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By Jani Ziedins | End of Day Analysis
Free After-hours Update:
What a difference a few days makes. Last week the market was collapsing. This week we recovered a big chunk of those losses and things feel significantly better. The only question is if this rebound is the real deal, or just a false bottom on our way lower.
The buying kicked off Tuesday morning when Goldman Sachs and Morgan Stanley reported solid earnings. That was enough to move the conversation away from rising Treasury yields and put traders back in a buying mood. Last week’s selloff lowered expectations and now “not bad” is good enough to send prices higher.
There were a lot of “what ifs” last week asking if rising interest rates and trade war tariffs were going to strangle the economy and crush corporate profits. But if companies continue to hit their numbers the way GS and MS did, expect these “what ifs” to quickly fade from memory. Reality is rarely as bad as feared and it won’t take much to put traders back into a buying mood.
And this week’s dramatic reversal shouldn’t surprise anyone. Markets that fall down the elevator shaft typically land on a trampoline. Last Wednesday I wrote the following after stocks tumbled 3.3%:
“I fear the slow, insidious grind lower. Those are the losses that accumulate when no one is paying attention. What I don’t fear are the big, headline-grabbing down-days. The one that gets everyone’s attention and makes headlines around the world. That’s because those big, flashy days don’t have any substance. As the saying goes, the flame that burns twice as bright only lasts half as long.”
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While it is most certainly premature to claim last week’s selloff is over, the situation is far less scary than it was a few days ago. And that matters a lot when talking about emotion-fueled selloffs. Last week people reflexively sold first, asked questions later. But this week’s bounce gives traders more time to be thoughtful and make rational decisions. Without the pressure of falling prices, most owners will stop overreacting to the fear-mongering headlines.
Risk is a function of height and believe it or not, last week’s dip was actually one of the safest times to buy in months. Prices plunged and impulsive sellers bailed out, but those discounts and turnover in ownership made stocks far more attractive. It certainly didn’t feel that way, but buying dips is never easy. By rule, every dip feels real. If it didn’t, no one would sell and we wouldn’t dip.
We are not out of the woods, but we are close. Hold near 2,800 support through Wednesday’s close and we can say last week’s emotion-filled selloff is over. Even a dip to the 200dma wouldn’t be bad as long as it found support and didn’t trigger a waterfall selloff. Market collapses are breathtakingly quick and holding last week’s lows for four days means cooler heads are prevailing and the impulsive selling is over. Without a doubt, the market could experience another leg lower, but it would take a fresh round of headlines to trigger that next wave of selling.
And while I continue to believe in this market over the medium- and long-term, we should expect volatility to persist over the near-term. If we survive the next few days, then this bounce will continue all the way up to the old highs near 2,870. That is where waterfall selloff started, and the market will likely hit its head back toward 2,800 support. But rather than fear the next dip, that back-and-forth is the healthy way the market recovers from a big scare.
As usual, long-term investors should stick with their positions. More nimble traders can profit from these back-and-forth gyrations. A person that cannot stomach another dip should sell the strength as we approach the old highs and buy the next dip. And if everything goes according to plan, the market will put this bout of indigestion behind it, and we are still on track for a nice rally into year-end. Every dip over the last nine years has been buyable and chances are this one is no different.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 was murdered Wednesday, collapsing 3.3% as the market plunged for the fifth-consecutive session as interest rate fears spiraled out of control. This was the worst down-day since last February’s selloff.
While that sounds dreadful, could this actually be a good thing? Did anyone look back at that fateful day in February when we fell 3.75%? If you did, you already know what happened next. Panic driven selling pushed us down another 50-points early the next day, but rather than collapse lower, supply actually dried up and we finished the day up 1.5%. And not only that, that morning’s lows were the lowest point for all of 2018 and we have been higher ever since. Will this time be any different?
Without a doubt, we could fall further, but is that an excuse to abandon this market? Or is this a golden opportunity to jump in? Only time will tell, but at this point, the best we can do is look at history.
I fear the slow, insidious grind lower. Those are the losses that accumulate when no one is paying attention. What I don’t fear are the big, headline-grabbing down-days. The one that gets everyone’s attention and makes headlines around the world. That’s because those big, flashy days don’t have any substance. As the saying goes, the flame that burns twice as bright only lasts half as long.
They don’t get any bigger than 1987’s 20% collapse. That day will forever live in market folklore. But what you rarely hear is the market actually finished 1987 with a respectable 6% gain. And not only that, all of those 20% losses were erased within 12 months. It doesn’t sound nearly as scary when you put that 20% loss in context.
But forget 1987, we don’t even need to look further back than earlier this year to see the same behavior. February’s selloff sliced nearly 10% off this market. Yet we reclaimed all of those losses within six months.
I will be the first to admit I didn’t see Wednesday’s dramatic selloff coming. I have been bullish on this market since February’s bottom and today’s 3% selloff doesn’t change anything. Dips are a healthy part of every move higher. And that includes frighteningly dramatic days like Wednesday. If a person cannot handle a 3% dip in the broad market, or a 10% dip in a highflying tech stock, they probably shouldn’t be speculating in stocks.
If I wasn’t already fully invested in this market, I would be buying this dip with both arms. I’ve been doing this for way too long to let a little irrational selling scare me off. But that is what works for me. If the market’s volatility is keeping a person up at night, that is a sign they need to reduce their position sizes to something that is more manageable. The key to surviving the market is keeping your head when everyone else is losing theirs. Do whatever is necessary to reclaim your perspective. If that means dialing back your position sizes, then that is what you need to do.
Back to the big picture, if a person believes a 0.25% bump in Treasury rates will strangle the economy, then they definitely need to sell and lock-in their profits. But if a person doesn’t believe this economy is teetering on the verge of a recession, then they can ignore the noise and wait for higher prices. As crazy as it sounds, I still believe this market is setting up for a year-end rally. Come back in three months and we’ll see who was right.
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Jani
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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
What’s a good trade worth?
How about avoiding a loss?
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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.
If you found this post useful, Follow Me on Twitter so you don’t miss future updates: Follow @crackedmarket
Jani
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