Jun 14

Does anyone still care about rate-hikes?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Thursday the S&P500 traded sideways for a fourth day as we consolidate recent gains under 2,800 resistance. Things got a little spooky Wednesday after the Fed said a fourth rate-hike this year was likely, one more than previously expected. Higher rates have been a concern and that was enough to send some traders scrambling for the exits and prices stumbled into Wednesday’s close. But the selling was short-lived and prices rebounded Thursday, hardly missing a beat.

As I’ve been writing about for months, the headlines that have been dominating the financial pages have already been priced in. If any of these headlines were going to knock us down, it would have happened by now. Instead, owners who feared these headlines bailed out months ago and were replaced by confident dip-buyers willing to own these risks. If they didn’t sell rate-hike headlines two, three, and four months ago, why would they sell them now? The answer is they wouldn’t. And as we saw Thursday, Wednesday’s dip was little more than a flash in the pan.

This is a strong market, not a weak one. Bears have been wrong for months and they will stay wrong unless they change sides. But another thing I frequently point out is risk is a function of height, meaning this rebound to the highest levels in several months also makes this a more risky place to be adding new money. The best buys come when the crowd is scared, not when it is breathing a sigh of relief. The best time to buy was weeks ago, and anyone not invested is probably better off waiting for a better entry point. Or at the very least, dollar-cost-averaging into the market.

The market is acting well and we should keep doing what is working. Our favorite buy-and-hold positions are doing great and we should stick with them. Even though the S&P500 is consolidating underneath prior highs, FAANG stocks are on fire and many of them are setting new all-time highs on a daily basis. The strongest stocks are leading the way as expensive keeps getting even more expensive. The downside is this rebound sucked a lot of emotion out of the market and volatility is crashing. While that is good for nerves, it isn’t so good for swing-trading. Those of us that were paying attention made good money this spring jumping in and out of the emotional gyrations, but unfortunately the market is transitioning back into slow-money where buy-and-hold works better than swing-trading.

Summer is often a slow time for the market, but that calm often sets the stage for a more exciting fall season. So far the market is acting well and that most likely means big money will start chasing prices higher into year-end when they return from their summer cottages. In the meantime, stick with what is working and right now that is buying-and-holding our favorite tech stocks.

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Jani

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Jun 12

Things look good, but is that a warning?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 continues inching higher and is at the highest levels since March. Long gone is the doom-and-gloom that dominated the market only a few weeks ago. Instead we are only a handful of points away from retaking 2,800 and erasing almost all of February’s stock crash.

I spent all spring reminding readers that risk is a function of height and it was far safer buying February’s crash than the calm that preceded it. The best opportunities come from buying heavily discounted stocks from fearful sellers. And just when people fear the worst is when the deals are the best. We saw a similar phenomena when the FAANG stocks tumbled in March following Facebook’s public relations disaster.

The thing about both the market’s crash and FAANG’s correction is countless people had begged for a pullback so they could get in or buy more. But when the market answered their prayers, most were too afraid to buy the dip and many more abandoned their favorite stocks. That is the curse of the “rational” trader, we are naturally drawn to stocks that are at premium prices and fear stocks that have been discounted.

Bears continue to pound the desk, insisting the market is going to crash for X, Y, and Z reasons (Fed rate-hikes, interest rates, and the Muller investigation). The problem with their argument is everyone knows about X, Y, and Z and rather than fearfully abandon their favorite stocks, confident owners shrug and keep holding for higher prices. While the cynics love to remind us that market’s peak on complacency, what they forget to mention is complacency can last for years. That’s because confident owners don’t sell and the resulting tight supply makes it really easy for stocks to rally on modest demand. Sound familiar?

Even though the market is acting well and the path of least resistance is definitely higher, we cannot forget risk is a function of height and the market moves in waves. If this is the highest we’ve been in several months, that also means this is the riskiest place to be adding new money in the same number of months. In addition, the strong move over the last week leaves us vulnerable to a subsequent down-wave. We are quickly approaching 2,800 resistance and we should at the very least expect the market to pause. We entered the slower summer season and many big money managers have flow off to their summer cottages. Without their big buying, we shouldn’t expect a large directional move. Things still look good for our medium-term stock positions and long-term investments and we should leave them alone, but for short-term swing-trades, this is a better place to be taking profits than adding new money.

Bitcoin got pounded this weekend. I tried to warn people several weeks ago when BTC just slipped under $9k when I wrote the following:

Last week’s $9k support has turned into this week’s $8k support. And thus far it is giving every indication that $7k will become next week’s support. I hope you see the trend here. Cryptocurrencies are still very much in a downtrend and we should expect lower prices. It takes most bubbles between 6 and 24 months to finish bursting. If bitcoin is like most bubbles, that means the worst is still ahead of us and we should expect lower-lows over the next few months.

Then last week I wrote:

And unfortunately things don’t look any better now that we have dipped to $7k support. This cryptocurrency had a very ugly May and it looks like things will only get worse. This is a long-term downtrend and lower lows are still ahead of us. Breaking $7k support will trigger to another wave of selling, but the fear won’t strike in earnest until we undercut the $6k lows. Remember, double-bottoms are a common and powerful reversal pattern. But there is a reason why no one talks about triple-bottoms, because they are not a real thing. Hit bottom three times and you are headed much lower.

And on cue, Bitcoin crashed through support last weekend and is now hovering in the mid-$6k’s. $9k support failed. Then we broke $8k support. $7k was next. Anyone see a pattern here? What are the chances $6k will hold? I suspect by this time next week we will have our answer.

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Jani

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Jun 07

Why we should have seen this coming

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 treaded water on Thursday following four consecutive days of gains. This week’s rally leaves us at the highest levels since March and puts us within a few percent of all-time highs. That’s a long way from the panic selling that gripped markets in early February.

I know I sound like a broken record when I keep saying this is a strong market, unfortunately a lot of people didn’t believe me when we were 200-points lower. That is the biggest frustration with trading, by the time the answer is obvious, it is too late to profit from it. But for those of us paying attention, it is possible find the answers long before it is obvious to everyone else.

The following is a quote from my free blog back in early May, the day the market crashed under the 200-dma and 2,600 support and many were fearing the start of a much larger selloff:

“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.”

Since I wrote that, the market is up 7%. I don’t have a crystal ball, but I’ve been doing this long enough to know what is real and what is market trickery. Last months selling was misleading because it was being driven by recycled headlines; Fed rate hikes, rising interest rates, Trump’s trade war, and the growing Muller investigation. All of these are real risk factors, but they became priced-in when they originally came out earlier in the year. The first and second time these stories flared up, waves of nervous owners bailed out of the market. These nervous sellers were quickly replaced by confident dip buyers who demonstrated a willingness to hold these headline risks. Out with the nervous and in with the confident. It didn’t take long for us to run out of nervous sellers and the third and fourth time these stories flared up, there was no one left to sell a recycling of these stories. When no one sells the news, we stop going down. And that is exactly what happened in early May and the same thing happened again last week.

Market selloffs are brutally quick. Hanging at these levels through countless waves of recycled headlines told us we had nothing to worry about. The most important thing to remember is we trade the market, not the news. Headlines cannot be bullish or bearish, only people’s reaction to them is what determines if they are good or bad for stock prices. And so far, everything looks pretty good.

But no one wants to hear what the market did last month since it is now obvious to anyone looking at a chart. What people want to know is what is ahead of us. I wish I could say everything looks great and we will surge another 200-points from here over the next few weeks. Unfortunately the market doesn’t work that way. In fact, most of the time it works the opposite way. Risk is a function of height. No matter how scary it felt in early May, that was one of the least risky times to buy stocks this year and the subsequent rebound proved that. But after that rebound put us at the highest level in months, the risk/reward looks far different. Everyone feels great because we rebounded off the lows, but that actually makes this one of the risker times to be buying stocks this year.

Momentum and the path of least resistance is definitely higher, but this is also the slower summer months and we are quickly approaching 2,800 resistance. That makes this a better place to be taking profits than adding new money. Anyone who bought last month’s dip should definitely start thinking about locking in some of those gains. Those that missed the rebound should let this one go and resist the temptation to chase prices higher. I’m most definitely not calling a top or predicting a large pullback, but a cooling off would be normal and expected. Everyone knows markets move in waves; unfortunately most forget that in the heat of battle.

As well as S&P500 has been doing, the FAANG stocks have been doing even better, pushing the Nasdaq to record highs this week. Back in April I wrote the following about the FAANG stocks following a particularly painful down-day:

“Everyone’s favorite FAANG stocks got hammered today. But this isn’t a surprise. These highfliers magnify the market’s move in both directions. They go higher than everything else, but that also means they get hit the hardest on bad days too. Weeks ago people were begging for a pullback so they could get in. The market answered their prayers. The question is if any of those people have the courage to buy. While we could see a little more near-term weakness, months from now people will be kicking themselves for not buying more at these levels.”

Here we are a couple of months later and no doubt people are kicking themselves for not taking advantage of those discounts. Maybe next time……

And just so people don’t think I’m a perma-bull, here is my bearish call on Bitcoin from several weeks ago, just after BTC slipped under $9k support:

Bitcoin is a completely different story. Last week’s $9k support has turned into this week’s $8k support. And thus far it is giving every indication that $7k will become next week’s support. I hope you see the trend here. Cryptocurrencies are still very much in a downtrend and we should expect lower prices. It takes most bubbles between 6 and 24 months to finish bursting. If bitcoin is like most bubbles, that means the worst is still ahead of us and we should expect lower-lows over the next few months.

And unfortunately things don’t look any better now that we have dipped to $7k support. This cryptocurrency had a very ugly May and it looks like things will only get worse. This is a long-term downtrend and lower lows are still ahead of us. Breaking $7k support will trigger to another wave of selling, but the fear won’t strike in earnest until we undercut the $6k lows. Remember, double-bottoms are a common and powerful reversal pattern. But there is a reason why no one talks about triple-bottoms, because they are not a real thing. Hit bottom three times and you are headed much lower.

If you found this post useful, return the favor by sharing it on Twitter, Reddit, Facebook and StockTwits!

Jani

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May 29

Does Italy change anything?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 crashed under 2,700 support Tuesday following a political flare-up in Italy. A populist movement is taking hold that threatens Italy’s membership in the EU and common currency and these headlines were enough to send global markets into a tailspin. Losing one of the largest economies in the EU and euro could be a fatal blow to entire union. These headlines echo Grexit and Brexit of years past. While both of those past episodes avoided the worst, it isn’t hard to imagine the economic devastation a collapsing EU would cause and is why markets are understandably jittery.

Owning stocks is risky. There is no way around it. Last week the stock market was acting well and even negative headlines surrounding rate hikes, interest rates, trade wars, and North Korean tensions couldn’t dent this teflon market. But the thing about all of those headlines is they had been in the news for months and were largely priced in. Anyone who feared those stories bailed out months ago and were replaced by confident dip buyers who demonstrated a willingness to hold these risks. After a period of turnover, we ran out of fearful sellers and recycling old headlines stopped bothering the market. When no one is left to sell a headline, it stops mattering. There are few things more bullish than a market that refuses to go down on bad news. And that is where we finished last week.

But that was then and this is now. These Italian headlines are new and unexpected. Few saw this coming and if the crowd doesn’t know about something, then by rule it cannot be priced in. That is what makes these Italian headlines a far more serious threat to stock prices than rate hikes, interest rates, trade wars, and North Korean summits. Sometimes we can ignore the news, other times we need to snap to attention and take them seriously. These new and unexpected Italian headlines most definitely deserve our full attention.

While Italy’s departure from the EU would most definitely be disruptive, this is a binary, black swan event. Either it happens or it doesn’t, and the chances of it happening are extremely remote. We saw similar episodes play out with Greece earlier in the decade. The ramifications of a Grexit were frightening, but the risks were so great that political leadership in Europe ensured it didn’t happen. And what could have been a catastrophe turned into a fantastically profitable dip buying opportunity.

No doubt most money managers remember the fear mongering surrounding the Grexit and Brexit. And most money managers also remember selling that fear and uncertainty was a big mistake. Just like the boy who cried wolf too many times lost his credibility, I expect the same to happen here. The typical reaction on Wall Street will be “not this again” and most will discount it as another EU drama that ultimately isn’t worth worrying about.

These new and unexpected events usually take at least a few days to work their way through the system and we should expect headlines to flare-up over the next few weeks. But as bad as the worst case sounds, I expect most money managers will be more confident sitting through this uncertainty than they were during the Grexit and Brexit episodes. We could see further near-term weakness, but I don’t expect this to go too far and any dip is still buyable. This will be more of a blip than a crash. There is no reason to abandon medium and long-term positions, but a short-term trader could wait for things to get a little worse before jumping in and buying the dip.

Of course the above assessment assumes Italy doesn’t destroy the EU. All bets are off if this situation escalates to the point of no return. But we are most definitely not there yet. I still think this market looks good, but I would let this situation play out for a few days before rushing in and buying the dip.

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Jani

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May 24

Is this market being manipulated?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 started Thursday with another abysmal gap lower. Trump called off his scheduled meeting with Kim Jong Un before the open and that sent stock futures into a tailspin. That mirrored Wednesday’s horrible open following a flareup of Trump’s trade war. Consecutive days of bearish headlines followed by horrid opens, can it get any worse?

As bad as we started, the S&P500 is actually ABOVE Tuesday’s close! How could two horrible days end in gains for the index? No wonder so many people feel like the market is “rigged”. When the market doesn’t do what we think it should, obviously the only plausible explanation is someone is manipulating it.

Of course that is far from the truth. There is there is no evil wizard hiding behind the scenes tricking and deceiving us. People who think the market is fixed simply don’t understand why it is doing what it is doing. There is no trickery. There is no boogie man. It is nothing more insidious than a simple misunderstanding.

When humans didn’t understand why the Sun came up every day, they assumed is was being controlled by the Gods. The same logic  occurs in the stock market today. When people don’t understand why the market does something, they blame it on some evil conspiracy that has rigged the market against them. It couldn’t possibly be that their analysis is flawed.

Luckily for regular readers of this blog, most of us understand what is going on and were not fooled by these bearish headlines and weak opens. As I’ve been saying for a while, this market is strong, not weak. There have been plenty of bearish headlines swirling around this market for months. Yet this market is consistently oblivious to them. Bears claimed it is only time before the “sheep” wake up and send stock prices tumbling. But the critical flaw in the Bear thesis is market selloffs are brutally quick. They happen so rapidly most people don’t have to react. Yet here we are, holding 2,700 support for two full weeks. What selloff gives us two weeks of warning before plunging? None. That’s how I knew the last two weak opens were not sustainable and were bound to bounce. If we were going to crash, it would have happened a long time ago. This market is strong, not weak. That meant recycling trade war and North Korean headlines were not going to make any more of a difference than the first time they occurred.

Everyone knows markets move up and down. This is one of the most fundamental principles of the stock market and it is plainly obvious to anyone who glances at a stock chart. We all know stocks mostly go sideways and most of the ups and downs don’t really mean anything. Yet most people forget this most basic concept in the heat of battle. If most day’s gyrations are meaningless noise, why do we always try to find a meaning in today’s price-action? Why do we automatically assume today’s bump in the road is the start of the next big move when most bumps in the road never go anywhere?

With the benefit of hindsight, we can confidently say Wednesday’s and Thursday’s gap lower opens were nothing more than meaningless noise driven by a handful of reactive traders trying to “get out before things get worse”. Their impulsive selling was clearly a mistake and just a few hours later they are poorer for it. As I’ve said countless times before, this is a strong market, not a weak one. If we were going to crash, it would have happened by now.

While the path of least resistance is most definitely higher, the easy gains are behind us. There is no way we could keep the sharp rebound from May’s bottom going indefinitely. We knew a cooldown and consolidation was inevitable. We also know gains slow down the further into a move we get. Applying that to this market, it seems pretty obvious that prices want to go higher, but that we should expect the rate of gains to slow down and for there to be more back and forth. And guess what? That’s exactly what’s happened.

Those of us that were paying attention during May’s dip and rebound have collected our fast money. But that trade has come and gone. Now we are into the slow money portion of the rebound and should expect the gains to accumulate much slower and be accompanied by a bunch of back and forth. Those of us that believe in this market should stick with our buy-and-hold positions and enjoy this slow glide higher. Anyone who has less conviction should simply sit this one out and wait for a better trading opportunity. Without the conviction to sit through dips like Wednesday and Thursday, that inevitably leads to reactive selling and poorly timed trades.

FAANG stocks are acting well and these tech highfliers will continue leading this market higher. But just like the broad market, we should expect the rate of gains to slow down as we fall into the slow summer sessions.

Bitcoin still looks broken. $9k support two weeks ago gave way to $8k support last week, which has since given way to S7k support here. Hopefully everyone sees the pattern here. We are in a bear market and the downtrend is still alive and well. Expect prices to undercut the $6k lows over coming weeks. This bubble isn’t done bursting and that means lower-lows are ahead of us.

If you found this post useful, return the favor by sharing it on Twitter, Reddit, Facebook and StockTwits!

Jani

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