Sep 06

Why everyone should have seen this week’s dip coming

By Jani Ziedins | Free Content

Free After-Hours Analysis:

On Thursday the S&P slipped for the fourth time out of the last five trading sessions. But this shouldn’t surprise anyone. It was a strong run following August’s decisive rebound off 2,800 support. Markets cannot go up like that indefinitely and a cooldown was inevitable.

Regular readers of this blog saw this coming a mile away. I wrote the following last Tuesday, one day before we rolled over:

If the best trade is buying weakness and selling strength, no matter how safe 2,900 feels, this is definitely the wrong time to be buying. Resist the temptation to chase these prices higher because recent gains make this a far riskier place to be adding new money. The risk/reward shifted away from us because a big chunk of the upside has already been realized while the risks of a normal and healthy dip increase with every point higher. In fact, if the best trade is buying weakness and selling strength, this is actually a darn good time to start thinking about locking-in profits. Remember, we only make money when we sell our winners and it is impossible to buy the next dip if we don’t have cash.

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I don’t have a crystal ball and I cannot predict the future, but when the market keeps doing the same thing over and over again, it isn’t hard to figure out what comes next.

As I wrote last week, it was inevitable the Canada trade deal wouldn’t be fast or easy. Missing Friday’s arbitrary deadline is all it took for last week’s hope to turn into this week’s disappointment. But to be honest, Canada’s refusal to be Trump’s lap-dog shouldn’t surprise anyone. The fact most people saw this coming means this latest round of weakness will only be a modest dip, not the start of a bigger crash. We fear what we don’t know, not what everyone is talking about. If we were going to crash because of trade war headlines, it would have happened many months ago. The fact we keep holding up so well tells us this is a strong market, not a weak one.

Thursday’s dip found support at the old highs near 2,870, but that doesn’t mean this dip is over. While I like buying 2,870 a heck of a lot more than 2,920, I still don’t feel the need to rush in at these levels.

Sometimes markets consolidate gains by pulling back. Other times they do it by trading sideways. It is still a little premature know which way this consolidation will go. Maybe we dip a little further, maybe we bounce back to 2,900 but struggle to climb back above. Either creates an effective consolidation, unfortunately right now the only thing we can do is wait for more clues. The good news is we should know more over the next couple of days.

At this point it is still a little too early to buy the dip. The discounts are modest and the profit potential is limited. I prefer better risk/rewards and am willing to wait a little longer. In a perfect world, we crash all the way down to 2,800 support before bouncing. That would give us a second opportunity to profit from the move up to 2,900. If only we can be that lucky.

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Jani

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Sep 04

Hope turns to disappointment

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Tuesday the S&P 500 got off to a rocky start following the Labor Day weekend. Trump and Canada couldn’t come to terms on a new NAFTA and that let air out of last week’s hope-filled rally to all-time highs.

Tuesday’s weak price-action fits perfectly with what I wrote last week:

If the best trade is buying weakness and selling strength, no matter how safe 2,900 feels, this is definitely the wrong time to be buying. Resist the temptation to chase these prices higher because recent gains make this a far riskier place to be adding new money. The risk/reward shifted away from us because a big chunk of the upside has already been realized, while the risks of a normal and healthy dip increase with every point higher. In fact, if the best trade is buying weakness and selling strength, this is actually a darn good time to start thinking about locking-in profits. Remember, we only make money when we sell our winners and it is impossible to buy the next dip if we don’t have cash.

Make sure you sign up for Free Email Alerts so you don’t miss profitable insights like these.

It is little surprise Canada didn’t roll over for Trump and Friday’s arbitrary deadline came and went without a deal. Both sides threw barbs at each other in the press over the weekend, but this is little more than grandstanding for the cameras that accompanies all political negotiations.

Even though we didn’t get a deal this weekend, there is no reason we shouldn’t expect one over the next few weeks. Canadian and American businesses are far too reliant on NAFTA and it would be incredibly disruptive to both economies to throw it out. Even the president of the powerful AFL-CIO union came out strongly against excluding Canada. If the unions are against it, you know it must be really bad for business.

While the market dipped Tuesday, the losses were modest and we are still at levels that were all-time highs last week. This is more of an exhale following a strong run than the start of a bigger correction. This is an incredibly resilient market and owners have refused to sell far more dire headlines this spring and summer. There is no reason to think anything changed this week.

As I wrote last week, there are plenty of good reasons to take profits at these highs, but selling because Canada didn’t jump aboard Trump’s ‘new and improved’ NAFTA deal by an artificially imposed Friday deadline is not one of those reasons.

We take profits because it’s been a nice run. We take profits because we are running into resistance. We take profits because we buy weakness and sell strength. We take profits because we need cash to buy the next dip. But we definitely don’t sell because we are afraid of Canada collapsing this market.

Personally, I would love it if this selling spiraled out of control so that we could jump in at much lower levels. Unfortunately, I doubt we get that lucky. Instead, I expect this dip to bounce quickly. Support at the old highs near 2,870 is as far as this goes, and most likely we won’t even get that far. This is simply an exhale after a nice run and we shouldn’t read too much into this normal, healthy, and periodic gyration.

Until further notice, keep doing what has been working. That means buying weakness and selling strength in our short-term trading account and sitting on our favorite stocks with our longer-term investments.

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Jani

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Aug 28

It took a while, but 2,900 finally happened

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Tuesday morning the S&P 500 poked its head above 2,900 for the first time in history. The market continues basking in the after-glow of Trump’s Mexican deal that triggered Monday’s breakout to all-time highs. Unfortunately Mexico is only one piece in a much larger puzzle. Canada’s, Europe’s, and China’s trade deals remain elusive. All the work ahead of us is why the celebration was shortlived and we slipped under the psychologically significant 2,900 level in late-morning trade.

That said, 2,900 is a major milestone no matter how you cut it. This strength is impressive and caught a lot of people off guard. Not long ago the crowd was overrun by doom and gloom and predictions of the market’s collapse were everywhere. Between trade wars, rate hikes, rising interest rates, Turkey, Italy, Iran, and all the other drama thrown our way this year, it is no surprise traders were so negative.

Luckily regular readers of this blog knew better. Four months ago when the market was teetering on the edge of collapse and on the verge of making new lows for the year, I wrote the following:

Predicting the market isn’t hard if you know what to look for because the same thing keeps happening over and over. But just because we know what is going to happen doesn’t make trading easy. Far and away the hardest part is getting the timing right. That is where experience and confidence comes in. Several months ago investors were begging for a pullback so they could jump aboard this raging bull market. But now that prices dipped, rather than embrace the discounts, these same people are running scared. Markets dip and bounce all the time, but we only make money if we time our trades well.

The most important thing to remember is risk is a function of height. The higher we are, the greater the risks. By that measure, Tuesday’s dip near the 2018 lows was actually one of the safest times to buy stocks this year. Did it feel that way? Of course not. But that is why most people lose money in the stock market. If most people were selling Tuesday, and most people lose money, then shouldn’t we have been buying? Given the market’s reaction today, the answer is a pretty resounding yes.

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The S&P 500 is up 10% since I wrote those words back in April. 10% is a great result by itself. It is even better if a person took advantage of leveraged ETFs. But far and away the best trade of the year was profiting from these fantastic swings between optimism and pessimism by buying weakness and selling strength. Buy the dip, sell the rip, and repeat until a good year becomes a great year.

While it is fun to look back at my successful trading calls, what readers really want to know is what comes next. Luckily for us today’s strength doesn’t change anything. The best trade is still buying weakness and selling strength. The problem with today’s hope is it will be replaced by disappointment in a few days. Today we see light, in a few days we come across another stumbling block. And like clockwork, the market continues its swings between hope and despair.

If the best trade is buying weakness and selling strength, no matter how safe 2,900 feels, this is definitely the wrong time to be buying. Resist the temptation to chase these prices higher because recent gains made this a far riskier place to be adding new money. The risk/reward shifted away from us because a big chunk of the upside has already been realized while the risks of a normal and healthy dip increase with every point higher. In fact, if the best trade is buying weakness and selling strength, this is actually a darn good time to start thinking about locking-in profits. Remember, we only make money when we sell our winners and it is impossible to buy the next dip if we don’t have cash.

While I am cautious with my short-term swing-trades, this market is acting well and there is no reason to abandon our favorite medium- and long-term investments. We are still setting up for a strong rally into year-end and the only thing to do is patiently watch the profits pile up in our favorite long-term investments.

If you found this post useful, join the thousands who follow me on Twitter so you don’t miss future updates: 

Jani

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Aug 23

Why the market doesn’t care about the growing Trump scandal

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Thursday the S&P 500 finished modestly lower after drifting sideways for most of the day. Headlines continue to be negative for Trump, but as expected, the market doesn’t care.

This is what I wrote Tuesday after the market initially dipped following Michael Cohen’s guilty plea and accusations against Trump:

I don’t expect the market to overreact to these Cohen headlines because anyone who was paying attention saw this coming a mile away. Remember, we fear what we don’t know, not what everyone else is talking about. There are real risks lurking out there, but this is not one of them.

 

The market is a little more vulnerable to these headlines simply because we are at the upper end of the trading range and a cool down was inevitable. If it wasn’t these headlines, it would have been something else. We are still stuck in the slower summer months and we won’t have the firepower to push a large directional move until institutional money managers return from their summer cottages. Until then we should expect these smaller directional moves to fizzle at the edges of the trading range or one reason or another.

The growing Trump scandal isn’t dampening the market’s mood and traders are not concerned about recent developments. These events first came out months ago and if prices were going to tumble, they would have done so back then. The fact we didn’t sell off initially tells us we don’t need to worry about these headlines today. If the market doesn’t care, then neither should we. The market’s benign reaction the last two days confirms that outlook.

It’s been a while since Turkey and trade wars made the headlines and our “no news is good news” market continues hovering near all-time highs. While confident owners have zero interest in selling the news, it is harder to convince those with cash to buy these highs and is why the gains have stalled. We are at the tail end of the slow summer season and it will be a few more weeks before we start seeing more meaningful buying.

Many money managers are underweight stocks because they sold defensively earlier in the year. These managers have been desperately waiting for a pullback so they could jump back in. Unfortunately, the market is not cooperating and this latest round of gains is pressuring them to chase prices higher. Once they give up waiting for the pullback, they are going to be forced to bite the bullet and buy stocks at all-time highs. The breakout is not imminent, but it is coming.

Even though the market is acting well, we are still vulnerable to near-term volatility. Risk is a function of height and it would be normal, even routine for the market to dip modestly here. Prices are responding well to these Trump headlines. That means we are more likely to go higher than lower, but the risks of a small dip are always there. As long as we know what to expect, we are less likely to overreact to a modest bump in the road.

At this point, any dip is a buying opportunity, not an excuse to sell stocks. Remember, we take profits by selling strength, not weakness. If someone is not sure they can sit through a small dip, they should take profits now. Otherwise, there is nothing to do other than patiently watch the profits pile up.

If you found this post useful, join the thousands who follow me on Twitter so you don’t miss future updates: 

Jani

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Aug 21

All-time highs! Who knew this was coming?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Tuesday was a doubly significant day for the S&P 500. Not only did we notch a fresh all-time high, this also became the longest bull market in history. Not bad for a market that most were giving up on only a few weeks ago.

Last week stocks stumbled on fears of a Turkish collapse, but I wasn’t worried. If the stock market didn’t care about a trade war between the world’s two largest economies, why would it get spooked by problems in a minor eastern European country with an economy smaller than Netflix’s market cap?

Hindsight bias being what it is, everyone knows now it wasn’t a big deal. But if we want to make money we need to know these things ahead of time. Luckily readers of this blog were ready because I wrote the following last Tuesday before we dipped to 2,800 and bounced decisively off support:

While it already looks like the Turkish selloff is dead, we need to hold this bounce for a few more days to be certain. There is a chance this bounce could fizzle and we continue slipping back to 2,800 support. If that happens, that will be a far more attractive entry point. Until then I will keep watching, waiting, and hoping for that next profitable opportunity.

 

As for our longer-term positions. There is nothing to see here. Stick with what has been working and ignore the noise. The market is still setting up for a strong rally into year-end.

That was simple and profitable advice for both short-term traders and long-term investors. And even better for regular readers of this blog, they had the cash to buy the dip because I recommended locking in profits the week before.

While it is nice to reflect on profitable trades, what people really want to know is what comes next. Even though Tuesday was a record day for the S&P 500, things got a more difficult in the afternoon after Trump’s personal lawyer plead guilty and appears willing to work with prosecutors. If the worst plays out, Trump could be implicated in campaign finance violations. This was a developing story at the close and stocks continued to fall in after-hours trade.

That said, the losses were relatively minor, only falling 0.5% after the close. While this Michael Cohen stuff is making headlines today, it doesn’t really surprise anyone. This scandal has been brewing for months and if the market was truly worried about it, we would have fallen on these headlines a long time ago. If it didn’t matter then, it doesn’t really matter now.

The market is a little more vulnerable to these headlines simply because we are at the upper end of the trading range and a cool down was inevitable. If it wasn’t these headlines, it would have been something else. We are still stuck in the slower summer months and we won’t have the firepower to push a large directional move until institutional money managers return from their summer cottages. Until then we should expect these smaller directional moves to fizzle at the edges of the trading range or one reason or another.

As I said, I don’t expect the market to overreact to these Cohen headlines because anyone who was paying attention saw this coming a mile away. Remember, we fear what we don’t know, not what everyone else is talking about. There are real risks lurking out there, but this is not one of them.

And to editorialize a little here, I actually don’t think the market would mind all that much if Trump was bogged down by a scandal that robbed him of a big chunk of his political capital. The stock market got the regulatory relaxations and tax cuts it was looking for last year. In a perfect world Trump would have gone on a two-year vacation instead of starting fights with our biggest trading partners. At this point there is a good chance the market would actually cheer Trump getting his hands tied so that he couldn’t screw with anything else.

Earnings season is winding down and by all accounts, it was a good one. Trade and politics don’t matter nearly as much as economic growth and profitability. Despite all the negative headlines dominating the financial press over the last six months, companies are doing well and the stock market is rallying on that strength. Nothing else mattered then and it won’t matter now. This is a strong market and we should continue to trade it as such.

For short-term traders, the opportunity to buy was last week as we tested support, not now that we are making new highs. This is a better place to be taking profits than adding new money. Assuming this Cohen thing is short-lived, we should push toward 2,900 resistance over the next week or two. That would be a good place to take short-term trading profits.

For our long-term stocks, there isn’t a lot to do here other than relax and let the profits come to us. We are setting up for a rally into year-end and we should enjoy the ride.

As for the tech trade, it missed the early parts of last week’s bounce off of support, but it has been catching up the last two days. The tech trade will survive as long as the broad market does well and it will continue leading the way. FB and NFLX got hit pretty hard and are consolidating their losses, but the worst is behind us. These are the discounts people were praying for a few months ago. No doubt in a few months those same people will be kicking themselves for not buying these discounts when they had the chance.

If you found this post useful, join the thousands who follow me on Twitter so you don’t miss future updates: 

Jani

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