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By Jani Ziedins | Free CMU
Cracked.Market University
The S&P 500 continues trading incredibly well and is hovering near recent highs. As much as people don’t trust this record-setting rebound, it keeps defying the odds and it deserves our respect.
As I’ve written previously, there are two “safer” ways to trade this rebound. Long-term investors with a holding period measured in years should be happy to buy this dip, the next dip, and the dip after that. What happens between here and three, four, or five years isn’t important. The most important thing is we get in. For example, during the last stock market crash, the S&P 500 bottomed at 666. Do you think anyone minds having bought the dip at 800? 900? Or even 1,200? More important than how close we get to the bottom is the simple fact we get in. Years from now, the Coronavirus will be long behind us and stocks will be much higher. (If for no other reason than runaway inflation!) Maybe prices go lower first, or maybe they don’t. Either way, it doesn’t really matter as long as we buy attractive discounts and hold for better times.
On the other end of the spectrum is our short-term trades. While I’m confident stocks will be higher in three, four, or five years. I’m far less confident about where they will be next week. Stocks are holding up amazingly well and I could easily see this strength persist into next week as governments continue scaling back restrictions. On the other hand, it wouldn’t surprise me to see infection rates edge higher after this relaxation. If our leaders get cold feet and pull the drawbridge again, that will send stocks into another tail-spin.
Which outcome will we see next week or the week after? I have no idea and I don’t even pretend to speculate. Lucky for me, I’m a nimble independent investor and I don’t need to commit to a position weeks ahead of time. I can buy and sell with a few mouse clicks and rather than fall for this bull versus bear argument, I’m simply standing by, waiting to see who wins before I put any money at risk.
Making money is 80% waiting for the right trade and 20% making the right trade. Right now we are in the waiting phase. Stay patient and wait for the trade to come to you. Making money is easy, the hard part is not giving back all of those profits by following it up with a bad trade. Maybe that next great trading opportunity is coming next week. Maybe the week after. And even if it doesn’t come until June, it’s not a big deal. We made a killing last month and there is no reason to follow that success with an unnecessary trade here.
As for the next good trade, an aggressive trader should wait for this strength to breakdown before shorting. For the less courageous, wait for the next wave of weakness to bottom before buying the dip.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | Weekly Analysis
Free Weekly Analysis and Lookahead
The S&P 500 lost 1.3% this week and slipped for only the second time in the last five weeks. As bad as the headlines have been, the stock market is holding up amazingly well as it continues ignoring all the critics calling for a pullback.
I will be the first to admit I was among those waiting for a pullback because that’s what markets typically do. Yet, this one is defying the odds. And even that is not that unusual. Markets tend to do the opposite of what the crowd expects. Not because it is spiteful, but because that’s the nature of supply and demand.
When people expect a particular outcome, they naturally trade in anticipation of it. That means all of the people who feared a near-term pullback already sold. Once these cynics abandon ship, there is no one left to sell and supply dries up. Holding true to its contrarian nature, when the crowd calls for a pullback, prices hold up instead.
While I was one of those that expected a pullback three weeks ago, I was also one of the first to change my mind when the market refused to do what it was supposed to do. There are few trading signals more reliable than looking at what a market isn’t doing. A market that refuses to go down is far stronger than most people give it credit for and it deserves our respect. While we don’t have to embrace this market, we definitely shouldn’t be fighting it.
What does next week hold? Most likely more of the same. The market is very comfortable at these levels and it will take something significant to change that. Right now we are in a very bad place but things are improving ever so slightly. Infection rates are starting to slow and some states are starting to relax their restrictions. If we get more of the same next week, expect stocks to continue trading well, which mostly means sideways to slightly higher.
To make a dramatic move higher or lower, we need a significant change in the headlines. Either a huge surge in infections and deaths. Or a cure. Outside of those extremes, expect more of the same, i.e. continuing to defy the cynics.
That said, as nimble individual investors, we shouldn’t be married to our outlook. If the environment changes, change with it. If stocks breakout or breakdown, disregard everything we believed previously and jump aboard the next move. When we disagree with the market, the market is always right.
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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 continues consolidating inside the 2,700 and 2,900 range. We’ve been stuck in this region for two weeks following the mammoth rebound from the March lows. Thus far, the market refused multiple opportunities to breakout/breakdown and no matter what the bulls and bears claim, it continues chugging sideways.
It’s been a fantastic run and obviously the market deserves a break following a historic 20% surge. There are two ways markets rest and reset. The first is a more conventional pullback to support. The proverbial, two steps forward, one step back. That’s what a lot of people, myself included, were expecting. But as resilient as this market’s been over these two weeks, most longer-viewed owners are refusing to sell their favorite stocks at a discount. When owners refuse to sell, it makes no difference what the headlines say or what the experts think prices should do.
That said, supply is only half of the pricing equation. While owners are supporting prices by refusing to sell, our upside momentum has been blunted by prospective buyers refusing to pay ever-increasing prices. Owners not selling and those with cash not buying is the recipe for a sideways grind.
Which side caves first? That’s a good question and unfortunately, I don’t have the answer. Bulls have a good case that many states are already starting to reopen their economies. On the other side, bears point to the sharpest economic contraction in modern history and a stock market that’s only down 15%. There’s something definitely wrong with that calculus. Either stocks are way too high or the economy will bounce back a lot quicker than the headlines portend.
Luckily for us, we don’t need to place our bets just yet. As independent investors, our greatest strength is the nimbleness of our size. Rather than commit to one side or the other, we should wait for the bandwagon to start rolling before we jump aboard. Only the partisans need to be right. The rest of us are satisfied collecting a few bucks jumping aboard this no matter which way it goes.
Until proven otherwise, assume any dip to 2,700 will bounce and rally to 2,900 will stall. Buy the bounce off the lower end and take profits at the upper edge. If the market breaks above the highs or breaks under the lows, close those positions and flip the other direction. By staying nimble, we can profit no matter what the market does next.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | Free CMU
Cracked.Market University
Some of the worst behaviors come out when people hide behind anonymous handles on the internet. These trolls use the cover of anonymity to say things they would never have the courage to do in person. Yet somehow, this has become the normal way of interacting online.
One of the most frequent abuses in trading circles is taunting someone for making a wrong trading call. When a person shares an idea, a certain segment of the community eagerly looks forward to crucifying them if that call turns out wrong. While this vulgar act tells us very little about the skill of the person that made the incorrect call, it speaks volumes about the critic’s trading abilities.
Every savvy trader learned early in their career mistakes and losing money are normal parts of this game. They understand trading successfully means being wrong…a lot. The difference between the sophisticated trader and these trolls is the sophisticated trader doesn’t think anything of being wrong. To them, a mistake is a mistake and nothing more. Take the loss, learn from it, and move on.
Savvy traders most certainly don’t taunt anyone for a trading call that doesn’t work out. They learned a long time ago some trades simply don’t work out and the outcome of any individual trade is not an indication of a person’s abilities. They took a chance and it didn’t work out. Nothing more, nothing less. And just as important, when they are right, instead of gloating, they recognize they could have just as easily been on the losing end.
If you see someone criticizing another person for making a wrong call, that tells you the critic doesn’t have a clue how successful trading actually works. If a person believes there is nothing more important than being right or wrong, that person clearly doesn’t understand what it takes to be successful in the market.
If you find yourself on the receiving end of these attacks, shrug it off. It is obvious the troll attacking you knows even less about trading than you do and their opinion doesn’t matter. The most successful traders are the most modest because they have been on the losing end of more trades than they can count. Only novices make a big deal out of individual trades.
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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 shed 3% Tuesday, adding to Monday’s nearly 2% decline. As well as the market has been trading lately, these two sessions closed nearly the daily lows and their price action stands out like a sore thumb.
Stocks have been defying gravity every since they launched off of the March lows. This has been one of the biggest and fastest rebounds in history and most seasoned observers were skeptical this strength could last given the frighteningly dreadful economic headlines surrounding us. But the same thing could have been said last week and the week before that. And unfortunately, a lot of anxious bears got themselves run over shorting this meat-grinder rebound a little too early.
As I often say, knowing what the market will do is easy, the hard part is getting the timing right and that’s where all the money is made. Without a doubt, this market was going to pull back, the hard part is knowing when. Are we finally at that point? Great question but if we are approaching this the right way, it shouldn’t matter.
Far and away the greatest strength we have as independent traders is the nimbleness of our size. We can go from full long to full short with just a few mouse clicks. We don’t have big money’s army of analysts, supercomputers, or inside connections, but those things are not necessary if we know how to exploit our size. We don’t need to know what the market will do ahead of time because we are fast enough to react to events as they happen. Rather than short the pullback before it rolls over, we can (and should) wait for it to happen before we jump aboard that move lower.
The keys are knowing what signals to look for and then being able to recognize quickly when we get it wrong. Get in, get out, and try again. That’s the formula for our success as independent traders. With that approach, we don’t need to predict the future. We simply react to it as it happens in realtime.
Yesterday’s weak close, this morning’s early dip and finishing again near the daily lows gave us the first interesting overnight shorting opportunity in a while. For several weeks I’ve been day-trading this market because opening gaps have been large and unpredictable. But this is the first time in a while I felt like there was something worth holding.
That said, this trade needs to be done carefully. Shorting today’s weak open gave us a profit cushion going into the close. And more than that, locking-in a portion of profits this afternoon both guaranteed some profits and reduced our exposure by leaving us with a smaller position.
If the short trade doesn’t work tomorrow, it won’t hurt much between the reduced position size, existing profit cushion, and the portion of profits already locked-in. If that’s the case, we get out and try again next time. But if it works, add more at the open and see where it goes. Close weak for the third day and we follow the same formula tomorrow afternoon.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
As unprecedented and historic as this global shutdown has been, it keeps throwing curveballs at us that only a few weeks ago seemed too absurd to even be worth hypothesizing over.
The lastest unprecedented development was the most spectacular collapse in the history of commodity trading. $22 oil was shocking enough. Then we got barrels trading at $8 on the spot market a few days ago. But that was only warming us up for the main event.
People’s jaws were on the floor this afternoon when oil contracts for May delivery fell under one dollar. Fifty cents for 55 gallons of oil? Surely it couldn’t get any worse than that. And moments later, it did exactly that.
Traders were so desperate to avoid taking delivery of physical oil they became willing to pay people to take their oil. That’s just how bad the current situation is. And not just a dollar or two. The day closed with oil trading at minus $37 dollars! That’s right, traders were so desperate to get out of their positions they would pay you $37 for every barrel of oil you take off their hands!
How did one of the most important commodities in the world go from a coveted resource to something akin to raw sewage that requires payment to be disposed of?
But just as shocking as the collapse of May’s oil contract was the stock market’s indifference to it. The neighbor’s house was burning to the ground and the S&P 500 was too busy organizing its sock drawer to even look out the window.
Two months ago, if you told me oil would fall $55 dollars in a single day, I would have expected all financial instruments to be imploding. But not today. Today, it was just another headline the S&P 500 is ignoring.
At this point, we have three options. Argue with the stock market, fall in line, or get out of the way. No one wins an argument with the market, so please don’t do that. For our longer-term investments, buying at these levels still represents a decent discount if we plan on holding for a couple of years. For anything else, get out of the way!
There is a saying in the market, missing the bus is better than getting hit by the bus. If we don’t feel comfortable buying this strength for a long-term investment, there is nothing wrong with sitting this one out and waiting for a better opportunity. Remember, often the best trade is to not trade. Until the risk/reward lines up in our favor, wait patiently on the sidelines. That means waiting until this rebound is breaking down before shorting it. Or for the less aggressive, buying the next dip. But whatever you do, don’t allow yourself to argue with this strength.
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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 finished the week 3% higher and was the third up-week out of the last four. Equally impressive is Friday closed at the highest levels in six weeks. And not to be overlooked, this week’s spread between the lows and highs was the smallest in two months. As dire as the economic headlines have been, the stock market definitely seems to be coming to terms with our new reality.
Is a relatively modest 15% decline from all-time highs enough to account for the largest economic shock since the Great Depression? At this point, the stock market seems to think so. My Thursday post touched on some of the reasons the market finds itself at current levels, namely most investors believe the economy will bounce back relatively quickly. While this is part of the answer, there are also other supply and demand factors at play.
One of the bigger contributors to this limited selloff is the fact many investors have already lived through stock market crashes. Most of us were around to witness the 2008 Financial Crisis that cut stock prices in half. And the more recent example of 2018’s Christmas massacre that saw stocks tumble nearly 20% between Thanksgiving and Christmas.
What was the biggest takeaway from both of these crashes? Stocks bounce back even higher. Reactive sellers were left behind when the indexes pushed to new highs without them. Regret is a powerful motivator and these investors were not going to make the same mistake twice. Fool me once, shame you. Fool me twice, shame on me.
At least for the time being, many would-be sellers learned to hold through volatile episodes and not succumb to the panicked feeling in their gut. Rather than impulsively sell stocks again, these investors are still hanging on. And so far discipline has been rewarded with prices dramatically above the March lows.
No matter what we think should happen, when confident owners don’t sell, prices don’t fall. While we could see prices slip over the next week or two in a normal and healthy exhale, as long as the selling remains restrained and orderly, any dip is a buying opportunity, not an excuse to abandon ship. Short-term traders can exploit this weakness, but long-term investors should stick to their buy-and-hold plan.
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What’s a good trade worth to you?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
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