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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 stumbled Thursday in one of the few misses since the Christmas rebound kicked off. Over the last few days, the index struggled to break through 200dma resistance and has slipped back to the psychologically significant 2,700 level.
While today’s tumble felt abrupt given how calm and steady the climb has been from December’s lows, a down day shouldn’t surprise anyone. As I wrote late last week:
“Everyone knows markets don’t move in straight lines and anyone who expects the market to keep racing higher clearly doesn’t understand how market work. While anything could happen, more often than not, hot markets cool off and pullbacks from overbought levels are a normal and healthy way of consolidating gains.”
We knew this was going to happen, we just didn’t know the when or the why.
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Thursday’s weakness started before the open when European economic data failed to meet expectations. That brought last year’s global growth fears back to the front. The only question is if this is just a single bout of indigestion, or if this will trigger another wave of second-guessing and defensive selling.
The nice thing about today’s dip is we found a bottom before lunchtime and closed well off the early lows. That is the opposite of last year’s dreadful price-action when early weakness triggered runaway selloffs. At least for the time being, investors appear more inclined to buy the dips than pile on the selling. But it takes more than one day to consolidate nearly 400-points of gains, so we have a long way to go before we can waive the all-clear flag.
I want to make one thing clear, I am most definitely not bearish and think the setup over the medium- and long-term looks good. But I am far less optimistic over the near-term. Markets move in waves and the Christmas rebound priced in a lot of good news. Hope that things will be less bad than feared. Unfortunately, the problem with hope is it leaves the door open to disappointment.
The crowd is always filled with emotions that swing between extremes. Last month’s collapse was built on fear of an economic collapse. This rebound started with hope that things were not as bad as feared and quickly morphed into fear of being left behind. And no doubt recent gains leave us vulnerable to another near-term reversal. Two steps forward, one step back. That’s the way the market always worked and there is no reason to expect something different to happen here.
I’m not predicting a crash or anything dramatic like that. Just a cooling off. Maybe that means some sideways trade. Maybe that means a dip back to support. Either way, it is very predictable and shouldn’t catch anyone off guard. But it will. Because it always does.
Everyone knows markets move in waves, but they always forget that fact in the moment. Every dip is seen as the start of something bigger. By rule, it has to. If it didn’t scare people out, then no one would sell and we wouldn’t dip. Even if this is the start of a very normal and routine pullback to support, expect to hear all kinds of people shouting doom-and-gloom and how we better get out now before it is too late.
Smart money buys discounts and sells premiums. It is definitely premature to call a one day dip a discount and we should be prepared for more. But as long as we know it’s coming, then it is a lot easier to maintain our composure and resist the urge to join the hysterical crowd. The market is acting well and there is nothing to do with our favorite long-term investments. But for our short-term swing-trades. This is a good time to get defensive and start taking profits if you haven’t already.
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 Analysis:
The S&P 500 closed January with a bang, finishing at the highest levels in nearly two months. These gains erased almost all of December’s losses. It’s been a wild ride, but one that wasn’t all that hard to predict.
Back in mid-December, I wrote the following about the market swoon and where prices were headed:
While I like these discounts, the looming Christmas and New Years holidays complicate the situation. What would normally be an attractive buying opportunity might struggle to get off the ground since big money is leaving for vacation. That puts impulsive retail investors in charge and that is rarely a good thing. Luckily, these little guys have small accounts and their emotional buying and selling doesn’t go very far. We saw the emotional selling from Thanksgiving week erased the following week when big money returned to work. And the same could happen here.
And that is exactly what happened. Big money left for vacation and fearful retail investors foolishly abandoned their stocks at steep discounts leading up to the Christmas holiday. But just when things seemed their most dire, retail investors ran out of things to sell and we’ve been bouncing higher ever since.
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But everyone knows it’s been a crazy ride. What readers really want to know is what comes next. And like almost everything in the market, the answer “depends”.
Timing is everything in the market. The only thing that determines whether we make money is when we buy and when we sell. This dependency means timeframe matters more than anything else.
The biggest paradox of the market is both bulls and bears can make money at the same time. A bull buys today while a bear shorts, and they both make money if they time their sales right. A bear with a short-term horizon can make money when prices dip next week, while the bull with a longer-term horizon rides the rebound higher over the next few months. They had opposite outlooks, but they both made money.
We currently find ourselves in that position. The market is acting really well and last month’s fears are quickly fading from memory. Anyone with a long-term investing horizon should have been buying this entire dip. The lower prices go, the better it is for them because they get more stocks for their money. What was true last month, is still true today. Unfortunately, too many investors foolishly listened to their gut and were selling the dip, not buying it.
But things get a little more complicated if we shorten our horizon and try to figure out what will happen next week. Everyone knows markets don’t move in straight lines and anyone who expects the market to keep racing higher clearly doesn’t understand how market work. While anything could happen, more often than not, hot markets cool off and pullbacks from overbought levels are a normal and healthy way of consolidating gains.
While momentum is still higher and we could keep drifting that way, there is a lot of air underneath us and each point higher takes away another point of upside. Increasing risks and decreasing rewards makes this is a better place to be taking short-term profits than adding new short-term money.
And while it sounds great that both bulls and bears can make money at the same time, there is no free lunch in the market and unfortunately, more often than not, both bulls and bears end up losing money because they trade impulsively and react to the market’s head fakes. If a person wants to give away money, follow the crowd by dumping stocks after they go down and buying them after they go up. And most people repeat that until they have nothing left. If you want to make money, don’t follow the crowd.
And just to be clearly, I’m most definitely not bearish here. I just think this rally will cool off and consolidate over the next few weeks and that will give us better prices to get in at.
What’s a good trade worth to you?
How about avoiding a loss?
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
On Tuesday, the S&P 500 slipped fractionally, but more importantly, it continues holding this month’s 2,600 breakout.
Over the weekend, Trump and Congress agreed to a temporary budget that allowed government workers to return to work and collect back pay. That was a critical development for Federal workers who missed two paychecks, but the political situation is far from resolved and the market actually declined Monday.
As I wrote last week, the 10% rally from the December lows priced in a lot of optimism the problems triggering last month’s swoon would be resolved. Unfortunately, that also meant any compromise was already largely priced in and stocks actually fell Monday because our politicians only offered a temporary solution.
The other significant development is the U.S. government’s criminal probe into Huawei, one of China’s most important companies. No doubt this escalates trade war tensions between these two economic superpowers.
Both of these events could be interpreted as bearish, and that’s the way the market took it, with declines on Monday and Tuesday, but the silver lining is the losses were relatively restrained. Taken together, the last two days of selling didn’t even trim 1% of value and we are still above the psychologically significant 2,600 level. Based on how volatile the previous three months has been, this week’s dip was barely a tremor.
I like how well the market is holding 2,600 support. Prices tumble from overbought and unsustainable levels quickly. This is our third week above this level and shows real demand for stocks at these prices. If equities were fragile and vulnerable to a tumble, there have been more than enough triggers to send us crashing back to the lows. Instead, the market shrugs the negativity off and continues holding recent gains. This is a dramatic improvement from late last year where even the smallest hint of a problem hiccup would send traders scrambling for the exits.
While the market’s mood has done a 180, its not that investors changed their mind, but that we changed investors. Fearful owners sold their stocks at a steep discount to confident dip buyers willing to hold these risks. After enough turnover takes place, we run out of fearful sellers and confident dip buyers disregard flare-ups of recycled headlines. That’s how we go from 250-point free falls to 300-point rebounds.
The problem with 300-point rebounds is those rate of gains is clearly not sustainable for any length of time. And this two-week consolidation above 2,600 support is proof of that. The market needs a breather and there are two ways this plays out; the dramatic stepback, or a mind numbing sideways grind. One scares weak traders out, the other bores them out.
To this point the market has resisted invitations to pullback. Big money seems more interested in buying these discounts than selling the fear and that is keeping a floor under prices. But at the same time, big money hates chasing prices higher and we can see their reluctance show up in the stalled rebound. In many ways, their reluctance to buy after a big move higher is a self fulfilling prophecy that creates the very dip they are worried about. But given how well the market is trading, most likely any near-term dip will be a buying opportunity.
While there is no reason to abandon our favorite long-term investments, there is also no reason to chase prices higher. Either we dip under 2,600 over the next few days or weeks, or we trade sideways for a while. Neither setup creates a good short-term buy. Instead, we should be patient and wait for a better entry.
If the market fails to rally on good news and finishes at the lows for a few days in a row, that is a bearish signal and an inviting short entry. If prices fall under 2,600 support, but quickly find a bottom, then that is our signal to buy the dip. And if we keep grinding sideways, then we just sit and watch. We only want to hold the risk of owning stocks when we are getting paid for it. If stocks are drifting sideways, we’re not getting paid and should be watching safely from the sidelines. We only want to buy when the risk/reward is stacked in our favor and that is not the case at these levels.
Apple reported its first declining revenue and earnings in more than a decade. But everyone knew this was coming and is why the stock was down nearly 40% from the highs. But the thing about the risks is they were already incorporated into the price. And like most things in the market, it probably even over did it.
If after-hours trade is any indication, AAPL will pop nicely tomorrow as reality turns out less bad than feared. If these gains stick Wednesday, it would put AAPL at the highest levels in over a month and easily erase the early January tumble when Apple lowered its guidance. At this point, it looks that dreadful day when the crowd was rushing for the exits was actually one of the best entry points in over a year.
This is what I told subscribers the day after AAPL lowered guidance and the stock plunged to fresh lows:
“I suspect we have already heard the worst from AAPL and things will only improve from here. Hopefully, Tim Cook was smart enough to lower expectations so far yesterday that it will create an easy beat when they report earnings at the end of the month. With the worst of the bad news already out there, most likely things will start getting better from here. Even AAPL bears should be expecting a near-term bounce from these oversold levels.”
Since then, AAPL is up 15% from those lows.
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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