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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
After weeks of dramatic moves, the S&P 500 finally seems to be getting comfortable at current levels. While we are still experiencing elevated volatility with 1% and 2% daily moves, they have largely been offsetting each other from day-to-day around 2,800.
While the market has been finding its footing, there are a few stocks that have definitely been taking advantage of this calm to reassert their dominance. NFLX and AMZN are inherently well-positioned to do well during these lockdown times because they cater to customers at home.
As expected, these two companies navigated last month’s stock crash relatively well, losing less than the indexes. No surprise there. But then something curious happened Monday. Investors started piling into these stocks with reckless abandon. There wasn’t a definitive headline driving this strength. Instead, retail investors were hungry for something to throw their money at and these two stocks happened to be the beneficiary.
Fundamentally, nothing changed between last week and this week for NLFX and AMZN. Neither one found the cure to the Coronavirus or unlocked the secretes to sustained fusion. These were some of the best run and best-positioned companies last week when no one was paying much attention to them and they are the exact same well-run companies this week. The only thing that changed is they are now popping up every Tom, Dick, and Harry’s stock screen. Nothing attracts a crowd like a crowd and these two mega-caps are the hottest thing going right now.
Of course, this should look familiar to anyone who’s been following the market over the last few months. In late January, we saw the same thing happen with TSLA. A company that was doing well and going about its business when all of a sudden it became the hottest trade in the market, for seemingly no explicable reason. There wasn’t a headline breakthrough. TSLA reported earnings a couple of weeks before and showed a small profit but not much happened after earnings. And then all of a sudden, one day out of nowhere, the stock started racing higher, much like NFLX and AMZN are doing today.
Like TSLA before it, NFLX and AMZN are nothing more than momentum trades. People want to get in because they’re afraid of being left out. They’re not buying AMZN and NFLX because they love the companies. They’re buying them because everyone else is buying them. And unfortunately, these things rarely end well. I warned people to lock-in TSLA profits when the stock slipped under $800 and I definitely hope a lot of readers heeded that advice. As similar as NFLX and TSLA’s stock charts look here, only a fool would expect this to end any differently.
Unsustainable moves are unsustainable. They’re great while they last, but always recognize it for what it is. Stick with what is working and ride this higher, but never let it go to your head. Make sure you stay disciplined and use a trailing stop to protect your profits. No doubt this will pop like all of the other unsustainable surges higher that came before it. Some people will make money and other people will lose money. Make sure you are one of the people who end up on the right side of this trade.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
The S&P 500 gapped lower at the open, making this the fourth consecutive day of large opening moves in opposite directions. One day the bulls are in charge, the next day belongs to the bears. As much passion as there is in the market, both sides have been equally wrong about this one.
Over the last few weeks, I’ve been discussing strategies to trade this rebound. Today I’m shifting gears and will get into why the market is doing what it is doing.
While it isn’t hard to point out a few historical examples of the market getting things wrong, the thing we need to remember is the market is right far more often than it is wrong. These cherry-picked instances ignore all of the other times the market got things right. This also means when the market is not doing what we think it should be doing, the very first thing we should question is ourselves. And even more important than who’s right or wrong, the market determines our profits and losses and by that measure, it is always right. Rather than fall into the argument of why the stock market should be dramatically higher or lower than it is right now, let’s figure out why it is where it is.
Tumbling 20% from the highs of only a few weeks ago is a dramatic move. But these are dramatic time and this kind of reaction is logical and expected. The world looks nothing like it did at the start of the year and that means the stock market should obviously reflect this new reality. Where we run into disagreements is if -20% is too hot, too cold, or just right.
At this point, most investors are encouraged by the moderating infection rates and they are hopeful people can start going back to work in a few weeks. This will require obvious adjustments to our old routines to include social-distancing and protective measures, but it will be a good start that gets most people back to doing what they need to be doing. There will be some outliers like concert venues and movie theaters that will continue suffering from bans on large groups, but the rest of the economy should start thawing soon. Or at least that is the market’s current expectation.
While the upcoming earnings reports will be some of the worst in history, the thing to remember is the market doesn’t care as much about what happened last month or what will happen next month, it is looking six months ahead and wants to know where we will be this fall. As bad as things look now, if the market expects economic activity to be picking back up this fall, that is how it will price stocks today. Everyone knows our economic numbers will be shockingly bad. But that also means we can assume this is already priced in. Just like the market, our attention needs to be focused on is where the economy will be six months from now.
As for this -20%, the bears think we haven’t fallen far enough and bulls believe prices are already too low. Split the difference between these two extremes and we end up right where we should be. That said, it is impossible for the market to stay at one level so we should expect these volatile gyrations to continue for the foreseeable future. But no matter how high or low we go, unless something dramatic happens (i.e. a vaccine is released or a flare-up races out of control), expect these big swings to cancel each other out and for the prices to move mostly sideways around these more moderate levels. That means buying the bigger dips and selling the bigger rebounds for the next six months.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | Free CMU
Cracked.Market University
The S&P 500 bounced back from yesterday’s modest dip and the March rebound continues reclaiming lost ground. There wasn’t a definitive headline driving this strength, instead, this relief primarily comes from a moderation of the viral infection rates. We are still a long, long way from resolving this crisis, but at least for the moment, it appears like it is no longer spiraling out of control.
Last week I shared a day-trading strategy that has been working well in this market. It doesn’t matter if the market gaps higher or lower, what we are paying attention to is the market’s first move following the open. If the market rallies, we buy. If it dips, we short. Now, when I say first move, I don’t mean five seconds after the open, but in the first five or ten minutes. Identify that move, jump aboard, leave a stop near the open and see what happens. If the first move fizzles and hits your stop, get out. If you are aggressive, consider flipping directions and going the other way. Take profits in the afternoon and be ready to do it again the next day.
Easy enough, right? Well, today gave us one of the more challenging cases. To this point, the market’s been really good about going in one direction or the other. The handful of times it switched directions midday, that reversal kept on going, making a flipped trade work well. But today’s price-action caught us in the middle. The early rally dipped back to the open and then bounced higher. How this affected a person’s trade depends on the levels they got in at, the stop they picked, and if they switched directions or not.
If a person gave their stop little extra room under the open, they were probably okay and rode the afternoon rebound higher. But if they were more conservative, this midday swoon undercut their stops and knocked them out for a small loss. If they used that trigger as a signal to enter a short trade, they got washed out a few minutes later when that midday false-alarm bounced higher.
If I person got zinged twice today, there is nothing wrong with calling it quits and trying again tomorrow. These losses are measured in cents and not a big deal relative to the profits we’ve been collecting over the last few weeks. We cannot win them all and this is just part of the game. Come back tomorrow and by then today’s trade will be long forgotten.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 stumbled at the open following the long holiday weekend. Coronavirus headlines were actually fairly encouraging with infection rates moderating in a lot of areas. Unfortunately, much that optimism was already priced in during last week’s 12% surge. Now that we are at the upper end of the recent range, the market requires even better news to keep pushing higher and today’s headlines didn’t cut it.
That said, after the morning’s selling ran its course, the market held up surprisingly well. I’ve been one of the countless cynics that are suspicious of this market’s nearly 30% rebound from last month’s lows. But despite the widespread criticism, this market keeps hanging in there. And today’s price action was no different. Rather than devolve into a mass of panicked sellers, supply dried up in late-morning trade and we spent the rest of the day climbing out of that hole. While prices still finished in the red, I actually count this as a win for the bulls. When owners were given the invitation to sell, they shrugged and bought the dip instead. How much longer this lasts is anyone’s guess, but for the time being, the market is still acting well and it still demands our respect.
While odds are high the market will stumble and test support at some point, it doesn’t seem like we are at that point yet. Maybe it finally happens tomorrow, the day after, or even next week. But either way, we need to be careful shorting a resilient market. Lately, I’ve been day-trading this market because I’d rather not be caught on the wrong side of a 3%, 4% or even 5% opening gap. There is still plenty of money to be made trading during regular hours and most importantly, this allows us to exercise prudent risk management by preventing prices from leaping over our stop-losses in the middle of the night. While I might miss some profits when the market gaps in my direction, inevitably, I am also missing those days when it would have run over me instead.
I don’t need to make all of the money, just the easier, lower risk stuff. I’ll leave everything else to the gamblers. If you want to read how I’m trading this market, check out last week’s free posts.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | Weekly Analysis
Free End of Week Analysis and Lookahead
The S&P 500 closed out another outstanding week, this time finishing 12% above last Friday’s close. As is usually the case, the best days (and weeks) occur in the middle of the worst times. As I often write, the market likes symmetry and it is no surprise this historic selloff contains an equally historic rebound.
As incredulous as people were two weeks ago when the index surged 20% and (technically) started the next bull market, thus far the new bull has been sticking. I’m most definitely not critical of the people who were skeptical of this sharp bounce because I was right there with them. Of course as is often the case in the market, the more people that think the same thing, the less likely it is to happen. There are a lot of structural and psychological reasons why this happens, but suffice to say, if an idea is too popular, the market is more likely to do the opposite of what most people expect. And that is exactly what we got this week.
Does this sharp bounce mean the selloff is over? No, of course not. Anyone who saw this morning’s weekly unemployment claims knows we are a long way from solving our economic problems. While social-distancing policies have done a lot to contain new infections, they are doing a number on our economy. So far the government has done a good job of reassuring markets by throwing truckloads of money at the problem, but it is safe to say any return to normalcy is still a long way in the future.
As is often the case, the market tends to overshoot during these crashes and the subsequent bounces. Last month’s crash went too far and it appears like this month’s rebound will end the same way. That said, it is easy to predict what the market will do next because it always does the same thing. The challenge isn’t predicting a near-term pullback, it is predicting when it will happen. And most important to us, getting the timing right is where all the money is made.
At the risk of sounding like a broken record, I’m still skeptical of this rebound and suspect the next pullback is just around the corner. That said, I’m prepared to be wrong again next week. What the market thinks is a lot more important than what I think. If it wants to keep going up, then there is only one way to trade it. That said, when the cracks start showing, be ready to get out of the way and even go short. If a person wants to know how I’m trading this, take a look at yesterday’s post.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
In Tuesday’s free after-hours post, I explained why I felt the market’s recent runup left us vulnerable to a near-term pullback. Those suspicions seemed confirmed by yesterday’s intraday selloff that erased all of the impressive opening gains. While I liked what I saw and in a normal market I would have held that short for multiple days, unfortunately, these are most definitely not normal times.
It has been my policy for a few weeks now to not hold positions overnight. These 2%, 3%, and even 5% opening gaps leap over any sensible stops we use to protect ourselves. Sometimes the gaps are higher, other times they are lower, and so far I haven’t figured out a reliable way of anticipating how the market is going to react to the overnight headlines. Rather than risk losing my profits the next morning, I take those profits in the afternoon and look for a new trade the next morning. While I normally don’t like day-trading, we trade the market we are given and this is the one we get.
But as unreliable as the open gaps have been, the market’s first move has been quite reliable and often signals a much larger intraday move. Most of the time that means buying the early move, hanging on, and taking profits in the afternoon.
While it’s been a good strategy, it doesn’t always work and that’s why we need a nearby stop to minimize the cost of any mistakes. And more than just that, the other thing I noticed lately is when I’m wrong, I tend to be really wrong. Rather than simply pull the plug and try again the next day, I pull the plug and switch directions. As much as it feels wrong to go against my gut, it gets a lot easier to tolerate when we see the profits pile up.
And that’s exactly what happened today. I started the day flat and the initial dip from the open got me in on the short side. This is the swoon I was looking for and everything was going according to plan. But by midmorning, the early slide bounced and overtook the opening levels. Rather than argue with the market or convince myself to give the trade a little more time to work, I pulled the plug. And more than just pull the plug, as I said, when I’m wrong, I tend to be really wrong, so I switched directions, went long, and held on.
While no one is getting rich from a 1% or 2% intraday move, do it enough times and the profits start to add up.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
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