May 21

Was today’s down-day a warning signal or no big deal?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Obviously, many up-days are good days and down-days are bad days. But don’t overlook the fact there are also bad up-days and good down-days. Where in this matrix did today’s price action land? Good question.

Stocks rebounded nicely from last week’s modest selloff and set two fresh higher-highs this week. There are few things more bullish than responding to an attempted dip with higher-highs. Not only did the market refuse to breakdown, but prices resumed rallying to even higher levels.

That said, the market stumbled into Tuesday’s close. A waterfall selloff in the last hour of trade is always something to be wary of. If we get a few too many weak closes in a short period of time, that tells us big money is getting out and we shouldn’t be far behind. But rather than extend Tuesday’s weak close, the index bounced even higher Wednesday. All clear right? Well…not so fast. In a bit of groundhog day, today’s price-action produced another weak close. Is this second weak close something we should be worried about?

No, and I’ll tell you why. First, the weakness developed early in the day and rather than trigger another waterfall selloff, supply dried up and prices drifted sideways for the remainder of the day. The all-important final hour of trade was more flat than anything and that told us big money wasn’t abandoning ship today.

The second thing to keep in mind is down-days are a very normal part of every move higher. In fact, I get nervous if we go too long without a normal and routine down day. They are healthy and they keep uptrends healthy sustainable.

The short answer to the original question is today was a good down-day. There was nothing unusual or noteworthy about today’s 0.78% loss. That means the path of least resistance remains higher and there is no reason to worry about today’s very benign down-day. Until further notice, continue giving this rebound the benefit of doubt.

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May 20

Trading wisdom for the cynic in each of us

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 bounced back from yesterday’s late-day tumble. But this was expected. As I wrote yesterday:

I don’t see any reason to expect today’s late selloff will turn into anything more dramatic. Last week’s dip was our best chance to crack this rebound. If bears couldn’t get it done with a far better setup, I doubt they have what it takes this time around.

And not only did the market shrug off yesterday’s dip, it went ahead and set yet another high water mark for this rebound. As bad as the economy is today, investors are encouraged by the modest improvements and are forecasting a far better outlook six months from now.

There are two ways to approach any market. Trading what we think “should” happen, or trading what “is” happening. As obvious as the correct answer is, far too many people get caught arguing with the market. There are a million reasons this market should be lower (30 million reasons if you count the job losses!) Yet this market keeps grinding higher. The worst economic contraction in modern history and stocks are barely down 10%. Surely something is broken.

And you know what, something probably is broken. But when the market is broken, we go with it, we don’t fight it. The only other option is to get out of the way. At this point, a mountain of stubborn bears have been bankrupted by this rebound. The more they resist, the more they lose. Now, maybe at some point they will be proven right. But most of them will be long dead and buried by then and that small victory won’t matter.

No doubt this market will go down at some point. But this is most definitely not that point. Until then, expect every dip to be quick and shallow. If this rebound was going to break, it would have happened by now. It is okay to disbelieve this market. But it is not okay to trade against it.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 19

Is today’s late selloff a warning sign?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished in the red for the first time in three sessions. That said, today’s losses only gave up a small portion of yesterday’s gains. So far the rebound is fully intact and prices are just shy of the rebound’s highs. As long as this market keeps making higher-highs, everything remains on track.

While a 1% loss doesn’t mean much by itself, the one noteworthy attribute of today’s pullback is almost all of the selling occurred in the final hour of trade. This is when the largest institutions trade and almost all of their participation seemed to involve selling.

How much of that was swing-traders locking in recent profits and how much was fearful owners looking to get out before the next fall? We won’t have a conclusive answer for a few days, but here is what to look for. If it was simple profit-taking, then this is nothing more than a fleeting bout of indigestion and this weak close won’t amount to anything meaningful. On the other hand, if this is more chronic nervous selling, it could become contagious and trigger follow-on waves of defensive selling over the next few days.

Which is it? Well, since the market rebuffed a far more promising selloff opportunity last week, I don’t see any reason to expect today’s late selloff will turn into anything more dramatic. Last week’s dip was our best chance to crack this rebound. If bears couldn’t get it done with a far better setup, I doubt they have what it takes this time around. Last week’s bounce ended, continuing the trend of higher-highs and bulls remain fully in control as long as prices remain above Friday’s close.

Unless we see an extension of today’s waterfall selling, the path of least resistance remains higher. While I don’t have a problem shorting the next promising crack, remember, shorting is going against the trend and it must be done with extreme caution. That means starting small, keeping nearby stops, and admitting defeat early. Just ask anyone who held a short over the weekend what it feels like to give a short trade “a little more time”.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 18

CMU: Why headlines don’t really matter

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 popped 3% today after an early vaccine trial produced encouraging results. We are still a long, long way from a viable vaccine being ready for widespread public use, but this is the first critical step in that journey. Also feeding into today’s rally, the Fed reiterated their willingness to use its “full range of tools to support the economy”.

While those appear to be obvious catalysts for a market rally, this market already wanted to go higher and these were simply the excuses. If it weren’t these headlines, it would have been something else.

The market reads whatever it wants into the news. Sometimes it grabs on to the half-full portion of a story. Other times it is the half-empty. Then there are the paradoxical “good is bad” and “bad is good”. What is the one thing all of these have in common? The market does what it wants to do and journalists search for the most plausible explanation after the fact.

If we want a powerful example of this phenomenon, we don’t have to look any further than the sharpest economic contraction in modern history. Economists haven’t seen anything this dramatic….ever! Yet stocks are barely off 10%. Explain that one using logic and reason! It can’t be done. Stocks are this far above March’s lows, not because this is where the headlines tell us we should be, but because this is where the market wants to be despite the horrifying headlines.

The market didn’t need vaccine trials or Fed’s reassurances to rally today. If it wasn’t these things, it would have been something else. More important for a trader was recognizing this market wanted to rally. It told us that quite clearly last Thursday when it bounced decisively off of recent lows. The latest dip died Thursday morning and today’s rally was practically inevitable. (Obvious hyperbole since nothing is inevitable.) Lucky for readers of this blog, they already saw this strength coming “Is this week’s selloff already over? It sure appears like it.” I certainly didn’t expect a 3% pop today, but I knew the market wanted to go higher and that was the way I positioned myself.

What comes next? Expect more of the same. Volatility is off the charts and that means big moves in both directions, but the up days will be a little larger than the down days and any weakness will be shallow and fleeting. If this market was going to crash, it would have happened by now. This could change tomorrow or next week, but until we have a compelling reason not to, we need to continue giving this market the benefit of doubt.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 14

Know when to hold ’em and know when to fold ’em.

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 stumbled into a 2% hole not long after the open and it looked like the previous two days of selling was only just the beginning. The economy shed another three million jobs last week but as bad as that sounds, it wasn’t materially worse than the headlines we’ve been dealing with over the previous two months. If last week’s three million jobs lost didn’t dent the rebound, why was this week’s numbers any more significant? And that’s the conclusion investors came to as prices bottomed in midmorning trade and spent the rest of the day powering higher, finishing more than 3% above those early lows.

Is this week’s selloff already over? It sure appears like it. Rather than look at what the market is doing, I prefer looking at what it is not doing because often that is far more insightful. Far and away the most striking thing the market is not doing is selling off in the face of the most severe economic contraction in our lifetime. Rather than argue with what the market is not doing, we need to be savvy enough to recognize and respect the significance of the market’s defiance.

I’ve been there right alongside the crowd questioning the logic of this unbelievable rebound. It doesn’t make any sense. But that is also the reason we need to fear it. When the market disagrees with us, we are always the one that’s wrong, if for no other reason than the market is far more powerful than we are. If this market wants to trade strong, there are only two options, hop aboard or get the hell out of the way.

That said, even I couldn’t resist the urge to look for cracks in this facade. There is a lot of air underneath is and if this breaks, it could get ugly. I shorted the dreadful close two days ago and was adding to my short position yesterday. But rather than stubbornly stick with that trade this afternoon, I saw it was moving the wrong direction and I had no choice but to bailout. We don’t need to wait until our stops are hit to recognize when a trade is going off the rails. This morning was the perfect setup to extend the selloff. Instead, supply dried up and dip buyers flooded the market. That was my signal to lock-in the short profits I had and even get a little long.

If today’s bounce fizzles, I can always get short again. But if this strength persists, it will put a lot of shorts in a very uncomfortable position. As the saying goes, it is better to be out of the market wishing you were in, than in the market wishing you were out.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 13

Why this dip might be different

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 stumbled on Wednesday for the second day in a row. While economic headlines haven’t changed in a material way, the market’s previously upbeat mood seems to be shifting more cautious the last few days.

Is this finally the long-awaited pullback? Maybe, but prices still remain within a few percent of the rebound’s highs. To this point, the market resisted every other invitation to sell off, including the highest unemployment rate since the Great Depression and the fastest contraction in corporate earnings ever. If those shocking headlines couldn’t break this market, why should “a little cooling” off be any more successful?

As I often write, headlines only matter when they convince owners to sell. This time around, confident owners didn’t flinch during the latest employment report or when the appalling second-quarter earnings were released. Since confident owners didn’t care, the headlines didn’t matter.

But we also need to remember, supply is only half of the pricing equation. No matter how confident owners are, if we start running out of buyers willing to push prices even higher, then we also have a problem. The difference is oversupply happens quickly while running out of demand is a more gradual process. Rather than crash lower following an unnerving headline, flagging demand shows up more often as a gradual series of lower-highs and lower-lows. Are we at that point? Maybe, but it is a little too early to say conclusively.

For the time being, we can continue to short this weakness as I described in yesterday’s post. But until further notice, we need to be very careful shorting such a strong market. More specifically, that means if the short trade isn’t working, get out immediately and don’t wait for it to start working. A whole lot of bears shorted this market at much lower levels and their patience with a losing position only added to their misery. Counter-trend trades are one of the hardest ways to make money in the stock market and that means we need to be extremely nimble. Keep a nearby stop and be willing to admit defeat quickly. If the selloff resumes after we get out, we can always put the short trade back on. As the popular saying goes, it is better to be out of the market wishing you were in than in the market wishing you were out.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

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