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By Jani Ziedins | Free CMU
Cracked Market University:
With 2020 only a few days away, I want to discuss the “calendar effect”. I alluded to this phenomenon in recent posts, but this is an important concept and worthy of the entire spotlight today.
In a lot of ways, the calendar doesn’t matter. For example, Year-to-Date gains/losses are a meaningless statistic, especially early in the yar. The same can be said for annual gains. 2019 will go down in history as the second-best performance of the last two decades and everyone is cheering these nearly 30% gains!
Unfortunately, 2019’s headline number isn’t so much about how good 2019 has been, but how bad 2018’s fourth quarter was. If we adjust the rolling 12-month period from October 1st, 2018 to October 1st, 2019, these impressive 12-months gains tumble all the way to a measly 0.5% annual return! That’s right, just half-of-a-percent in 12 whole months! If our calendar went from October to October instead of January to January, the second-best year in two decades turns into a very forgettable performance. Ouch.
While we need to question these somewhat arbitrary rolling periods when making performance comparisons, there are times when the calendar actually matters to the market. It isn’t so much about the calendar itself or even the seasonality of the business cycle, but how institutional investors’ performance is measured and how their managers are paid.
Most institutional funds are judged by their annual performance and that means the managers running these funds live and die by where they stand at the end of every calendar year. There is nothing more important in their world. Next in importance comes the quarterly statements that get mailed to investors. If you want to keep people’s money, then you better show respectable gains at the end of every third month. And lastly, monthly gains, but they don’t matter as much because only the nerdiest of the nerds keep track of those.
Institutional money managers’ entire mindset revolves around March 31st, June 30th, September 30th, and December 31st. All of their decision are driven by how they will look on those four critical days. And since most market moves are propelled by institutional buying and selling, those four days matter to us too.
Currently, there is a lot of pressure on large money managers who are trailing this very impressive year. If they cannot match the market’s gains, at the very least they need to be able to tell their investors that they are in all the right stocks and that the results will come. This chasing of performance is what gives us strong moves in the final months of good quarters and years.
But here’s the important thing, once the calendar rolls over to the next quarter or year, these institutions are starting with a clean slate. Those that were compelled to buy in the final weeks of the year no longer need to chase prices higher because they have just been given three months of breathing room.
This herd buying and selling ahead of the end of quarters and years is what gives quarters and years consistent personalities. Quarters and years are most often up, down, or flat. But once those quarters/years end, we move into a new quarter/year, one that most likely will have a much different personality than the one that preceded it. 2019 was a good year for stocks. Chances are, 2020 will look a lot different. Be ready for it.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $STUDY
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
Two weeks ago I wrote a cautious post about AMZN. I explained how I was leery of this stock’s latest rebound because the prior dip lacked a compelling capitulation point. And while this remains the case, that didn’t deter traders from piling into the stock today. The company reported record holiday sales and that sent the stock surging nearly 5%.
Clearly I missed today’s move and I have no problem admitting that. That’s the way this goes sometimes. Successful trading does not come from being right about everything all the time, it is based on finding the best setups and profiting from those exemplary opportunities. This often means passing on something that ends up working simply because the odds of success were lower than what we typically look for. I wasn’t bearish on AMZN, I just didn’t see the latest dip as compelling enough to be worth buying.
While today’s performance was impressive, I wouldn’t chase AMZN at these levels. Today’s gains could easily fizzle over the next few weeks if this demand proves fleeting. It takes more than one day to reverse a downtrend and as impressive as today looked, it was just a single day. I would like to see the stock hold this level for several weeks before concluding this rebound is the real deal.
There are a few reasons to be wary of today’s strength. First, it came during a holiday affected period. That means most institutional investors are on vacation and not participating in today’s buying. Second, if big money wasn’t buying, then demand was coming from retail investors and bears covering their shorts. This more impulsive based buying was evident in today’s one-way price action that started with smaller gains and rallied strongly all day long. That told us people were desperately chasing prices higher, not making intelligent and informed investment decisions.
Why this matters is because retail investors have shallow pockets and short-covering is a fleeting phenomenon. Until we see institutional investors support these prices by buying at these levels when they return in January, I would be leery of chasing today’s gains. That said, I could be wrong about AMZN again and prices could continue surging higher. But if I miss another move in AMZN, I don’t mind because trading opportunities with higher odds come along all the time.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AMZN
By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
As expected, the S&P 500 continues drifting higher into year-end. All of the nasty headlines are behind us and for the most part, things turned out far less bad than feared. This return of optimism allowed stocks to rally to record highs. That said, this post is less about the market and more about what we should be doing this time of the year.
All too often it is easy to obsess over the market, and many times that distracts us from the things that really matter. Borrowing a well-used cliche, we should trade to live, not live to trade. If all you can think about is how well your positions are doing, or sometimes how poorly, you are missing out on all of the things going on around you.
As we approach the Christmas holiday, it often makes a lot of sense to unplug for a few days. For some people, that means liquidating everything and being fully present with their friends and family. For other people, this simply means lightening up on some of your biggest winners to the point you no longer feel the need to watch the market’s every move. For longer viewed investors, skip a few days of financial headlines and don’t open your stock app. Don’t worry, everything will still be there next week.
The above recommendations are doubly important if things are not going well. Sometimes we get stuck and have a hard time letting go of a losing trade. Forcing yourself to sell that bad trade for a few days might just be the thing you need to clear your head and come back with a fresh set of eyes. If you still like that trade next week, you can always get back in. But more often than not, we would rather avoid putting ourselves in that situation again. If that’s the case, chalk it up to “experience” and start looking for another opportunity.
No matter what happens over the next two weeks, don’t worry about it. There will be plenty of new trading opportunities next month, and the month after that, and the month after that…
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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 expected, the S&P 500 finally pushed up to and then broke through 3,200 resistance. Today’s gains mark the seventh positive finish out of the last eight trading sessions. While the crowd is busy congratulating themselves for holding through this easy run, those of us that have been doing this a while are starting to get nervous.
Everyone knows the market move in waves, unfortunately, most people forget this simple idea when we are experiencing one. It doesn’t matter if it is on the way up or the way down, people naturally take the recent past and extrapolate that trend from now to forever. After the year we’ve had, why would anyone worry about stocks? Making money in this market is so easy! Or so the popular consensus goes.
Now don’t get me wrong. I am not a bear or anything even close. The market is acting well and I will continue trading with the bullish trend until given a compelling reason to change my outlook. But I also know that if we are in this to make money, the only way we do that is by selling our favorite winners.
It’s been a nice run, but that also tells us it is time to start locking in some profits. A person can do that by either selling proactively into this strength or by following the market higher with a trailing stop. Both strategies work well and it is largely up to personal preference. Pick one and stick to it. Or better yet, do a little of both.
But the other thing to remember is as soon as we get out, we need to start looking for that next trade. Maybe this rally stalls at current levels and drifts sideways into next year. If that’s the case, we stay out and wait for a trade in January. Maybe stocks pause for a few days before continuing higher. Just because we got out doesn’t mean we cannot get back in when conditions warrant it. And maybe the bubble bursts in January and that turns out to be a great time to short the market. No matter what happens, by taking profits now, we will have the cash ready to jump on the next opportunity.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
TSLA has been rangebound, stuck between $200 and $400 since 2017. But this week the stock staged a breakout and is challenging the upper end of the trading range for the first time in a year. Model 3 sales are robust and the company is venturing into pickups, far and away the largest vehicle category in the United State. Of course the stock pushed to the upper end of the trading range, duh! But for those of us that are not drunk on the Koolaid, the real question is whether recent gains are sustainable, or if the stock will be rejected by $400 for the umpteenth time.
No doubt both bulls and bears have compelling arguments supporting their case. But as traders, do we really need to choose sides? Not if we are nimble enough. The upper and lower end of trading ranges give us clear lines in the sand, allowing us to more clearly define our risk. Above this line we are bulls, underneath it, we are bears. It doesn’t get any simpler than that. We don’t care who wins this battle as long as there is a clear victor.
Prior highs near $390 are our trigger point. Above this level we are buyers. Below it, we are sellers. While this seems easy enough, nothing in the market is ever easy and that includes trading breakouts. Most likely, prices will flirt with the prior highs for a while, breaking above and below this level several times before the stock shows its true intention. But as nimble traders, this isn’t a problem for us. We can dart all-in and all-out with a single click. While this will inevitably lead to some whipsaws, that is a small price to pay for both downside protection and profit potential. The big guys only wish they could move as quickly as we do.
Smarter than jumping all-in and all-out, start with a smaller stake and only add more when the trade starts working. That way any losses from the inevitable whipsaws are minor and we will still be in a great position to jump aboard when the true move finally reveals itself.
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Tags: $TSLA S&P 500 $SPY $SPX
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
This is the time of the year when pundits stand on their soapboxes and tell the world what will happen next year. That said, I will be the first to admit I don’t have a crystal ball and won’t even pretend to guess what economic calamities will or won’t happen next year. But even with that limitation, there are still reliable clues we can use to estimate what 2020 will be like.
2019 was the year of a generous and gentle rally. The market climbed nearly 30% and most pullbacks were benign and prices recovered quickly. This strength was definitely aided by a snapback from 2018’s grossly oversold 4th quarter, but regardless of the source, this was the market’s second strongest annual performance since the dot-com bubble. Unfortunately for us, 2020 will look nothing like 2019. The market almost never repeats a performance and next year won’t be any different. If we cross strong rally off the list of possibilities, that leaves us with modest rally, modest dip, and stock market crash.
While stock market crashes are scary and forever seared into the memory of anyone who lives through one, they are exceedingly rare. Most active traders will only see one or two in their careers. Will next year be one of those years? Probably not. Especially since the market is not grossly overbought or overleveraged like it was during the dot-com and housing bubbles. Stocks are definitely not cheap, but they are not “bubblelicious” either.
Crossing both extremes off the list leaves us with a little up or a little down. At this point, I could see either happening. The labor market is stretched and labor shortages will keep a lid on economic growth going forward. If a business cannot find new staff, it cannot expand no matter how strong demand is. On the other side, modest stock market gains could easily be wiped out if an unpopular Republican president is replaced by a Democrat. Fear of looming regulations and taxes will send stocks retreating in the final months of 2020. And so, that is my prediction, fairly modest gains between 5% and 10% if Trump wins. If he loses, expect a flat year.
But where we end is only one piece of the puzzle. How we get there is even more important to active traders. Everyone knows stocks cannot sit still and like a sugared-up 5-year-old, they always have to be moving. Sometimes they move up for extended periods like 2019. Other times they decline relentlessly like 2008. But most of the time, they move up and down for no other reason than they cannot sit still. 2020 will be a year of moving just because. That means lots of moderate dips and bounces along the way. While it won’t show up in a long-term portfolio, 2020 will be a great year for the opportunistic swing-trader.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
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