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By Jani Ziedins | End of Day Analysis
End of Day Update:
I’ve been bullish on this market for awhile and profited handsomely from this rally above 2,800. But all good things come to an end and I’m losing confidence in this latest move higher. Last week the S&P 500 surged to 2,850 after Trump agreed in principle to end his trade war with Europe. Unfortunately those gains evaporated after FB and NFLX failed to live up to investors’ lofty expectations.
Tuesday evening AAPL joined GOOGL and AMZN in beating expectations, but that wasn’t enough to put traders into a buying mood Wednesday. If this market was poised to go higher, there have been enough positive headlines to fuel a “half-full” move. Instead we remain stubbornly stuck just above 2,800 support as trade war fears simmer in the background.
Few things make me more nervous than a market that refuses to rally on good news and is why my conviction is fading. To be clear, I’m not bearish and don’t expect a large crash. But I am growing more cautious and worried this pause at support is turning into stalling. The longer we hold near support, the more likely it is we will breach it. I’d like to see us keep inching higher, but we are quickly running out of excuses to rally. If good news cannot lift us, eventually bad news will knock us down.
That said, I’m not looking for a large move lower; 2,750 seems reasonable. While a move that small hardly seems worth worrying about, and we shouldn’t worry about it, that is a lot easier to do when we see it coming. Those that are unprepared will watch us crash under 2,800 support and keep falling past 2,790…2,780…2.770…2.760…and…2,750. Those that don’t know what is happening get spooked more easily because it is natural to assume prices will keep falling. Unfortunately the point they finally call mercy and bailout is usually moments before prices capitulate and rebound.
There are two ways to trade a modest dip. Either have the confidence and conviction to ride through the dip and rebound. Or take profits before we stumble and buy back in at lower levels. What we don’t want to do is hold until pain and fear forces us out moments before prices rebound.
I’m not bearish enough to short this stalling, but am growing more cautious. Longer-term investors should be prepared to weather a little near-term weakness, while short-term traders should consider locking-in profits. I still expect good things over the medium and long-term, but I have less conviction over the near-term.
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Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
As I’ve been saying for a while, a market that refuses to go down will eventually go up. That is exactly what happened this week and now the S&P 500 finds itself 1% from all-time highs. This is a long way from the fear and uncertainty that dominated the headlines for most of the year.
This “unexplainable” strength confuses skeptics and the only expiration they can come up with is the market is rigged. Personally I wish the market was rigged because that would make trading so much easier. All I would need to do is follow the people who are rigging it and I would be printing money! Unfortunately nothing is ever that easy and we actually have to work for our profits. But don’t fret, it isn’t that difficult if we know what to look for.
In this case it was recognizing the market’s strength. Remember, we trade the market, not the news. If the market doesn’t care about headlines (trade wars, rising interest rates, sex scandals, etc), then neither should we. This one idea could have saved a lot of people a lot of money this year.
If the market didn’t care about Trump’s trade war yesterday, last week, and last month, what are the chances it will start caring today? Almost none. It doesn’t get any simpler than this. Anyone still arguing with the market got run over and is much poorer for it. Don’t be that guy.
While it is easy to say these things after the market made it’s move and it is obvious to everyone, I’ve actually been saying these things for a while. I wrote the following last week as the market threatened to tumble under 2,800 support:
No matter what people think should happen, Trump’s trade war has largely been priced in. Anyone who fears these headlines bailed out months ago and was replaced by confident dip buyers. Right or wrong, this turnover in ownership means the remaining owners don’t care about these headlines. When no one sells the headlines, they stop mattering. That is how we find ourselves in a paradoxical market that rallies 100-points after Trump imposes billions of dollars of tariffs on the Chinese. These things don’t matter because no one is left to sell the news. This market is not “rigged”. It is not “irrational”. It is behaving exactly like it should. The people who don’t understand this strength are simply looking at the wrong things.
The market is actually fairly easy to figure out once we know what to look at. In this case it was ignoring all the noise surrounding us and seeing a strong market. That said, many of the easy gains are behind us. The path of least resistance is most definitely higher, but the gains will be slower and harder to come by. Anyone trying to profit going forward will need more conviction and patience to sit through the inevitable gyrations as we run into resistance near all-time highs. Stick with what has been working and keep believing in this market.
FB is got hammered following disappointing earnings. I didn’t expect anything this dramatic and obviously neither did the market. This crushing loss highlights the importance of diversification when trading individual stocks. One misstep can send a highflier tumbling in a terrifying way. I don’t mind holding large positions in the indexes because they are naturally diversified. But with individual stocks it never makes sense to hold more than 20-25% of your portfolio in any one company. If a person had equal weightings of the FAANG stocks in their account, today’s 20% plunge would have only put a 4% dent in their portfolio.
That said, these stocks don’t trade in isolation and one highflier’s stumble risks taking down the entire group. Luckily GOOGL and AMZN carried their weight and it looks like the tech trade is still alive. It will just take NFLX and FB a little while to overcome their latest stumble. If these stocks hold current levels into next week, this is simply another buyable dip.
Bitcoin is struggling to hang onto $8k support and we are left wondering if this latest rebound is simply another “dead cat” bounce. Every significant selloff is littered with sharp rebounds. The problem is each of these bounces is less high than the one before it. This year we witnessed strong bounces to $17k, $13k, $12k, $10k and now $8k. Will this one end any different than those? I’m skeptical. To prove me wrong BTC needs to end this cycle of lower-highs by breaking above the previous lower-high of $10k. Until then this rebound is guilty until proven innocent.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
On Tuesday the S&P 500 surged above 2,800 support following better than expected earnings from Google. This market resisted every invitation to selloff and all it took was a little good news to put traders into a buying mood.
I wrote the following last week after Netflix bombed earnings and trade war fears sent a shiver through the market:
What people want to know is what comes next. If it isn’t obvious yet, this market wants to go higher and it isn’t going to let headlines get in its way. Either we jump aboard and enjoy the ride, or we get out of the way. But we most definitely don’t fight it. If this market was fragile and vulnerable, we would have crashed months ago. Bears can talk all they want about complacency, but they forget periods of complacency often last months and even years before ending in a top. Confident owners don’t sell and the resulting tight supply props up prices. Headlines don’t matter when no one sells them and that is the exactly what is happening here. Right or wrong, it doesn’t matter, I trade the market and this market wants to go up.
After flirting with dip under 2,800 support, we now find ourselves at the highest levels in nearly six-months. While I wouldn’t call Tuesday’s 0.5% gain huge, it was far larger than any down-day we’ve seen recently. As I’ve been saying for a while, a market that refuses to go down will eventually go up. This was finally that day. Google’s earnings are not that important in the big picture, but it is the one piece of good news we’ve been searching for. The thing that puts traders into a buying mood.
This is just another example of why we trade the market, not the headlines. Trade war headlines are a far bigger worry for the economy than Google’s earnings are a positive. Intuitively we would expect the trade war to send us tumbling and Google to barely register a bump. Yet the exact opposite happened. The trade war is little more than a speed bump and Google triggered one of the biggest up-days in weeks. Anyone trading what “is” happening is doing a lot better than those trading what “should be” happening.
Tuesday’s strength confirms my prior analysis and there is no reason to second guess ourselves now. We are still in the slower summer months and we should’t expect a large move higher, but the path of least resistance is higher. Stick with what has been working and look for prices to creep toward all-time highs over the next few weeks. If bad news was going to knocks us down, it would have happened by now. This is a strong market, not a weak one. Those that are patient and don’t overreact to these daily gyrations will be rewarded.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P500 slipped back to 2,800 support as trade war fears flared up and Trump made comments about the Fed’s interest rate hikes and dollar strength.
While any kind of weakness feels scary following this month’s pleasant surge above 2,800 resistance, we need to keep it in perspective. Down-days are a healthy and normal part of every move higher. Given the magnitude of the headlines swirling around us, a 0.4% decline feels fairly insignificant. As I’ve been saying for a while, if this market was fragile and vulnerable, we would have collapsed months ago. There is far more than enough ammunition for a large market selloff. In fact most bears are shocked we haven’t collapsed given how dire the news is. But as traders, the thing we can never lose sight of is we don’t trade the headlines, we trade the market. If the market chooses to ignore these headlines, then so should we. If it didn’t matter last week, last month, and the month before that, why is it all of a sudden going to start mattering now? Quick answer is it won’t.
No matter what people think should happen, Trump’s trade war has largely been priced in. Anyone who fears these headlines bailed out months ago and was replaced by confident dip buyers. Right or wrong, this turnover in ownership means the remaining owners don’t care about these headlines. When no one sells the headlines, they stop mattering. That is how we find ourselves in a paradoxical market that rallies 100-points after Trump imposes billions of dollars of tariffs on the Chinese. These things don’t matter because no one is left to sell the news. This market is not “rigged”. It is not “irrational”. It is behaving exactly like it should. The people who don’t understand this strength are simply looking at the wrong things.
While it is easy to make these claims after the fact, I’ve been telling readers to expect this rally for a while. This is what I wrote last month as the market teetered on the edge of what most assumed would be another leg down.
Bears have been gifted everything. Horrible headlines. Violating key support levels. The largest one-day selloff in months. Yet they are unable to do anything with it. Instead of crashing, this market is holding up amazingly well. Respecting 2,700 support for four days demonstrates strength, not weakness. If this market was fragile and vulnerable, there has been more than enough to send us tumbling. Yet here we stand.
Back when everyone feared the worst, I told readers to not worry about it. Anyone who listened avoided giving away money by selling at the wrong time and profited nicely as the market surged 100-points over the next few weeks. I don’t have a crystal ball, but I have been doing this long enough to know what we need to worry about and what we can ignore. I fear the things I don’t know, not what everyone is talking about. Trump’s trade war has dominated the financial press for months. That meant it was already priced in and not something we needed to worry about.
And what was true last month is still true this month. This market doesn’t care about all the things the bears are talking about. If we were going to crash, it would have happened by now. That tells us we are standing on firm ground. That said, the 100-point rally from 2,700 support consumed a lot of upside and the easy gains are now behind us. From here every additional point gets harder and slower. That path of least resistance is still higher, but it requires more conviction and patience.
If a person bought last month’s dip and is sitting on healthy profits, there is nothing wrong with taking profits here if that is what their strategy dictates. But at the same time, those that are more patient can squeeze a few more dollars out of this market. If this month’s rebound pushed us to overbought and unsustainable levels, we would have fallen back into the trading range by now. Instead, 2,800 resistance turned into support and is holding us up quite nicely. The next obvious target is all-time highs at 2,880. We will get there eventually, but it will take a few weeks and there will be lots of back-and-forth between now and then. Remember, red days are a normal and healthy part of every move higher.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P500 ended Tuesday with nice gains, easily erasing opening losses. Monday evening Netflix reported disappointing subscriber growth and that sent a chill through the entire tech sector. But Tuesday’s weak open was as bad as it got and prices rebounded decisively through the day. This strength resulted in the highest close since February 1st and leaves us within 2% of all-time highs. Not bad given all the headline uncertainty swirling around the market.
Bears are left dumbstruck by this market’s resilience and no doubt they are crying foul. But it didn’t have to be this way if they had been paying attention. We trade the market, not the headlines. If a person kept this in mind, they would have embraced this strength, not challenged it.
I’ve been telling readers for months this is a strong market. This is what I wrote back on May 3rd when the market threatened to crash under 2,600 support:
As I’ve been saying since February, we are in a trading range. That means buying weakness and selling strength. Stick with what is working until something changes. Did something change today? Nope. That means today’s weakness was a buying opportunity, not a chance to bailout “before things get worse”. Maybe we slip a little further, but that’s not a big deal. Remember, risk is a function of height. The lower prices go, the less risky it is to buy. If this market wanted to crash, it would have happened months ago. There have been more than enough excuses to send prices tumbling. Instead, every time we slip to the lows, supply dries up and prices rebound. This is a resilient market, not a weak one. And the only people losing money are the ones overreacting to these gyrations. They lose money buying when they feel confident (high) and sell when they are fearful (low). If we want to make money, do the opposite of most people. That means buying fear and selling confidence.
The market is up nearly 8% since I wrote that. I don’t have a crystal ball, but I’ve been doing this long enough to know what to pay attention to. While fearful owners were panic selling, I was buying their discounts and it has worked out really well. And nothings has changed. If this market ignored bad news in May and June, why would that change in July? Given today’s resilient price-action, clearly it hasn’t.
But that was then and this is now. What people want to know is what comes next. If it isn’t obvious yet, this market wants to go higher and it isn’t going to let headlines get in its way. Either we jump aboard and enjoy the ride, or we get out of the way. But we most definitely don’t fight it. If this market was fragile and vulnerable, we would have crashed months ago. Bears can talk all they want about complacency, but they forget periods of complacency often last months and even years before ending in a top. Confident owners don’t sell and the resulting tight supply propping up prices. Headlines don’t matter when no one sells them and that is the exactly what is happening here. Right or wrong, it doesn’t matter, I trade the market and this market wants to go up.
That said, the easy gains are behind us. Long gone are the days of buying the dip-buying and racking up quick profits. Instead this market is approaching old highs and we should expect the rate of gains to slow. Confident owners don’t want to sell, but we need new money willing to chase prices higher and that is getting harder to come by. We are still in the slower summer months and we shouldn’t expect the real buying to start until big money returns from their summer cottages this fall. Things still look good for this market, but expect the rate of gains to slow. And remember, slow includes lots of back and forth along the way. The easy money was made weeks ago. Now it takes more conviction to hold through the inevitable gyrations like we saw Tuesday morning. But the rewards will be there for those that have the patience and conviction.
The market is acting well and that means we stick with what has been working. Longer-term, keep holding our favorite buy-and-hold stocks. Short-term wise, we are stuck in no-man’s land and a lot depends on a trader’s plan. Shorter-viewed swing-traders can start taking profits and waiting for the next trade. Those with a little more patience can continue waiting for higher prices. Over the next few weeks I expect this market will challenge all-time highs near 2,880. But rather than cheer that strength, I will be collecting my profits.
If you found this post useful, return the favor by sharing it on Twitter, Reddit, Facebook and StockTwits!
Jani
What’s a good trade worth to you?
How about avoiding a loss?
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