Oct 29

The smartest way to trade this volatility

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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Oct 28

The real reason stocks are tumbling and it’s not what you think

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 entered free-fall territory Wednesday, producing the biggest single-day decline since June’s 6% plunge.

Coronavirus infection rate headlines overwhelmed most coverage in the financial press of stimulus and the election. But that’s not a huge surprise.

At this point, a follow-on round of $2 trillion in stimulus appears inevitable, the only question is if happens in a few weeks with Republican support or an even bigger package passes in a few months if Democrats take control.  Either way, the free money is coming!

As for the election, most people believe they already know who is going to win; either they believe the polls or they believe the polls are wrong. Either way, neither side has any doubt about the outcome.

And that leaves us with this runaway surge in Covid infections as the biggest uncertainty in front of us.

That said, I don’t know anyone headed for the hills because of this spike in Covid. In fact, I don’t know anyone that changed their behavior because of this latest surge. National and international infection rates have never been higher, yet most people seem to be going about their lives like they were earlier this summer when infection rates were far lower.

Sure, wash your hands, cover your face, avoid large crowds, and all the other sensible things people did this summer. But even in the face of this surge in infections, most people are still going to work and most people are still shopping. And let’s be honest, those are the only things the stock market cares about.

Even in Europe, where infection rates are far higher and their willingness to aggressively lock down the continent earlier this spring, not much is changing because of this surge in infections. It seems most people are already doing everything they are willing to do for themselves and other people and they are comfortable with the risks.

And that leads us to today’s stock market meltdown. I bet most of the people abandoning stocks today at big discounts are not afraid of Covid either. And I bet they are not even predicting another wave of widespread lockdowns. Instead, these people are selling because they think other investors are afraid of Covid and lockdowns.

This is classic herd psychology. I didn’t see the lion, but everyone around me is freaking out so I’m going to freak out too. After all, the one person who didn’t freak out and run was eaten by the unseen lion. Unfortunately, survival instincts that worked so well in the caveman days compel us to do the exact wrong thing at the exact wrong time in financial markets.

Smart money sells because they don’t like their thoughtful outlook. They don’t sell because other people around them are selling. In fact, if they have a positive outlook, they are the first to line up and buy the discounts.

And we don’t need to look far to see the aftereffects of panic selling. Twice since the Covid lows, the market has been hit by big waves of panic selling. Once in June (-6% in one day) and another time in September (-7% over 3 days). And you know what? Both times the bottom was near and that big collapse was a better time to be buying, not selling.

Will this time be any different? Probably not. Prices could fall a little further and volatility will remain elevated until after the election. But the bottom is not far. Maybe we slip and test 3,200 over the next week or two, but don’t expect prices to fall a lot further than that. That said, don’t be foolish and rush out to buy this dip. Smart money buys the bounce and protects itself with a nearby stop. If prices keep falling, no big deal. Their stop gets them out and they try again during the next bounce.

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Oct 27

When a setup doesn’t work out

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped a modest 0.3% on Tuesday and it finds itself down another 0.5% in after-hours trade. Not what I was hoping for and it seems like this weakness ants to stick around a little longer.

As I wrote Monday evening, retaking 3,425 Tuesday would have been a great entry point. Remember, we don’t buy dips, we buy bounces. Reclaiming 3,425 support would have done two things. First, it would have demonstrated resilience and proved dip-buyers were back in control. Second, it would have given us a clear entry-point with a sensible nearby stop-loss. Buy the bounce with a nearby stop and the risk/reward is skewed heavily in our favor. If the bounce returns to the upper end of the trading range, we make a few bucks. If it fizzles and retreats, we lose a few pennies. I really like that risk/reward.

Alas, it wasn’t to be. Stocks never reclaimed 3,425 and I was left watching this listless grind from the sidelines. While I didn’t get the bullish trade I was hoping for, by having a clearly defined prerequisite for entering the market, I never bought the dip and I avoided this subsequent weakness.

Going forward, if prices fall even further, no big deal. In fact, additional weakness works out even better for me because the lower prices fall now, the more profit opportunity there is buying the next bounce.

Adjusting this trade for the more aggressive trader on Wednesday: If prices undercut Monday’s lows (3,365ish) and continue falling, short that weakness with a stop just above this level. If prices gap under Monday’s lows at the open but quickly bounce back above, buy that bounce with a stop just under this key level.

As volatile and emotional as this market is getting, expect the next directional move to be swift and decisive. That means jumping in early and hanging regardless of which direction it is headed.

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Oct 26

Should we fear Monday’s tumble?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 crashed Monday as investor sentiment soured following record-high Coronavirus infection rates in Europe and the U.S. and the next round of Covid stimulus negotiations are postponed until after the election. At least that’s what the financial media told us.

While both of these headlines are extremely concerning, do they qualify as new and unexpected? Nancy Pelosi’s stimulus deadline came and went nearly a week ago and European infection rates have been spiking since September and the U.S. rates have been trending higher for nearly as long. If a person didn’t see these things coming from a mile away, clearly they were not paying attention. Yet the financial press spins these obvious events as if they caught everyone by surprise. I don’t know about you, but neither of these headlines surprised me. While I might be more cynical than most, I doubt these predictable headlines surprised even optimists among us.

If stocks didn’t tumble today because of a surge in infection rates or the postponement of stimulus negotiations, why did they crash? Simple, stocks move in waves. Always have and always will. Every bit of up is followed by a bit of down. Everyone knows this, yet it is amazing how many people are caught off guard when the next wave comes.

Large institutions already positioned themselves ahead of the election. Bullish or bearish, big money placed their bets weeks ago and that means supply and demand is modest and prices are mostly drifting sideways into the election.

The thing to remember about trading ranges is prices typically rally to the upper bound before stalling falling to the lower end. The S&P 500 challenged 3,500 in early October where it peaked and now it is testing 3,425 support.

If that’s all that’s going on, should people be running around in a panic? No, of course not. But if people didn’t panic and sell, prices wouldn’t fall. Investing 101: Every dip feels real. If it didn’t, no one would sell and prices wouldn’t fall.

As bad as Monday’s selloff felt midday, prices bounced and finished well above the early lows. As is usually the case, how we close is far more important than how we started. The early wave of selling capitulated and prices bounced back near 3,425 support by the end of the day. If stocks reclaim support Tuesday, that’s a buyable bounce with a stop just under this level. Start small, get in early, and keep a nearby stop. If the market trades well tomorrow afternoon, add more. If it doesn’t, no big deal, pull the plug and try again next time.

Previously, I was expecting some weakness after the election. But maybe that weakness came a little early. Until further notice, I will treat this test of support as a buying opportunity, not a reason to abandon ship. If prices tumble under 3,400 Tuesday, all bets are off and I will reevaluate. Until then, this is a great entry point with a well-defined stop.

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Oct 23

Free Weekly Analysis

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis: 

The S&P 500 lost half a percent this week as it consolidates gains near recent highs. While not a great week, such a minor pullback near the highs and in this dubious headline environment is actually a constructive sign. Overbought markets tumble from unsustainable levels quickly and so far that hasn’t happened here, suggesting stocks are neither overbought nor unsustainable.

As much as investors are looking forward to another round of Covid stimulus, it appears that won’t get done before the election. But as I wrote previously, the market isn’t overly concerned about a week here or there as long as it looks like something will get done eventually. If the timing was critical to the market, we would have seen far more dramatic swings as these negotiations dragged on. Instead, most owners shrugged and kept holding their favorite stocks.

With little more than a week to go before the election, we shouldn’t expect a lot from the market between now and then. If the polls, Supreme Court, or even the outcome of the election mattered, we would have seen far more volatility show up in the price action. Instead, most investors seem pretty content with what they see and are comfortable holding for higher prices.

In my opinion, the biggest near-term risk is a wave of sour-grapes selling by supporters of the losing candidate. This could trigger a near-term dip in the hours and days after the election, but this is typically a fleeting phenomenon. Once those sore-losers finish giving away their stocks at a discount, supply will dry up and prices will bounce.

On the other hand, if the election goes off without a hitch and we know the winner Wednesday morning, stocks could actually rally in relief that we avoided a constitutional crisis.

Dip or no dip in the days after the election, expect stocks to trade well for the remainder of the year.

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Oct 22

How the stock market will react to the election

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The final presidential debate came and went and stock futures barely noticed. But that isn’t a surprise. As ridiculous as the first debate was, it didn’t move the market in a meaningful way and this slightly less crazy version was even less likely to matter.

The debates are done. As many as 1/3 of voters have already cast in their ballots and if you believe the polls, only 4% of the electorate remain undecided. (If a person hasn’t made up their mind by now, clearly they are not paying attention!) This election is going to turn out how it is going to turn out and tonight’s debate didn’t change anything.

At this point, Trump needs the polls to be way off if he’s going to win reelection. He pulled off the upset before and he can do it again. I just think it is less likely this time because pollsters recalibrated their formulas after 2016’s miss and are most likely are doing a better job counting Trump supporters, both the outspoken and the shy.

While the stock market loves Republicans’ tax cuts and reduced regulations, chances are good that if elected, Democrats will unleash a stimulus bonanza like we’ve never seen before. Whether all that debt that is good for the economy long-term can (and should) be debated, the stock market will love all the free money and will likely rally over the near-term.

If Trump wins, stocks go up. If Biden wins, stocks go up too. Sounds plausible.

So what’s really going to happen? Stocks will most likely tumble Wednesday morning as supporters of the losing side dump stocks in a giant wave of sour-grapes selling. Whether that lasts a few hours, days or weeks has yet to be decided, but no matter what happens, expect stocks to bounce back and any near-term weakness after the election will be another buying opportunity.

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Oct 21

Is this latest run in bitcoin sustainable?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

It’s been a while since I wrote about bitcoin and it has largely been flying under the radar this summer. Rather than act as a safe haven during the Covid crash, it tumbled alongside everything else. Since then, most pundits gave up on it and it isn’t attracting much coverage in the financial press. Maybe today’s run-up to $13k will change that.

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 held above $10k, it was doing everything it needed 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.

What’s behind this strength? There are a lot of opinions being thrown around between Paypal integration and a mountain of U.S. stimulus coming our way, but if I had to guess, a lot of nervous Republicans and Democrats are hedging their portfolios in case “the other guy” wins the election.

It doesn’t matter who you talk to, but it seems everyone is convinced the apocalypse is coming if their guy loses. While I have opinions about both candidates, I’m pragmatic enough to know the presidency isn’t nearly as important as most people believe. I’ve traded under both Democrats and Republicans alike and markets go up and down regardless of who sits in the oval office and this election cycle won’t be any different.

By the time December and January roll around, most of the reflexive sour-grapes selling will have passed and the market’s attention will long have since shifted to something else. The same goes for Bitcoin. When the world doesn’t collapse after the election, BTC will lose its appeal and will most likely retreat back to $10k support.

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.

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