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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Monday was a good day for the S&P 500. It reclaimed the psychologically significant 3,600 level one week after momentarily cresting above this level exactly seven days ago.
In a bit of a groundhog day, today’s pop was also driven by a different vaccine candidate that proved 95% effective in preventing Covid. That makes two separate vaccines that can get us out of this mess and the light at the end of the tunnel keeps getting brighter
Without a doubt, our reality is far less bad than people feared six months ago when we were falling into the Covid abyss. But there is a huge difference between “less bad” and “good”.
Now don’t get me wrong, I’m all for buying stocks during uncertain times because that’s where the best profit opportunities come from. But what makes those periods so profitable is buying stocks at irrationally steep discounts and then waiting for sanity to return.
Unfortunately, that’s not the case here. At this point, the S&P 500 is 6% HIGHER than it was BEFORE Covid! Does anyone actually believe this Covid pandemic has been good for corporate earnings?!?!
There is no way I would ever allow myself to trade against a strong market, but we shouldn’t fall in love with it either. (The AAII Investor Sentiment Survey is near record highs!) Trade this market for what it is: strong momentum with questionable fundamentals. Just be sure to always keep the big picture in view. Long-term gains will be far harder to come by, especially if 2021 falls into a more conventional economic recession due to the growing number of permanent layoffs.
While I’m wary of this strength, I know better than to fight it. There are a lot of shorts getting run over by this strength. In fact, a big chunk of recent buying is coming from bears scrambling to get out of their painful short positions. Remember, savvy traders always trade in the direction of the market, not in the direction of their opinions.
Assume this market is rangebound until we have evidence that it isn’t. That meant buying last week’s dip near 3,500 and selling this week’s bounce near 3,650. While stocks could keep going higher over the next few days, we always need to protect our profits. Often that means selling too early. But that definitely beats holding too long and watching those profits evaporate. If this market breaks out next week or next month, we can always jump back in when it exceeds the prior highs.
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By Jani Ziedins | Weekly Analysis
Free Weekly Analysis:
It was an eventful week. After five days of counting, Biden was finally declared winner of the election Saturday. Monday morning we got outstanding news one of the vaccine candidates tested 90% effective in preventing Covid infections. And Friday, Covid-19 infections smashed all previous records and topped 150k daily cases for the first time.
Mix all of those gigantic headlines together and the S&P 500 ended the week higher by 2%. Not bad.
The vaccine headline is obviously outstanding news. Biden’s win is good or bad depending on who you were pulling for, but mix those two viewpoints together and it is largely a wash. And 150k daily Covid infections are most definitely dreadful.
From this smorgasbord of hugely bullish and hugely bearish headlines, stocks had free reign to do whatever they wanted. If the market wanted to crash, there were far more than enough excuses to trigger a stampede for the exits. On the other hand, if stocks wanted to explode higher, Monday’s 4% gap higher was more than enough to trigger a wave of breakout buying. And what did we end up with? A modest move higher.
This muted reaction tells us this market is not vulnerable to a collapse lower and it is not ready to explode higher. Sentiment is good enough to keep us near the highs and even drift modestly higher, but that’s about it. If the market was on the verge of a huge move in either direction, it would have happened this week.
As I wrote earlier this week, prices were setting up for a 3,500 to 3,650 trading range and I don’t see anything from week’s price action that changes my mind. It is okay to own this market, but keep a stop near 3,500 support and the adventurous should be ready to short a violation of this level. But as long as the index holds above 3,500 support, things are actually looking pretty good for stocks despite these dreadful Covid headlines.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 lost 1% Thursday. The recent spike in Covid infections unnerved investors and Monday’s bullish vaccine headlines are already old news.
Are we standing on the edge of a precipice or at the lower end of a longer-term trading range? That’s a great question and there are a million different opinions being shared online. And to be honest, both sides have great arguments.
What’s a person to do when the market could break either way? As obvious as this sounds, follow its lead! If stocks are going to breakdown, prices will have to cross 3,500(ish) support first. If we’re staying in a trading range above 3,500, then obviously prices will remain above 3,500.
This isn’t rocket science. Short a break under 3,500(ish) and buy a bounce off it. Put a stop on the other side of 3,500(ish) and wait to collect your profits. If the first move proves to be a false alarm, no big deal, close and trade in the opposite direction.
Emotional markets give us some of the best trades because they are prone to large, one-way moves. No matter which way this goes, grab ahold and collect your profits a few days later. It doesn’t get any easier than that.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
It’s been a crazy few days for the S&P 500.
Stocks exploded higher Monday morning after a vaccine candidate proved 90% effective in preventing COVID-19. Unfortunately, the buying frenzy didn’t last and within a day the index “closed the gap”. So much for that breakout.
But this retreat isn’t a surprise. Stocks were already at record highs and there wasn’t a lot of upside remaining no matter how good the news. But rather than get discouraged after seeing all of those gains evaporate, most owners refused to join the profit-taking and stocks quickly bounced after closing the gap. While investors were not prepared to chase stocks higher with reckless abandon, most didn’t want to sell their favorite stocks either.
And that leaves us where we find ourselves today. Somewhere between Friday’s 3,500ish close and Monday’s 3,650ish open. Support and resistance. Sometimes stocks refresh following a big rally by taking a step back. Other times stocks rest and recuperate by taking time off and grinding sideways for a bit.
As long as the S&P 500 remains between 3,500 and 3,650, expect the sideways grind to persist for a while. Break under support and we can short the market with a stop just above this level. If prices rally above resistance, that is also a buyable move. But as long as we stick between support and resistance, don’t expect much.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday was a bit of a timeout for the S&P 500 as it closed pretty much where it started. Whether this is good or bad depends on which side of the bull/bear debate you fall on.
Bears will point to Monday’s dreadful intraday reversal and today’s pathetic bounce. Bulls are encouraged that yesterday’s one-way selling stopped after we filled the gap and buyers felt more comfortable getting in at these levels.
Who’s right? Well, Tuesday was a tie, making this a best-out-of-three contest. If bulls prop up prices Wednesday, then all is well again. If the profit-taking ramps up tomorrow, we could easily fall another 200-points.
The thing about market collapses is they are breathtakingly quick. If you stop to ask what’s going on, you are already too late. That means if we are standing on the edge of the precipice, we will figure that out real quick, probably within hours of Wednesday’s open. If on the other hand, not much is going on by lunchtime, then Monday’s dreadful reversal was more bark than bite.
Which will it be? To be honest, I couldn’t tell you. This remains an emotional and volatile market and those are the hardest to anticipate. That said, these are also some of the easiest to profit from because prices go in large, one-direction moves and all we need is the courage to grab on early and enjoy the ride.
If Wednesday starts weak and prices keep falling, that is our signal to stay short or get short if we are not already short. If the day ends near the lows, we can hold that short position overnight. But don’t get greedy. This is still a bull market and that means dips bounce hard and quick. Hold a few hours too long and really nice short profits morph into humbling losses.
On the bullish side of the spectrum, it is hard to envision a lot of near-term upside. If recent gains don’t consolidate through a quick step-back to support, they recuperate with a prolonged sideways grind. If that’s the case, we’re going nowhere fast and there is no need to rush in.
Short an extension of Monday’s reversal. If the market doesn’t breakdown, there isn’t a whole lot to do here other than wait for the next trade. That should cover it.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 exploded higher at the open after a vaccine candidate tested 90% effective in preventing the COVID infection. That’s the home run we need to end this pandemic and get life back to normal. Investors were justifiably excited by this development and sent stocks sharply higher.
Unfortunately, the enthusiasm didn’t carry over to the close and stocks finished well under their opening highs. As exciting as this vaccine is, there is still a gigantic chasm between today and when a large percentage of the country will be vaccinated.
While almost all recent developments turned out far less bad than initially feared and we are steadily moving to a better place, the biggest hurdle for stocks is their huge runup in valuations. Prices are well above their pre-COVID levels despite this fairly dramatic economic contraction and an earnings recession. Everything is pointed in the right direction, but stocks have already priced that in and then some.
I like this bull market. I like the direction the economy is headed. I truly believe the worst days are long behind us. That said, stocks have a tendency to get ahead of themselves and today’s price-action was absolutely dreadful.
The fact we couldn’t hold this huge breakout to fresh highs on outstanding news is deeply troubling. I still like where the world is headed over the medium and long-term, but we should be ready for a near-term stepback in stock prices. Investors clearly told us today they are not comfortable buying stocks at these levels and the only thing that will cure that is time.
Whether that means a bigger pullback to support or a longer sideways grind near current levels has yet to be decided, but either way, we should temper our expectations for a while. The levels are definitely a better place to be taking profits than adding new money. The bull market is still alive and well, we just need prices to pull back and rest a little bit over the near-term. Two-steps forward, one-step back.
An aggressive trader can short further weakness Tuesday, but this is still a bull market and that means taking short profits quickly and often. On the other side, any dip is a buying opportunity, just be smart about your entries. Start small, wait for the bounce, keep a nearby stop, and only add to a trade that’s working. If the first bounce doesn’t work, get out and try again next time.
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By Jani Ziedins | Weekly Analysis
Free Weekly Analysis:
This week’s 7.3% gain was the best five-day performance since late March. Not bad for a market that was (allegedly) on the verge of collapse only a few days ago.
The biggest headline was obviously the presidential election. While stocks initially popped Wednesday morning following Trump’s unexpectedly strong performance, as the week wound down, Trump’s chances of scoring a second underdog victory were slipping away. Of the five battleground states still up for grabs, Biden has a modest lead in four of them.
But rather than retreat on Trump’s dimming prospects, stocks continued holding all of this week’s robust gains. It turns out the market is far more excited about the split government than who is going to occupy the White House. We got confirmation of that sentiment Friday morning when Georgia and Pennsylvania flipped blue and stocks barely budged. If this market feared a Biden presidency, stocks would most definitely not be holding steady near all-time highs.
Now that the election is (mostly) behind us, we get to shift our focus to what comes next. Which at this point is the dramatic surge in COVID infections. The U.S. and Europe are smashing previous daily records for positive tests and local governments are moving back into lockdown.
Will the economic damage from this second, larger COVID wave be as bad as this spring? Given stocks are within a few percent of all-time highs, most investors don’t seem worried about it. But that’s the problem with the stock market, things don’t matter until they do.
Can stocks surge to fresh records while the global economy is weighed down by another round of stay-at-home orders? Probably not. Unless there is a dramatic turnaround in these COVID infection rates, stocks will run into a ceiling near the old highs. Limited upside and lots of downside? It’s hard to justify that risk/reward.
Stocks are trading well and we have to respect that. But keep your trailing stops nearby and be ready to lock-in profits. Wait a few days too long and those gains will morph into losses.
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What’s a good trade worth to you?
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