it. Shorting simply because things are “too high” is a very expensive trading strategy, just ask any bear complaining about this “stupid market”.

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Dec 02

What’s coming next for Bitcoin

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

It’s been a while since I wrote about Bitcoin and given the recent record highs, it’s time for an update.

Back in October, I wrote:

As I’ve been telling my premium subscribers this fall, $10k has been the key level for this cryptocurrency. I’m not a big fan of virtual currencies by any stretch of the imagination, but as long as this holds above $10k, it is doing everything it needs to do to earn our respect. It took a few months, but it finally delivered on that promise, surging nearly 30% in a month, most of that happening over the last few days. Not bad.

I followed that up with:

There is nothing wrong with riding this latest wave higher but be sensible and follow this rally with a trailing stop. Remember, we don’t make money until we take profits in our best trades.

And you know what? Everything I said back then is just as applicable today as it was back then.

September’s bounce off of $10k support started this run, but breaking $13k and holding those gains was the first real sign his move was different from all the other fizzles. Exceeding $14k confirmed this was the real deal and this move wasn’t going to stop until it challenged the record highs. Something we finally did this week.

While all of this is obvious in hindsight, it wasn’t such an easy call to make at the time. But just like how we needed to give Bitcoin the benefit doubt above $10k, now that we are challenging the old highs, we smart money is betting on a continuation.

While this thing might roll over at some point, this is not that point. Obviously, we can consolidate for weeks or months near the old highs, but these huge rebounds almost never touch the old high and then simply give up. Even if the bubble eventually bursts, we are going to smash through the old highs before that happens. Maybe the top is $25k or maybe it is $30k. Either way, this latest buying frenzy is far from over.

That said, we could easily dip back to $15k on our way up to $30k and we need to ready for that. Rather than sit through a 25% pullback, it makes sense to lock-in some profits and wait to buy the next breakout above $20k. Sitting through a pullback is a lot easier when we have a pile of profits in our pocket and are riding the storm out with a smaller position. It is easy enough to buy back in when this finally breaks out, whether that is next week, next month, or next year. And if we are really good, we buy the pullback and make even more money.

But no matter what happens over the next few weeks (up, down, or sideways), this thing will go a lot higher before this rally is finished. Be ready for that $20k breakout.

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Dec 01

How low can ZM go?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Zoom reported blowout earnings Monday after the close, but rather than cheer 367% revenue growth, the stock was whacked 15%. Quarterly results were great across the board, unfortunately, investors were looking for outstanding.

Stock pricing is all about expectations. “Less bad than feared” launches powerful rallies in beaten-down names and “not as great as hoped for” triggers massive selloffs in highfliers.

ZM had already run into a wall this fall, retreating more than 30% from the October highs. The stock was attempting a bounce off of the November lows and was making good progress, that is, until today. While ZM remains above recent lows, there isn’t much margin for error.

There are few things more worrying than a stock that falls on good news. That signals unrealistic expectations and once the selling starts, it usually doesn’t stop. The market loves symmetry and rallies that go too high are almost always followed by pullbacks that go too low.

While ZM could bounce off of recent lows and that would be a valid entry point, if this dip undercuts recent lows, look out below. If the bubble is truly bursting, don’t expect the selling to stop until prices fall 80%. For anyone tempted to hold the dip, that means this still has room to fall another $300!!!

Don’t let a huge profit turn into a spectacular loss. If the stock retreats under $375, get out no questions asked. You can always buy back in if this selloff turns out to be a false alarm. But this is definitely one of those times when it is better to be safe than sorry.

And for the most aggressive traders, short a break under November’s lows with a stop just above this level.

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Nov 30

The good and bad of Monday’s price action

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 slipped on the first Monday after the Thanksgiving holiday.

Last week was a good one for the market and prices rallied 2.3%. But as is often the case during holiday weeks, stocks tend to undo whatever happened during the low-volume period when institutional investors were on vacation. Big money managers want to start where they left off and that often means undoing what retail investors did the previous week. In their mind, a move isn’t real until they are the ones making it happen. Hence today’s modest dip that erased a portion of last week’s rally. 

I don’t see anything alarming or even concerning about Monday’s give-back. In fact, the early bounce off of 3,600 is far more positive than negative. The day started weakly, but rather than trigger a bigger wave of selling, supply dried up because most owners would rather hold for higher prices. When confident owners refuse to sell, it doesn’t matter what the headlines are telling us.

As bad as the current Coronavirus situation is, investors don’t price stocks based on what is happening today, but what they expect six months from now. While infection rates are dreadful and only getting worse, most stock owners expect the situation to be under control by next summer. No one wants to sell their favorite stocks at a discount today when they know the situation will be a lot better in a few months. Or at least that is the logic bullish owners are using. Only time will tell if their optimism is warranted.

The indexes are trading well, but we are at the upper end of the trading range and a lot of bullish vaccine news has already been priced in. Stocks are expensive and a lot of the near-term upside potential has already been realized.

While momentum will likely continue pushing us higher, the risk/reward is fairly marginal and not at all stacked in our favor. We can own stocks at these evels, but we need to be careful if the market’s mood sours. Modest upside with a lot of air underneath us is not a great place to be adding new money. We can ride this momentum higher, but we need to have a plan ready to go if the tide turns against us.

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Nov 23

The biggest risk facing us this week

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 popped Monday morning after a 3rd vaccine candidate proved 90% effective in preventing Covid-19.

Multiple successful vaccine candidates and the dramatically increased manufacturing capacity that goes along with multiple vaccines is a huge step in getting life back to normal. But as far as the stock market goes, vaccine breakthrough headlines are quickly running up the curve of diminishing returns. We saw a huge pop after the first candidate proved 90% effective. Then a modest pop after the 2nd. And this 3rd bounce struggled to even hold its early gains and briefly turned red in midday trade.

This is the Thanksgiving holiday week and that means less participation and lower volumes. Most years this is a sleepy period where the few professionals still around are itching to getaway. But occasionally, the lower volume can lead to increased volatility.

Which will this year be? That’s hard to say. If we hold current levels, it will be fairly boring. Where things get interesting is if prices retreat under recent lows. While a lot of people might not be trading this market, many have standing stop-loss orders that will execute even if they are not there to do it themselves. At the same time, dip buyers are also gone and unlike the sellers, they don’t have standing orders to buy the dip. This means there won’t be anyone to save us once the selling starts.

But rather than fear stocks if they crash over the holidays, we should recognize the source of the weakness is nothing more than retail investors overreacting to the headlines and subsequent weak price action. When big money returns from vacation, things will go back to normal, which means grinding sideways between 3,500 and 3,650.

Personally, I don’t see anything compelling to trade. The market isn’t breaking out and it isn’t breaking down. Stocks are not undervalued or overpriced. Without a risk/reward skewed in my favor, I’m left watching this one from the sidelines. Which, isn’t a bad way to enjoy a little R&R over the holiday.

If stocks fall under 3,540, I’ll short the weakness but I have low expectations this trade turning into anything worthwhile. The same goes for a breakout above 3,640. I’ll buy it, but without much enthusiasm. But sometimes the next big move starts when we are least expecting it and is why we have to follow our trading plan no matter what we think will happen.

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