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By Jani Ziedins | End of Day Analysis
Free After-Hours Update
Thursday was brutal for the S&P 500. Ten-year Treasury yields surged to the highest levels since 2011 and fear of sharply rising interest rates sent global equity investors scrambling for cover.
The S&P 500 opened down a modest 0.2%, but that was as good as it is got and by midday, we crashed through 2,900 support and the selling didn’t stop until we shed nearly 1.5%. This was definitely a sell first, ask questions later kind of day. But not all was bad. A late-afternoon rebound reclaimed 2,900 support before the close. Not very often do we breathe a sigh of relief when the market finishes down 0.8%, but that was so much better than it could have been.
The question on everyone’s mind is what happens next. Today’s frenzied selling hit us out of the blue and is unlike anything we’ve seen in months. Wednesday we were flirting with all-time highs, but barely 24-hours later we crashed through support and shed nearly 60-points from the previous day’s highs. We have to go back to this winter’s big selloff to see two-day price-action that dramatic. It was especially shocking given how benign volatility has been lately. But the market has a nasty habit of smacking us when we least expect it, and that is exactly what happened Thursday.
While this price-action was dramatic, the first thing we have to ask ourselves is if anything actually changed. A surge in interest rates was the excuse for Thursday’s selloff, and while rates climbed to the highest levels in years, they didn’t really go up that much. We broke through 3% for the first time back in May and have been consistently above this level since September. And this week’s “surge” took us from 3.1% all the way up to 3.2%. It’s not nearly as impressive when you look at it that way.
But a segment of traders was looking for an excuse to sell, and once the floodgates opened, the race to the exits was on. Early selling pushed us under the first set of stop-losses, and that selling pushed us under the next tranche of stop-losses. That pattern of reactive selling, dropping, and more reactive selling continued until we triggered all the stop-losses and ran out of defensive sellers willing to abandon this market.
And so what happens next? We don’t need to look very far because what will happen next is the exact same thing that happened last time, and the time before that. This is an incredibly resilient market. Owners refused to sell an escalating trade war between the world’s two largest economies. They refused to sell an ever-expanding investigation into the president. They refused to sell the Fed raising interest rates three times this year and promising another hike before the end of the year. Should we believe confident owners would sit through all that, only to lose their nerve and turn into panicked sellers when Treasury rates go from 3.1% to 3.2%. Really???
I don’t see anything that materially changed Thursday and that means my positive outlook remains intact. Everyone knows stocks cannot go up every…single….day. Dips are inevitable. The thing to remember about dips is they always feel real. If they didn’t, no one would sell and we wouldn’t dip! Without a doubt, Thursday’s selloff felt real. But nothing changed, and that means we should ignore the noise. This is a strong market and the rally into year-end is alive and well. Savvy traders are buying these discounts, not selling them.
Last week I wrote the following and nothing changed since then:
There is not a lot to do with our short-term money. Either we stay and cash and wait for a more attractive opportunity, or we stretch our time-horizon and ride the eventual move higher. Of course, there is no free lunch and holding stocks is risky. Anyone waiting for the next move higher needs to be prepared to sit through near-term uncertainty and volatility.
If a person has cash, they are a great position to buy these discounts. If a person was taking a longer view, they should have expected dips and gyrations along the way. If they knew something like this could happen, they would be less tempted to reactively sell the weakness. Unfortunately, a lot of traders were not prepared for this dip, and they joined the crowd jumping out the window. But it’s not all bad, their loss is our gain when they sell us their heavily discounted stocks. Sign up for Free Email Alerts so you are on the right side of the trade next time.
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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 continued hovering near all-time highs as it digests recent trade war and interest rate headlines. We’ve been trading near 2,900 for nearly six weeks as the market consolidates August’s breakout to all-time highs.
But this isn’t a surprise for regular readers of this blog. I wrote the following nearly a month ago, and the market has behaved exactly as expected since then:
“I didn’t expect much out of this dip and that is exactly what it gave us. Since the market likes symmetry, we shouldn’t expect much out of this rebound either. The next move is most likely trading sideways near the psychologically significant 2,900 level. It will take time for those with cash to become comfortable buying these levels before we will start marching higher again.”
With the benefit of hindsight, it is obvious the market isn’t up to much. But that didn’t stop countless people from losing money by selling last month’s dip and chasing Monday’s rebound. Easy mistakes that could have been avoided if people were paying attention. Make sure you sign up for Free Email Alerts so you don’t miss profitable insights like these.
Over the weekend the United States and Canada struck a compromise on a revised NAFTA. That sent prices higher Monday morning, but the market has struggled to add to those gains.
Typically a market that fails to react to good news makes me nervous, and Monday’s fizzled breakout definitely raised a red flag. A lack of follow-on buying often tells us we are running out of buyers and a price collapse is imminent. But this is not a not a normal market and the same rules don’t always apply.
Without a doubt, yesterday’s fizzle got my attention. But at the same time, this muted reaction is consistent with this bull market’s personality. Volatility is extremely low and that works in both direction. Since market selloffs are quicker and larger than rallies, this market’s reluctance to sell off on bad news is far more impressive than this week’s inability to surge higher on good news. I’d love to see prices race higher, but I’m not overly worried about this modest move becaue it fits this market’s personality. As I’ve been saying for a while, this is a slow market, and we need to be patient and allow the profits to come to us.
I’m willing to forgive the market for not holding Monday’s early highs, but that does count as one strike. If I see more warning signs, it will force me to reevaluate my outlook. But until then, I’m still giving this resilient bull market the benefit of the doubt.
FB is still struggling to get its mojo back. Between last quarter’s earnings disappointment, looming privacy regulations, and last week’s hacking revelation, it’s been hard for this stock to turn sentiment around. This is still the hottest social media property and nothing else comes close. As long as technology continues to be the hottest sector, FB will continue to be a buy. But if FB cannot catch back up to its FAANG peers, that could be an early sign the other FAANG stocks are skating on thin ice. At this point, FB is far more likely to catch up to the other tech high fliers than it is to bring everyone else down to their level. Things still look good over near-term and into year-end, but the situation could look a lot different next year. Stocks and sectors often take turns leading the way higher and at some point technology will hand the baton to the next hot sector.
AMZN announced it is boosting starting pay to $15/hr for its warehouse and other front-line employees. The stock initially dipped on the news, but it has since recovered those losses. Paying employees well is far better than dealing with high turnover, disgruntled workers, and public relation campaigns against the company. Plus, this has always been a growth story, not one about profits. Attracting and retaining the best employees will help it extend its growth streak.
Despite the flurry of headlines over the last few days, TSLA is right back where it was last week. The bulls are as dug in and entrenched as the bears. Both sides are prepared to fight to the death, and that is resulting in this stalemate. At this point, I still give a slight edge to the bulls simply because we are still at the lower end of this summer’s trading range.
Bitcoin is still struggling to break $6.8k resistance. If buyers wanted to buy this dip, they would have jumped in already. The chronic lack of demand at these levels is a concern, and the path of least resistance remains lower.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
On Thursday the S&P 500 recovered Wednesday’s late-day selloff and continues consolidating recent gains above 2,900 support.
But this is failed selloff is no surprise for regular readers of this blog. This what I wrote a few days ago and Thursday’s rebound played out exactly as expected:
“This market most definitely doesn’t want to go down. All summer it refused countless opportunities to tumble on bearish headlines. As I’ve been saying for a while, a market that refuses to go down will eventually go up.”
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The Fed released its latest policy statement Wednesday and told us it was raising interest rates a quarter percent. This move was widely expected, and the market initially rallied on the news. But later the Fed chairman told us rate hikes would continue through next year, eventually pushing us to 3%. The market got cold feet and tumbled into the red, and the selling got worse after Powell commented he thought stocks were overpriced.
For anyone that lived through 2013’s “Taper Tantrum”, Wednesday’s 0.3% dip wasn’t even a bump in the road. Thursday’s resilient price-action further confirmed most owners are not worried about the Fed’s rate increases…as long as the economic forecasts remain strong. The Fed lifted interest rates eight times over the last few years and another three or four increases over the next couple of years won’t be any more shocking to the system.
As shorter-term traders, the only thing that matters is the market’s reaction to these headlines. And so far stocks are shrugging them off. Maybe this will turn into a bigger deal down the road, but until then we don’t need to worry about it. This is a strong market, and it wants to keep going higher. Until that changes, we stick with what has been working.
The consolidation above 2,900 remains intact. If we were overbought and vulnerable to a correction, this week’s trade war and interest rate headlines were more than bearish enough to send us tumbling. Maybe bears will be proven right eventually, but they are definitely wrong right now. Timing is everything in the stock market and early is the same thing as wrong.
The biggest advantage of being small investors is we don’t need to look months and years into the future like big money managers do. Our smaller size means we can dart in and out of the market and only need to look days and weeks ahead. Things still look great for a year-end rally and that is how we should be positioned. No doubt we will run into challenges next year, but we will worry about those things when the time comes. For now, we stick with what has been working.
There is not a lot to do with our short-term money. Either we stay and cash and wait for a more attractive opportunity, or we stretch our time-horizon and ride the eventual move higher. Of course, there is no free lunch and holding stocks is risky. Anyone waiting for the next move higher needs to be prepared to sit through near-term uncertainty and volatility.
Highflying tech stocks lead Thursday’s charge higher, and worries about this sector are fading from memory. Even FB and NFLX are joining the party and climbed off their post-earnings lows. This hot sector will peak at some point, but this is not that point, and these stocks will lead the year-end rally.
TSLA got hammered after the close when securities regulators sued Elon Musk for fraud and sought to remove him from Tesla. The stock tumbled 13% in after-hours trade as the “Musk Premium” evaporated. While this will be a much bigger story and no doubt the selloff could get larger, I actually think the market is getting this one wrong. TSLA is currently navigating the rocky transition from disruptor to operator. No doubt Musk is a great visionary, but his execution skills leave a lot to be desired. The company no longer needs bold ideas; it needs to deliver on the promises it already made. The company needs leadership to take it from small, niche producer to a global competitor. Many people thought Jobs’ departure from AAPL would end of the company’s ride at the top, but AAPL didn’t need more innovation, it needed execution. And since Tim Cook took the reigns, the stock is up 450%. Something very similar could happen at TSLA……assuming they don’t go bankrupt between here and there. But if the company recruits a world-class operator as its next CEO, this whole episode could actually be a good thing for the company and its stock.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 traded sideways for a second day as it consolidates last week’s breakout to all-time highs. Trump and his trade war continue dominating economic headlines, but so far our stock market doesn’t mind. As usual, confident owners refuse to sell and that is keeping a floor under prices. But stubbornly tight supply is only half of the story. To keep going higher, we need demand and right now that is in short supply.
This market’s restrained breakout isn’t a surprise to readers of this blog. Two weeks ago I wrote the following after prices finally reclaimed 2.900 support:
“Since we are not refreshing through a bigger dip, that means we should expect a prolonged sideways period. When the market doesn’t scare us out, it bores us out. Things still look great for a year-end rally, but we need to be patient and let those profits come to us. This is a slow-money trade and we will have to wait a while before the next fast-money trade comes our way.”
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This market most definitely doesn’t want to go down. All summer it refused countless opportunities to tumble on bearish headlines. As I’ve been saying for a while, a market that refuses to go down will eventually go up. And that is precisely what happened here. But at the same time, there is enough headline uncertainty to keep those with cash from chasing prices higher. Their lack of buying is keeping a lid on this market. No doubt we will keep going higher over the medium- and longer-term, but it will take time for those with cash to warm up to these record high prices.
There is nothing to do with our favorite long-term positions except keep holding them and letting the profits come to us. This is a slow-money market and it rewards patience. As for our short-term money, there isn’t a lot to do here. Either we sit in cash and wait for the next trading opportunity (we cannot buy the next dip if we don’t have cash!), or we stretch our time horizon a little and enjoy this ride higher. But if you are buying, be prepared to ride through a few dips along the way. Remember, this is a strong market and we buy the dips, we don’t sell them.
This market is still setting up nicely for a year-end rally and we should keep doing what has been working. Don’t let the bears convince you otherwise.
AMZN and AAPL continue consolidating following last month’s impressive, but ultimately unsustainable climb higher. Pullbacks and consolidations are a very normal and healthy part of every move higher. These stocks are acting well and I would be far more worried about them if they didn’t pause to catch their breath.
FB and NFLX are basing following last month’s disappointing earnings. But this is a good thing. Traders that missed these highfliers had been praying for a pullback so they could jump aboard. Unfortunately, many of these same people are now too afraid to take advantage of these discounts. The thing to remember is risk is a function of height. These are some of the least risky places to be buying these stocks in six months. Without a doubt, this is a better time to be buying than a few months ago when the crowd thought everything was great.
Bitcoin continues holding $6k support, but I wish I could say that was a good thing. While we held $6k support firmly for nearly six months, every bounce has been getting lower. First, we bounced to $17k. Then it was $12k. $10k came next. After that $8.5k. Earlier this month it was $7.5k and this weekend we stalled $6.8k. At this point, it is only a matter of time before we tumble under $6k support. As long as owners are more inclined to sell the bounces than buying them, prices will keep getting lower. It is only a matter of time before owners are kicking themselves for not selling when prices were above $6k.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 surged to fresh highs as investors chose to ignore trade war headlines and instead embraced optimistic third-quarter forecasts.
Fortunately, readers of this blog saw today’s breakout coming from a mile away. I wrote the following two weeks ago when the market was threatening to tumble under 2,870 support:
“The economy continues to hum along and that is the only thing that matters to the stock market. As long as the economic numbers look good, expect prices to keep drifting higher. Institutional money managers that were hoping for a pullback will soon be pressured to chase prices higher or else risk being left even further behind.Their buying will propel us higher through year-end. Unfortunately that doesn’t mean the ride between here and December 31st will be smooth and uneventful. Expect volatility to persist, but unless something new and unexpected happens, every dip will be another buying opportunity.”
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While it is easy to say the market doesn’t care about Trump’s trade war after we surged to record highs. It wasn’t nearly as obvious three weeks ago when a lot of owners were selling the fear and uncertainty, causing prices to fall four days in a row, and five out of six trading sessions. We get paid for seeing these things before everyone else, not after it is obvious to the crowd.
Nothing has been resolved between the US, China, Europe, and Canada and no doubt things will get worse before they get better. But our market has been telling us all summer it doesn’t care. These events haven’t put a noticeable dent in our economy or corporate profits, so most investors are ignoring the noise.
So far Trump’s trade war went from $15 billion in steel and aluminum tariffs to now we are taxing more than 50% of everything that comes from China, and they are taxing 85% of everything we send their way. The way both sides are going, a further escalation is inevitable, That means we are not far away from both sides taxing everything. But if the market doesn’t care about 50%, bumping it up to 100% won’t make much of a difference.
Without a doubt, we are living in a “half-full” environment where most traders assume things will turn out for the best. That’s why owners overlook negative trade headlines so quickly.
This is a typical trait of an aging bull market. Five years ago traders were afraid of their own shadow and panic-sold every bump in the road. The catastrophic injuries suffered during the 2008 financial crisis were fresh in most investors’ minds, and they lived in fear of a repeat. But here we are nearly ten years later and every defensive sale proved to be a costly mistake. After years of getting burned selling prematurely, most traders learned to stop reacting defensively. That’s how we ended up in this situation where the market refuses to sell off no matter what the headlines are.
While conventional wisdom tells us complacency precedes the fall, what conventional wisdom fails to mention is periods of complacency last far longer than anyone thinks possible. No doubt this bull market will die like all the others that preceded it, but it will not be dying anytime soon and we should enjoy the ride higher.
There is nothing to do with our longer-term investments expect to hang on and enjoy the ride. Things are a little more challenging with our short-term money. We are left with a choice of either staying in cash and waiting for the next buyable dip. (Cannot buy the dip if we don’t have cash!) Or shifting our time horizon and sticking with a medium-term buy-and-hold. Neither choice is wrong; it largely depends on a person’s trading philosophy and risk tolerance.
The next significant milestone is 3,000 and at this rate, it is only a few weeks away. Bad news won’t take us down and good news will push us higher. These record highs are scary, but a market that refuses to go down will eventually go up.
If you found this post useful, Follow Me on Twitter so you don’t miss future updates: Follow @crackedmarket
Jani
What’s a good trade worth?
How about avoiding a loss?
For less than $1/day, have analysis like this delivered to your inbox every day during market hours.
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