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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
On Tuesday, the S&P 500 tumbled for the twelfth time this month on lingering trade war fears. May is on track to be the worst month of what was an otherwise outstanding 2019.
All of this started several weeks ago when Trump caught the market by surprise when he slapped additional tariffs on Chinese goods. China responded by retaliating several days later with further tariffs on US goods.
Trump continued escalating the rhetoric Tuesday when he threatened “substantial” increases on existing Chinese tariffs. Rather than getting better, Trump’s trade war keeps getting worse. No matter what Trump and his supporter believe, the stock market definitely does not agree with this trade war.
That said, this trade war has been with us for over a year and no matter how bad the headlines appear, anything will get priced in eventually. And that includes Trump’s trade war. He doubled Chinese tariffs this month, but the stock market is only down 4%. That’s not because these new tariffs don’t matter. They absolutely do because all taxes are bad for the economy. But the stock market hasn’t reacted in a dramatic way simply because the people who care about these things sold last year and were replaced by confident dip buyers. Eventually, there comes a point when we run out of new people willing to sell a headline. That’s when those headlines stop mattering.
Granted, a 4% pullback feel huge given how gentile this year’s climb higher has been, but we need to keep it in perspective. 5% pullbacks are a common occurrence in every bull market. So, the question is if this May swoon is nothing more than a normal and routine 5% pullback, or if this is the start of something far more insidious?
[bctt tweet=”How often does the market give us four weeks to thoughtfully reflect on a new development and give us the opportunity to get out at our leisure before the eventual collapse?” username=”crackedmarket”]The first thing we should remember about market crashes is they are brutally quick. This month’s selloff started several weeks ago when Trump unexpectedly jacked up the tariffs on Chinese imports. How often does the market give us four weeks to thoughtfully reflect on a new development and give us the opportunity to get out at our leisure before the eventual collapse? That’s not how the market normally works.
Tuesday’s tumble challenges 2,800 support for the third time this month and obviously, there are two ways this plays out. Either the market collapses, or prices bounce. Of course, what that looks like over the next few days and weeks is less obvious. The most likely scenario is prices crash through 2,800 support and just when things look their most hopeless, supply dries up and prices bounce.
The stock market loves fooling everyone and violating support just before bouncing is the best way to trick both sides into giving away money. Convince the bulls to abandon their favorite positions all while tempting bears to jump on the short bandwagon. But rather than prove these second-guessers and cynics right, the market embarrasses both by turning around not long after they make their bearish trades.
Hopefully, everyone has their trading plan laid out and already know how they will respond to this violation of support. Will you hold thorough it? Will you sell defensively and be ready to jump back in after the bounce? It all depends on our outlook, risk tolerance, and time frame. What it should never be based on is how we feel in the moment. Only fools let the market turn their emotions against them. Savvy traders plan their trades ahead of time and then trade their plan as conditions warrant.
That said, there is nothing wrong with trimming a position to help sleep at night. But if you sell, always be ready to jump back in as soon as conditions warrant it.
Most Likely Next Move: The dip violates 2,800 support before bouncing.
Trading Plan: Get defensive if needed, but be ready to buy the dip once prices find a bottom.
If I’m Wrong: Waves of emotional selling overwhelm the market and prices tumble all the way to 2,600 support.
Bitcoin popped this weekend. While this strength gives me pause, the cryptocurrency keeps doing everything it needs to do and $10k is the next target. That said, we need to be careful because there are clear signs of market manipulation. All of the big moves over the last few weeks have come in the middle of the night and over the weekend. Times when the volume is the lowest and easiest to manipulate. There is a good chance some unscrupulous players could be jacking up the price in order to suck gullible buyers in so they can sell to them in a classic pump-and-dump.
The buying frenzy in Bitcoin is being driven by the price increases, not a greater adoption of cryptocurrencies. Unless BTC starts delivering on some of its disruptive promises and becomes more ingrained in the economy and consumer behavior, this latest bounce will be nothing more than a fleeting speculative bounce in a much bigger bear market.
BTC keeps acting well and momentum is higher, but the crash will be hard and fast once the music stops. The next move is probably still higher, but we won’t get much warning when this ride ends.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $BTC.X
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
TL;DR: At the end.
Thursday was another ugly session for the S&P 500 as the index shed 1.2%. After a calm, even boring spring, volatility is roaring back. What this means for the market’s next move is the point of this analysis.
The primary catalyst for this month’s second-guessing is the latest flareup in Trump’s trade war with China. But as unnerving as the situation feels, the index is still holding above long-term support at 2,800.
In Tuesday’s free blog post I wrote the following:
“Quite simply, a market that refuses to go down will eventually go up. As long as we continue holding 2,800 support, the situation is constructive. Eventually headlines will let up and at this point, the only thing we need to rally back to the highs is less bad news.”
And two days later, nothing changed. Fear of new headlines is weighing on traders’ moods, but so far this latest bout of selling only brought us back to support.
The thing to remember about routine dips back to support is they always feel like things are about to get a lot worse. If they didn’t, no one would sell and prices wouldn’t dip in the first place.
So the question we have to ask ourselves is if this dip is the real deal and things are on the verge of getting a lot worse? Or if this is just another vanilla pullback back to support and savvy traders are buying these discounts?
Trumps has been waging his trade war for more than a year, and despite some volatility in the stock market along the way, the economy has swallowed all of the previous escalations fairly well. Without a doubt, these additional taxes on businesses and consumers are not helping the US economy, but so far they don’t seem to be doing a large amount of damage.
The thing to remember about headlines is once the market comes to terms with them, they get priced in and stop mattering. By the time the crowd knows about something, most people have already made all the trades they want to make. The people who fear Trump’s trade war sold last year and were replaced by confident dip buyers willing to hold these risks. Once we run out of people willing to these headlines, they stop mattering.
Without a doubt, we should be cautious as the market flirts with violating support, but until the market gives us a reason to stop trusting it, we should continue giving it the benefit of doubt. These trade war headlines are nothing new and if they haven’t broken this market already, they are unlikely to do so now.
That said, anything is possible when it comes to crowd psychology and we always need to be prepared for the unexpected. Few things shatter confidence like falling prices and I reserve the right to change my mind if we crash under 2,800 support and the selling accelerates. But rather than fear further weakness, the trader in us should be cheering over the opportunity to buy in at even better prices.
Most Likely Next Move: This test of support will hold and prices will eventually drift back to the highs as the market settles into a summer trading range.
Trading Plan: Get defensive if prices crash through 2,800 support. Baring that, stick with what has been working and that is believing in this market. If a person is nervous, consider selling a portion of your position and then buying back in after the market finds its footing.
If I’m Wrong: The market crashes through 2,800 support and that shatters confidence. If the selling spirals out of control, don’t expect it to stop until we reach 2,600 support.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 is recovering from this month’s trade war swoon. Prices bounced off 2,800 support last week and are attempting to retake the 50dma.
As bearish as the headlines appeared, the market has been holding up remarkably well. Crashes from unsustainable levels are breathtakingly quick. This is the third week since Trump escalated the trade war and so far prices are only down a couple of percent. If this market was fragile and vulnerable to a collapse, we would have tumbled a lot further by now.
Quite simply, a market that refuses to go down will eventually go up. As long as we continue holding 2,800 support, the situation is constructive. Eventually headlines will let up and at this point, the only thing we need to rally back to the highs is less bad news.
That said, Memorial Day is just around the corner and we are quickly approaching the summer trading season. Big money managers are heading off to their cottages and that means less buying.
A market that refuses to go down combined with lethargic summer demand is the perfect recipe for a trading range. 2,800 support is the lower bounds and last month’s highs near 2,950 is the upper edge. Until further notice, a move to the lower end of this range should be bought and a rally to the upper end should be sold.
Most people know markets trade sideways more than they go up or down, yet every time they approach the lower end of a range, people cannot help but be overcome by feelings of doom and gloom. The same happens at the upper end, except this time people are counting all the money they will make as prices keep racing ahead. Unfortunately, these reactions end in people buying the highs and selling the lows.
It’s been a great year and it only makes sense prices will stagnate for a while as we consolidate recent gains. Stick with your favorite long-term investments. But over the next few months, the best money will be made swing trading a rangebound market. Currently, we are on the upswing following last week’s bounce off support and the next move is still higher. But rather than get greedy when we return to the highs, takes some profits and get ready to do it again.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN
By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
After tumbling five out of six sessions and challenging 2,800 support Monday, the S&P 500 has been on a rip ever since. Prices are still underneath the highs, but this rebound has done a lot to alleviate last week’s trade war fears.
But this shouldn’t come as a surprise. Monday evening I wrote the following:
“But here is the thing about this latest round of trade war headlines, how much worse can they get? Both sides are already taxing so much they are quickly running out of new things to tax. Even if this doesn’t get solved, we are not far from the point where this cannot get any worse simply because both sides are running out of options to make it worse.
In my opinion, the headlines over the last seven days were the worst of what we will see. The market was blindsided by this escalation since it was anticipating a deal. But after the shock wears off and the market comes to terms with these headlines, most of the downside will have already been realized.”
And that is exactly what happened. The trade war headlines climaxed Monday morning and so did the selling.
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Rather than fear Monday’s tumble, smart traders were buying the discounts. People always pray for a pullback. Unfortunately, when the market gods finally answer their prayers, most people end up being too afraid to buy.
And even worse, reactive traders sold the dip and are stuck buying back in at higher prices. Sell low and buy high. Do that a few too many times and they won’t have any money left to trade.
Now that Monday’s lows are 75-points behind us, the question is what comes next?
The market is acting well. Pullbacks to support are perfectly normal and healthy. Unfortunately, most people forget about this fact when we are stuck in the middle of one. As long as we continue holding 2,800 support, all is good.
That brings up the one nuance we need to be wary of. There are few things more bearish than a bounce that fails to stick. If this rebound fizzles and prices tumble under the lows, that tells us demand evaporated and lower prices are ahead. But that is the worst case scenario. As long as this week’s gains stick, then all is good.
In fact, things are great. We challenged support and the bulls won. That doesn’t mean prices will continue racing higher, in fact, they could retreat some over the next few days. But as long as they remain above 2,800 support, that tells us the bull market alive and the uptrend will continue. If this market was fragile and on the verge of crashing, it would have happened by now.
Stick with what has been working, whether that is buying the dips, or patiently sitting on your favorite buy-and-hold stocks. Let the other guy give away his money by overreacting to these normal and healthy dips.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN
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