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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 surged another 2% Thursday, bringing the weekly gains to more than 7%. Not bad for a few days of work.
While the early strength Wednesday morning was largely attributed to optimism following Trump’s strong showing, Biden has been eating into those margins and is clawing his way back to frontrunner status. But rather than tumble on Trump’s dimming prospects Thursday, the stock market kept charging higher.
Thursday’s enduring strength confirms the market’s optimism isn’t due to Trump’s prospects, but instead, relief of a split government. As I wrote yesterday evening, the stock market loves ineffective governments. It can always price in good news and bad news, what it can’t handle is constantly changing rules. A slit government greatly increases the odds of legislative gridlock. As far as the stock market is concerned, the less that comes out of Washington, the better.
And while it was nice to see stocks explode higher the last few days, we must acknowledge this strength consumed an awful lot of near-term upside. This move puts us back near all-time highs.
If the only thing we were dealing with was an undecided election, everything is set for a continued march higher. But what is largely hidden behind these vote-counting headlines is today was the first time the U.S. had more than 100k positive Covid tests in a single day.
The election was great and we are well on our way to a completely ineffective and unproductive government. But once that euphoria wears off, the front pages will fill up again with Covid headlines and the news definitely isn’t good.
Two steps forward, one step back. Expect the market to run into some near-term resistance near the old highs. Maybe prices slump after Biden is declared the winner. Maybe stocks fall if Trump refuses to concede and promises to fight the result. Or maybe prices simply climbed a little too far and need some time to cool off.
No matter the reason, this is a better place to be taking profit than adding new money. If a person is sitting on nice profits, at the very least, follow this strength higher with a trailing stop. Remember, we only make money when we sell our winners.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
2020 is a year for the record books and this election is no exception. 24 hours later and we still don’t know who won. And whoever takes it will do so by the slimmest of margins.
As disruptive as this appears, the stock market doesn’t seem to mind. In fact, it cheered the results, surging more than 3% in midday trade.
Some people think investors are excited Trump proved the pollsters wrong and made this an incredibly close contest. And while this might be true for small, retail investors who are big Trump supporters, institutional money is far more excited Democrats didn’t take over the entire government.
The stock market loves split governments. As much a people complain about political gridlock, markets love it because no one is changing the rules on them in the middle of the game. Good news or bad news, the stock market can price anything in and move past it. What the market cannot deal with is constantly moving goalposts.
Dems seem poised to keep the house. Republicans will probably keep the Senate. And that means president Biden/Trump is less important because the opposing party in Congress will keep a lid on their boldest ambitions.
Anymore it seems like “compromise” is a dirty word in our highly partisan society, but the only thing the market loves more than sensible compromise is total gridlock. Here’s to wishing for four years of absolutely nothing.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
At some point, hopefully soon, we’re going to know who won the election. For the sake of this analysis, it doesn’t really matter who wins, just what the market does next and how we’re going to trade it.
I don’t subscribe to the conventional wisdom that Republicans are better for stocks. I’ve been trading for more than 30 years and some of the market’s best years occurred when Democrats occupied the White House and some of the worst bear markets started on Republican’s watch.
Trading through countless economic and political cycles, the one thing I learned a long time ago is the stock market and the economy are far larger than any one man. The initial knee-jerk might be lower or higher based on deeply ingrained cliches, but within weeks and sometimes even days, the market forgets about the election and start focusing on what’s coming next. In our case, Covid and the next round of economic stimulus. Those things matter far more than the (R) or (D) that follows our president’s name.
Stock futures are all over the place as I write this. One minute we’re up 1%, the next minute we’re down 1%, only to be back up 1% a few minutes later. Four years ago stock futures plunged 5% after Trump won Florida. And you know what happened the next day? Stocks finished in the green. Don’t pay attention to this overnight noise. Only inexperienced, impulsive retail traders are participating in this after-hours nonsense. The only thing that matters is what big money thinks and we won’t know their opinions until tomorrow afternoon.
As a trader, I don’t care who wins the election, only what the market does. Regardless if stocks open up or down, use those early few minutes as a starting point and then trade based on the market’s next move. If it rallies from the open, buy it. If prices retreat from the open, short it. Start small, get in early, and place a stop on the other side of the open.
There is a very good chance the first move will fizzle and reverse within an hour. If the opening dip bounces or the early rally fizzles, close the initial position near breakeven and flip the other way. More often than not, this second move is the real move and given how volatile the market’s been lately, expect this next move to cover multiple percent. If the market continues to trade strongly in that direction through the afternoon, add more and consider holding overnight. Most likely once this freight train starts moving, it will keep moving in the same direction for a few days.
After a couple of days, if the above trade is a short trade, look to lock in profits because short trades tend to be strong and fast. Take profits and get ready to buy the bounce. But if stocks rally over the next few days, these moves take longer to play out and expect near-term strength to stick around for a while, most likely taking up to and past the old highs.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Stocks rebounded Monday, reclaiming 1.2% of last week’s 5.6% decline. There was not any obvious news driving Monday’s strength, in fact, the weekend’s international headlines were quite the opposite with portions of Europe headlined back into Covid driven lockdowns. Luckily, those overseas headlines didn’t bother U.S. investors who are far more focused on Tuesday’s election.
As I wrote last week, Monday’s contrarian strength was largely predictable and a combination of “a little too far” and “less bad than feared”.
Most likely, prices will bounce Monday morning after nothing bad happens this weekend. Buy that bounce and ride it higher through the day. But remember, volatility is off the charts and that means every bit of up is followed by a bit of down. Take profits Monday afternoon and get ready to throw the tripwires out again Tuesday morning.
As for the election, my plan is to keep limited overnight exposure and trade the next couple of days as day-trades. There is a lot of uncertainty ahead of Tuesday night/Wednesday morning’s vote counting. I’m fairly certain things will go smoothly, but this is one of those situations where it is better to be a little late than a lot early.
And to be honest, part of the reason I don’t want to hold anything over election night is because I can easily envision the market going either way Wednesday morning. We could bounce on relief of a clean election. Or we could fall on sour-grapes selling as the losing side takes their toys and goes him. Both factors will be at play Wednesday morning, I just don’t know which one will be more dominant.
But no matter what happens Wednesday morning (rally or fall), I expect stocks to do well over the last few weeks of the year and that means any near-term weakness is a buying opportunity. But as is always the case when buying a bounce, start small, get in early, keep a nearby stop, and only add to a position that is working.
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By Jani Ziedins | Weekly Analysis
Free Weekly Analysis:
The S&P 500 shed nearly 6% over the last five sessions in the worst weekly loss since this spring’s Coronavirus collapse.
A recent spike in Covid infection rates and the looming presidential election created a risk cocktail many equity owners could no longer tolerate. The selling kicked off Monday with a 2% tumble and it peaked Wednesday following another 3.5% collapse. To put a bow on all of it, we finished near the weekly lows.
Sell first, ask questions later became many people’s trading plan and they were offering steep discounts to get out at any price. But as bad as all of this seems, the selling largely climaxed Wednesday and the last two sessions were testing but not exceeding the weekly lows in a meaningful way.
Nervous owners often place stop-losses under recent lows and crossing those widely followed levels triggers waves of autopilot selling. We saw that phenomenon at work on Monday and Wednesday in those multi-percent tumbles. But Thursday and Friday turned out differently. Both days undercut the prior lows but that violation did not trigger another cascading wave of defensive selling. That absence of auto-pilot selling suggests we are finally running out of nervous owners. At least for the time being.
As is always the case, few things shatter confidence like screens filled with red. While we might have exhausted this week’s supply of nervous sellers, tumbling next week on a hung election or spreading lockdowns could create an entirely new category of nervous sellers. That said, we got rid of a lot of nervous sellers this week and to trigger that next leg lower we need something new. If next week turns out to be more of the same, or even better, “less bad than feared”, the lows are already behind us.
For the more nimble-minded trader, expect this volatility to persist for a while. Remember, volatility means large swings in both directions. Set a tripwire on either side of Monday’s open and ride the next wave higher or lower, take profits in the afternoon and do it again Tuesday, Wednesday, and Thursday.
Most likely, prices will bounce Monday morning after nothing bad happens this weekend. Buy that bounce and ride it higher through the day. But remember, volatility is off the charts and that means every bit of up is followed by a bit of down. Take profits Monday afternoon and get ready to throw the tripwires out again Tuesday morning.
On the other hand, if the Covid situation gets worse this weekend and prices slump Monday morning, short that weakness and ride that wave of selling lower. But just like above, take profits Monday afternoon and be ready to set tripwires again Tuesday morning.
This is a volatile market and no matter which way it goes, expect these intraday moves to be fast and one-way. That makes this the perfect environment for directional day trading. Jump on the early move and take profits later that day. Avoid holding large positions overnight because one day’s up turns into the next day’s down.
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By Jani Ziedins | Free CMU
Free After-Hours Analysis:
Stocks bounced back Thursday and recovered a respectable chunk of Wednesday’s losses. In fact, it even got to the point where anyone who shorted Wednesday’s crash was left sitting on a pile of losses. Ouch! So much for chasing an easy short. But that’s not unusual. Anyone that shows up late to the party is often left holding the bag.
Crashes by nature are breathtakingly quick and they usually end with sharp bounces. Hold a few hours too long and nice short profits evaporate before our eyes. That’s exactly what bit everyone who shorted Wednesday’s tumble and didn’t harvest profits.
That’s not to say bulls don’t also commit the same foul. The indexes are down in Thursday’s after-hours session and virtually every bull that bought Thursday’s bounce is now sitting on a pile of losses. How’s that for equal opportunity humiliation!
And so continues the meatgrinder, a.k.a. the stock market. This is an extremely volatile period for equities and that means big swings in both directions. Every day of up is inevitably followed by a day of down.
There is nothing wrong with being aggressive and grabbing ahold of these large intraday swings. But be smart enough to recognize these profits are fleeting and they will be gone within a few hours. Take worthwhile profits and be ready to do it again in the other direction a few hours later.
As for what comes next? Expect more of the same. Wednesday’s 3.5% tumble was far too large to brush off with a single up-day. This volatility will stick around until at least after the election and probably a couple of weeks beyond that too.
That said, there is no reason to fear this volatility as long as we are smart about it. Put tripwires on either side of the open and grab ahold of that early move, whichever direction it happens to be. Place your stop-loss just on the other side of the open and be ready to lock-in a pile of worthwhile profits later that afternoon. Rinse and repeat the next morning.
If the trade doesn’t work and we get stopped out, no big deal, especially if we got in early enough and were able to move our stop to our entry point. That turns this into a free trade. It’s hard to beat that risk/reward.
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