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By Jani Ziedins | End of Day Analysis
Free After-Hours Update
NFLX has been struggling for six months to recover from its disappointing earnings report last summer. That said, it looks like the worst is behind it and the stock is well above its September lows. In fact, it doesn’t have far to go before it recovers all of last year’s selloff. Now that things are finally looking constructive for the stock, the bigger question is if it is still a buy at these levels.
I’ve been bullish on NFLX for a while. Last fall’s selloff was clearly overdone and it reached the point of being “so bad it was good.” Risk is a function of height and the lower we go, the less room we have to fall. Granted, this rule only applies to businesses with a bright future, but if we still believe in the fundaments of a company, every dip presents a buying opportunity. While panicked NFLX owners were busy abandoning their stock at steep discounts last summer, savvy investors were presented with a buying opportunity.
Without a doubt, NFLX was overbought last summer and even meeting expectations was going to be difficult. But once that bubble burst, everything turned around. By the time of the next earnings report, expectations were so low it was easy to beat them and that is why the stock popped. The recent tumble and sour sentiment made NFLX feel like an extremely risky buy, but it was actually one of the safest times to buy the stock in years. The thing to remember is the best opportunities come when other traders are nervous, not when everyone feels confident.
A lot can change in three months. Last quarter’s earnings confirmed NFLX isn’t headed out of business and the stock is dramatically higher. Today’s setup definitely nowhere near as attractive as it was three months ago. But an important thing to realize about the last six months, there has been a tremendous amount of selling in the stock. Nervous owners were abandoning ship and selling to confident dip buyers. Even though the stock is a lot higher than it was near the lows, the current ownership group is far more robust than it was when this selloff started.
NFLX is still a buy here, but as I already mentioned, higher prices mean this is a riskier buy. Trade an appropriate size so if the company reports dreadful earnings in two weeks, the loss isn’t unreasonably large. If earnings are bad, abandon ship and even consider shorting the stock. But if they meet expectations, or better yet, beat expectations, this stock will be making new highs in no time. One negative outcome versus two positive outcomes, I like those odds. There are no guarantees in the market, but this setup is attractive.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $NFLX
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
It’s been a dramatic 24 hours for the S&P 500. Iran launched rockets at two U.S. airbases in Tuesday evening, sending futures tumbling nearly 2%. Between the headlines and the futures market’s reaction, it was easy to be concerned for our equity positions on Wednesday. Yet barely 12 hours later, futures recovered those towering losses before the open and the index opened in the green. And it got even better, prices actually rallied to record highs later that afternoon!
While this performance was definitely awe-inspiring and a bit shocking, this resilience shouldn’t have surprised anyone. This was the fourth session in a row affected by headlines from the Middle East. It started Friday, then Monday, and again on Tuesday. What did all three of those sessions have in common? Owners largely shrugged and continued holding for higher prices. Would a fourth day of headlines change anything? Probably not. And that is exactly what happened today. Owners shrugged, supply dried up, and prices rallied back to the highs.
Agree with the market or don’t, but there is no arguing with it. If this market doesn’t want to go down, there is only one way to trade it. Anyone who overreacted to these developments is dumbfounded by the market’s blatant disregard for headlines that “obviously” should have sent stocks crashing. But while those people are busy arguing with the market, others of us are over here making money. I see a market that refuses to go down on bad news and from experience, there are few things more bullish than a market that refuses to go down.
I have no idea how much longer this strength can last, but as long as it keeps doing all the right things, I’m going to stick with it.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | Free CMU
Cracked.Market University:
The only way to make money in the stock market is by taking profits in our favorite trades. This blog post covers how I lock-in profits. This is a particularly timely post, not because I think this is the time to take profits, but because of what taking profits allows me to do.
First, I don’t know how to consistently pick tops and I bet most of you don’t either. If we cannot pick the top, then by rule, we are either selling too early or we are selling too late. Both strategies are perfectly acceptable and they come with their own unique set of advantages and disadvantages.
The first and easiest to understand is selling too late. This happens when we hold a stock past the peak and sell it on the way down. We’re in this to make money and that means we naturally want to squeeze every last dime of profit out of a trade. Who wants to sell for a 10% profit only to watch the stock rally another 200%?
The most conventional way of selling late is following the stock higher with a trailing stop. When the stock rallies from $50 to $60, we move our $40 stop up to $50. If the stock moves up to $70, we lift our stop to $60. We repeat this process until the stock finally peaks and dips under our trailing stop. This seems easy enough.
(Of course, a lot of traders are not sensible and rather than employ a thoughtful system like a trailing stop, they react impulsively to every bump in the road and only sell after they become convinced their favorite stock is crashing. And as most of us know from personal experience, this happens moments before prices rebound!)
But there is another way to take profits and is the approach I prefer, selling winners on the way up. The most obvious disadvantage of selling early is once we get out, we give up on any further upside. Unfortunately, most people believe this and it is absolutely not true. Just because we sold last week, yesterday, or even this morning doesn’t mean we cannot jump back in if the conditions warrant it. But most people have the mindset that once they sell, they are out of the trade and this just isn’t true. Selling simply means the risk/reward is no longer stacked in our favor. But like everything in the market, the situation can change quickly.
There are two reasons I like selling early. First, taking profits early frees my mind to look for the next trading opportunity. Selling early leaves me hungry and forces me to start looking for something to do with my cash. Sometimes that means buying back in after a short period out of the market. Other times it allows me to be the hungry dip buyer during the next dip. Second, I don’t like holding stocks moving sideways. I’m not getting paid when a stock is consolidating, yet when I own a stock, I continue holding all of the risks of the unknown. I only want to hold risk when I’m getting paid and that means avoiding stocks moving sideways.
The reason this applies to our current market is because I took profits proactively before the holidays. The S&P 500 rallied above 3,200 in mid-December and that was good enough for me. Every other time the market hit a round level over the last few months, it traded sideways for a bit. Now, I will freely admit I missed the move a few days later to 3,250, but I wasn’t worried about it. Not long after later prices tumbled and when the crowd was fearfully debating whether they should bailout before the market crashes, I was eagerly looking at this dip as a buying opportunity. While people were abandoning ship yesterday, I was buying the dip.
Selling early gives me more flexibility and it keeps me out of the market when I don’t need to be in. I had a nice holiday out of the market and taking profits early left me in a great position to jump back in once the market presented the next opportunity.
That said, this is what works for me and it doesn’t necessarily apply to you. Find the strategy that works for you and stick to it. The only way to do this wrong is making it an emotional decision.
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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:
Quarters and years often adopt personalities. Some go up, others go down, maybe they are volatile, maybe they are calm. While this is obvious to everyone after it is all said and done, to trade successfully, we need to recognize these changes in personality earlier than everyone else. This means being hyper-aware of inflection points that signal this quarter is going to be different than last quarter.
The calendar rolled over to 2020 last week and we changed both quarters and years. This means we need to be especially sensitive to the market’s mood. That said, in the first few trading session of the year, it doesn’t look like anything changed. We got some potentially bearish news late last week, markets fell on the new and unexpected uncertainty, but like we saw all of last year, rather than trigger waves of additional selling, buyers quickly jumped on the discounts and propped up prices.
There are few things more bullish than a market that refuses to go down on bad news and that is exactly what we are seeing here. If this market was fragile and vulnerable, there have been more than enough negative headlines to send nervous owners scrambling for cover. Instead, we are getting the exact opposite. Not only are confident owners holding through this headline noise, they are jumping on every discount no matter how small. I wasn’t sure how January would start, but so far, it doesn’t look like anything changed. That means we stick with what worked so well last year.
This morning’s dip was an excellent buying opportunity after prices found a bottom minutes after the open. The nice thing about opens like this is they give us an excellent stop-loss level extremely close to our entry point. If prices bounce like they did, we let the profits roll in. If the early bounce fizzles and prices tumble lower, we get stopped out for a tiny loss and we wait for the next entry point.
If a person missed this morning’s buying opportunity, don’t fret, there is still a chance to get in, it just involves a little more risk since we are further above this morning’s stop-loss point. To account for the increased risk, we manage that by starting with a smaller position and then only adding more after the trade starts working.
I’m not totally convinced the rest of this quarter will be as strong as last quarter yet, but it is starting off well and that means there is only one way to trade it right now.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
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
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