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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 stumbled Tuesday, breaking an eight-session win streak. Investors were unnerved after Trump announced a fresh round of EU tariffs, reigniting trade war fears. And right on cue, the EU said it was ready to implement retaliatory tariffs against the US.
So much for the trade situation getting better. But even though trade war headlines flared up again, the index shedding 0.6% is a fairly benign response. It certainly doesn’t measure up to the fear that gripped equity markets last year.
Today’s muted reaction is not a surprise for those of us that have been paying attention. We know most owners who fear Trump’s trade wars bailed out a long time ago. And not only did these fearful sellers already abandon the market, they sold to confident dip buyers who demonstrated a clear willingness to jump in front of these headlines.
If these confident dip buyers weren’t scared then, there is no reason to think they will get scared now. No matter what the cliches say about confidence, confident owners don’t sell, and when they refuse to sell, supply remains tight.
While tight supply is preventing any of this year’s modest dips from growing into something bigger, supply is only half the equation. The problem we is as prices approach last year’s highs, a huge chunk of demand has already been satiated during this amazing run. While most of this year’s rebound was fueled by “less bad than feared”, as we approach the old highs, “less bad” is no longer good enough and we need headlines to shift to “good” to continue marching higher.
I said as much last week when I predicted more back and forth was ahead of us:
“while the path of least resistance remains higher, the rate of gains is clearly slowing. The easy money has already been made. Now things get a lot more choppy. And choppy means challenging. Breakouts fizzle and breakdowns bounce.
Chasing these daily gyrations will most likely end in losses as people buy the strength and sell the ensuing weakness. Repeat that a few too many times and the losses will start to add up. This market needs to be traded proactively, not reactively. Don’t fall for its tricks.”
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Even though most of us understand the markets move sideways more often than they go up or down, almost everyone comes to the markets with a preexisting bias. Either people are bullish or bearish about current levels and they believe any move in their direction is the real deal. If they are bulls, they buy the breakout. If they are bearish, they short the breakdown. But not long after they react to the market’s move, it fizzles and reverses. Once prices start moving against these reactive traders, they lose their nerve and pull the plug. Buy high, sell low is a horrible way to trade. Unfortunately, most people fall for the market’s tricks and end up losing money.
Despite Tuesday’s weakness, I still like this market. This it has been challenged by countless bearish headlines and weak price-action. Yet, every time these dips fail to build momentum. We fear what we don’t know, not what everyone has been talking about for months. If these headlines were going to break this market, it would have happened a long time ago. If the market doesn’t care, then neither should we. The
This market is transitioning to more sideways than up. That means we need to be more careful with our purchases and stop-losses. In fact, for most people, they would be better off not trading this chop. Either buy-and-hold your favorite positions and wait for the slow grind higher to continue, or stay out and wait for the risk/reward to skew more in our favor.
What’s a good trade worth to you?
How about avoiding a loss?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
Little more than a week ago, the S&P 500 tumbled in the second largest down day of the year. By most accounts, that was an incredibly ominous sign and put many traders on the defensive. Yet only a handful of days later, the index finds itself at the highest levels in six months and within 3% of all-time highs.
While this swift rebound caught a lot of traders off guard, you would have seen this coming if you knew what to look for. Two day’s after that tumble, when the market was still flirting with the lows and threatening to violate 2,800 support, I wrote the following:
“Selling dried up and prices bounced. While we are not in the clear yet, every hour that passes without tumbling lower decreases the probability we will tumble lower. While we only recovered a sliver of last week’s losses, the fact the selloff stopped in its tracks is a big win. Market crashes are breathtakingly quick and the longer we hold these levels, the less likely a continuation lower becomes. I like the way the market is acting and the path of least resistance remains higher.”
I wrote that last Tuesday and today the market closed 50-points higher.
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While it was nice to see this rebound coming ahead of time, it is already in the rearview mirror and what readers really want to know is what comes next. Fortunately, the market has been telling us what it wants to do for a while.
Between the 1.9% plunge two weeks ago and last week’s repeated violations of 2,800 support, the market had more than enough excuses to tumble lower. The bearish headlines of slowing global growth and the weak price action would have crushed us if this market was fragile and vulnerable, yet here we stand. Rather than run scared, most owners shrugged and kept holding. The resulting tight supply ended the selloff made it easy for prices to bounce.
Last year’s epic collapse chased off a lot of scared owners. They chose to sell their stocks at steep discounts “before things got worse”. But at the same time they were rushing out of the market, confident dip buyers were rushing in. Those confident dip buyers are the same ones holding today. If they were not afraid of these headlines then, why would they be bothered by them now? They wouldn’t, and is why every attempted dip this year on recycled headlines failed to make a dent.
That said, while the path of least resistance remains higher, the rate of gains is clearly slowing. The easy money has already been made. Now things get a lot more choppy. And choppy means challenging. Breakouts fizzle and breakdowns bounce. React to these moves and you will end up buying high and selling low.
Choppy, sideways markets are best either held or avoided. This is a good time for longer-term buy-and-hold. Or simply sitting out and waiting for a better risk/reward skew. Chasing these daily gyrations will most likely end in losses as people buy the strength and sell the ensuing weakness. Repeat that a few too many times and the losses will start to add up. This market needs to be traded proactively, not reactively. Don’t fall for its tricks.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN
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