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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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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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