Jul 10

Strong dollar pressures equities

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:09 EDT

Stocks opened higher but slid back to breakeven as a strong dollar renewed pressure on the equities market.  The EUR/USD is making new lows again after a recent relief rally.  It is worth making this part of your daily routine because there are implications to the markets given the close inverse relationship between the USD and US equities.  If you don’t have direct access to currency market data, UUP is an ETF that follows the dollar.

Earnings season is kicking off this week and it will be interesting to watch the market’s reaction to both the Euro and US earnings.  Will these two forces offset each other or join ranks and shove the markets the same direction?  Rates on European sovereign debt from the periphery are creeping higher again, eliminating any margin of safety.  No doubt this is part of what is pressuring the Euro.  Earnings have been a mixed bag, but it is still way to early to make a a call on that.

UUP daily @ 1:10 EDT

Right now it feels like the market is stuck in no man’s land as everyone is waiting for it to break one way or the other.  There is some air under our feet and a few too many disappointments on the earnings front could drop us materially lower.  But on the other hand, a few marquee companies hitting the ball out of the park could ignite a lucrative rally.

The one thing I would like to see confirm new strength is high growth stocks taking leadership again.  There are too many defensive stocks showing the best relative strength and for us to have a sustainable move higher we need  investor’s hunger for speculative growth stocks come back.

Stay safe

Jul 09

Earnings season up next

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:05 EDT

The market is off in light, holiday-like volume this morning.  Seems most traders are waiting for the start of earnings season before placing their bigger bets.  It will be interesting to see what companies report and how it matches up with the market’s expectations.  We’ve been hammered all spring with bad news out of Europe and US jobs, making a relief rally seem plausible.  But seeing how we are already within 6% of 4-year highs, it is really hard to argue the market is still in an over-sold condition and poised to pop at the slightest hint of good news.

Now don’t mistake me for one of the bears who is claiming we are on the edge of the precipice, about to “financial contagion” our way back to the stone age.  The world is only dangerous when we are complacent and oblivious to the risks around us.  With all the scary headlines out there, it is hard to make a case the market is blind to the dangers surrounding of us.

But rather than simply hang out at one level until it has conclusive evidence for a move one way or the other, the market is always trying to predict the future.  We trade one way or another for no other reason than to grind up premature directional traders who are trying to get a jump on the rest of the market.  We’ve already seen this with a 130 point sell-off in May and a 110 point rebound in June.  And no doubt we could have a couple more hundred-point moves left before we break out of this summer’s trading range.

The danger of breakout trading during a flat market is you keep getting zinged from each failed breakout.  Worst case is you hold to your 8% stop-loss, which doesn’t seem too bad until you consider 3-failed breakouts in a row is a 22% loss.  This is more than most people made in the strongest first quarter rally in 20 years.  And then of course the follow on risk is all the psychological damage to you and your account will make you more reluctant to stick your neck out on the fourth follow-through-day, fearing another repeat of the first three failed FTDs.  But the thing about FTDs is each successive failure makes the next one even more likely to work out.  A fourth FTD is very likely to work out and the exact one most people will sit out after having been burned by the first three.

Of course the market could be totally hoodwinked me and my expectation of a near-term move down too.  If there are too many contrarians out there, they are no longer contrarian and now constitute the majority opinion.  At that point the real contrarian needs to go against the contrarians.  The real skill of contrarian trading is knowing when to trade against the market knowing when the contrarian trade is to go with the market.  For example in the first quarter, the contrarian trade was staying long the market while everyone else was calling for a pullback.

Just a few stocks are making the cut on IBD’s Stocks on the Move screen today.  This list identifies leading stocks up in high volume each day.  And none of the 6 stocks making the cut today are near proper buy points.  This just reinforces the market’s wait and see attitude toward earnings season.

Stay safe

Jul 06

Jobs let the market down again

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:58 EDT

Stock fell out of bed after yet another disappointing jobs report. But while sluggish, we are still in a very slow recovery.  The interesting thing will be to see how this plays out over time.  We’re four years into this recovery and under normal circumstances we should be on the lookout for a market and economic correction in our near future.  This is the boom and bust cycle typical of free markets.  So we need to ask ourselves, is this a normal economic recovery?

Economic boom and bust cycles are a factor of human nature.  Our minds like to project straight lines into the distant future as we expect conditions to remain stable.  No doubt we’ve all experienced this phenomena in the stock market as traders, but the same thing equally applies to business owners and managers out in industry.  When business is good, they anticipate it will continue indefinitely and they ramp up capacity and employment in anticipation of future growth.  Get a larger number of managers anticipating a rosy future and we become vulnerable to an economic correction as businesses find themselves over-staffed and start layoffs.  Fewer employed means fewer customers means more layoffs and the cycle continues until companies can’t afford to cut any more staff.  The economy is like a yo-yo going up and down overshooting on the high side and then on the low side.

So what does that mean for us right now?  I see a pathetically slow recovery and that might change how this boom and bust cycle plays out.  It would be hard to argue we are in the middle of an overly optimistic boom cycle.  The last several years have been full of nerve-wracking headlines and paranoid managers would rather sit on their hands than put their neck on the line and risk getting their head cut off by some unanticipated economic catastrophe.  This restraint on the part of business might actually keep the economy from overheating in its typical way.  This conservatism by business might allow this recovery to extend far longer than normal and there could be a lot more upside before we hit our next euphoric peak.

As I shared before, we could be in the start of a 10 or 15 year secular bull market and that is because business, banks, and investors are so overly pessimistic and restrained after the first 10 years of this century.  Companies are hording cash and the 10 year treasury is yielding far less than 2%.  That isn’t even keeping up with inflation!  There are deep wounds in people’s psyches and it will take a good long time for them to be excited about the markets and economy again, but it will happen over time and for those who have the courage to invest for the long-term in these uncertain markets will be hugely rewarded.  The market is up more than 100% from its 2009 lows and that is just the start of the move we’ll see over the next 10 years.

The US carried much of the world economically and technologically since the end of WWII, but now the rest of the world is catching up to us and the world will have ten times as many inventors, entrepreneurs, and middle class driving the 21st century economy forward.  It isn’t that the US is losing its edge, but that the rest of the world will now start contributing ideas and innovation.

But for the near term, I expect one more shakeout at the lower end of the June’s trading range before we begin our year-end rally.  Our election, Europe and China will start falling into place and the market will start rallying as many of those issues are finally put to bed.

Stay safe

Jul 05

Markets hold on to gains

By Jani Ziedins | Intraday Analysis

S&P500 after close

I apologize to everyone who came looking for my posts, but left empty-handed.  I had some issues in the first half of the week that prevented me from posting my thoughts on the market and hopefully all of that is behind me.

Even thought this is a holiday week, the market held Friday’s large gains.  Being a contrarian, I’m suspicious of this strong rally and  resisting the temptation to jump on board.  As self-selected investors, we tend to have a bullish bias and it only takes a few good days to get us excited to jump back in the markets.  There is no reason we can’t rally from here, it is just the market usually isn’t that easy.  The best rallies come after the most demoralizing periods.  If we want a strong rally, we need to base some more.

Pure speculation here, but the potential pullback in front of us could take us under the June 4th low before reversing higher.  From that point we could see a slow progression of higher highs and higher lows as we inch through the trading range.  But to be most effective we need one more flush-out at the bottom of the range to refresh the market.

But like always, these are just my thoughts and the market will do whatever it wants regardless of what any of us think.

Stay safe

Jun 29

Euro saves the day

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 11:58 EDT

Markets popped on news out of Europe.  The union is adopting a softer stance on austerity measures and now allowing bailout loans to go directly to ailing banks instead of through each nation’s central bank.  This prevents additional debt from being laid on each nation’s current obligations and pressuring their creditworthiness.

Is this a real fix, or just another temporary patch job?  I’m not an economist, but it doesn’t sound like a real fix and Europe will continue to muddle through this for a good while longer.  But it is a step in the right direction and shows a hint of flexibility coming from Germany.

The markets popped above their 50dmas in the opening gap up.  Not a good day to be short and no doubt a good chunk of the buying is shorts getting run out of the market.  The interesting thing to watch is if there is follow-on buying on this news or if big money continues to be reluctant to commit more capital to this uncertain market.  If these price gains and volume hold up, today will be a follow-through-day and we’ll move back into market in confirmed uptrend.  This will be the 3rd change in IBD’s market outlook in two weeks.  It is hard to imagine how such extreme volatility can be bullish.  The next technical level on the upside will be breaking through June 19th’s high of 1363.

It will be interesting to see if this newly found euphoria is sustainable or not.  Pullbacks and bases usually demoralize traders as they grind up both bears and bulls with all the false breakouts and reversals.  This volatility wears out traders before clearing the way for the next directional move.  Last year we traded sideways in a choppy fashion for 5 months before the strong uptrend kicked off.   We’re currently 2 months into this base.  Personally I think the market needs more time to fully demoralize traders before it will be poised to make its next move.

I closed my short position for a small loss this morning.  It’s not that I believe in this move higher, but I’m just being defensive and exercising risk management to protect my portfolio.  I’m ready to jump back in on the short side if I see any weakness in the market.  This is the best aspects of being a small trader, I can move in and out of the market with ease.  This is the only edge we have over big money managers and if we fail to take advantage of it, we are giving up the only advantage we have in this game. But this can be a double-edged sword and it will bite us in the butt if we over-think and over-trade every little blip in the markets. There is a fine line between being prudently defensive and being reactionary.

Stay safe

Jun 28

Mandate upheld

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:35 EDT

The Supreme Court blindsided the markets by upholding the individual mandate and mostly keeping Obamacare intact.   This was probably the least expected outcome given the tough questions many justices were asking during oral arguments.  But this might not be all bad for the markets because this is a definitive resolution to Obamacare and virtually eliminates all uncertainty by ending the health care debate.  The market now knows what the rules are and can move past this issue.  The markets deal with bad news far better than uncertainty, so this is most likely better for the markets than reopening the health care debate.

The markets opened lower on Euro concerns and then plunged on the Court’s ruling.  But after a sharp sell-off, the markets recovered a good chunk of the Supreme Court’s plunge and is getting back to the early morning’s levels.

It is less clear on where the market is headed because we are in the middle of the previous rally’s range.  At this point we could go either way since sentiment is fairly balanced.  I still expect the market will continue lower, but it really is a coin-flip.  The last few days shook out a lot of shorts that piled in on Monday’s sharp sell-off.  We’ll see if Tuesday and Wednesday were part of a reversal higher, or simply a head-fake to shake out momentum traders.  We’ve already given back all of Wednesday’s gains and half of Tuesday.  Another few points lower and we’ll be making new lows.

Some of the biggest movers are obviously health care stocks.  But the ruling has different implications for different sectors depending on if they were helped by or hurt by Obamacare.  Insurance companies are down, but hospitals and other healthcare providers are up because they benefit from the larger pool of insured.

Stay safe

Jun 27

What’s driving the rally?

By Jani Ziedins | Intraday Analysis

Markets are up nearly 1% at mid-day, a strong continuation of yesterday’s rally.  The interesting thing is this recent rally broke from the strong correlation of USD up, equities down.  This relationship has been rock-solid over the last couple years and seeing this divergence is extremely noteworthy.  There seems to be very little in the way of news to drive this rally, so what gives?

If I had to guess, a chunk of the market thinks it is being sneaky and acting on unique insight the market will rally tomorrow after the Supreme Court tosses out pieces of Obamacare.  The problem is this insight is not unique, as virtually everyone and their brother expects the individual mandate will be struck down and the only real question remaining is if the Court will also void the requirement insurance companies cover people with preexisting conditions, or a little more extreme, void the entire bill.  To make money in the market, you need to bet on the things few expect.  Obamacare is not one of those things, so I expect this could be a suckers trade.  The last couple days priced in most of the potential upside, so there is little remaining for anyone coming to the party late.

The one thing less expected is the entire bill being struck-down, and that could lead to a further rally.  But a peace-meal solution will renew the healthcare debate and create new uncertainty for the markets.   Hard to see how that is a bullish development.  The market hates uncertainty far more than it does quantified bad news.  In fact, leaving Obamacare fully intact could be more bullish for the markets simply because the result is definitive, same goes for completely throwing out the bill.  This halfway stuff is the least concrete of the possible outcomes and generates the most uncertainty.  But this is simply my thoughts on this trade and obviously the market doesn’t give a damn what I think.  This simply means we need to trade the market, not what we think.

But for how to trade this, if all the bulls get in ahead of the ruling, that means we might not see new buying on the news and the market could sag due to the lack of follow-on buying.  Of course there could be a reserve of Johnny-come-latelys waiting to buy the news, leading to one final push higher before exhausting the bounce and turning lower.  We could potentially reach and even penetrate the 50dma, but I still expect we have a date with the 200dma sooner than later.

It will be interesting to see how this all pans out, but most disciplined traders should be out of the market and simply spectators for this show.   We’re close to the middle of the range and the risk/reward for a move in either direction is not favorable for initiating a new position right now.

Stay safe

(p.s. I’m having some technical difficulties with my webhost and am unable to add charts at the moment.  Hopefully this can be resolved quickly.  Thank you for your patience.)

Jun 26

Rebound from sell-off part II

By Jani Ziedins | Intraday Analysis

The market opened up half a percent this morning, traded down to flat, and then rebounded to the opening levels in morning trade.  Seems to be a modest relief rally after yesterday’s large sell-off.  IBD moved it’s market outlook back to Market in Correction after yesterday’s price action.  Momentum systems do very poorly in sideways markets, often giving false signals and leading to buying the peaks and selling the troughs.  Just something to be aware of for anyone following a momentum strategy like CAN SLIM.

It will be interesting to see how the day ends.  Typically declining markets will show early strength and then weaken into the close.  We’ll see if this modest bounce ends in a slide this afternoon or if it can add to its morning gains.

I still think there is some downside remaining because too many people still have a buy the dip mentality.  They will be proven right soon enough, but the market needs to shake their confidence first.  The markets have a habit of convincing you you are wrong before proving you right.  We very well could see that come into play here as we drop under 1300 before rebounding.  Once everyone’s given up on the rebound it will be safe to wade back in after everyone’s sold in anticipation of a bigger decline. Of course an unexpected and highly bullish headline out of Europe could flip sentiment and the traders sitting on the sidelines could start chasing the market higher.

Staying with Europe, it seems a lot of people are worried Greece could be the next Lehman Brothers.  But the truth is Lehman and Greece are 180 degrees opposite.  Lehman caught everyone off guard, the market did not foresee the vulnerability of the banking system, and Lehman’s implosion happened over just a couple months.  Compare this to Greece that’s been a highly publicized, slow-motion, train wreck, 2.5 years in the making.  For the public markets, these  two events couldn’t be further apart in terms of expectations and what is already priced in the markets.

The other big catalyst is the Supreme Court’s ruling on Obamacare.   Virtually everyone is expecting a repeal of the individual mandate, so that has long been priced in the market.  At best it will lead to a temporary bounce before sell-the-news kicks in.   I actually expect a piecemeal repeal of Obamacare will lead to additional uncertainty since it will be impossible to predict how Congress will fix it.  That uncertainty will pressure the markets more than if Obamacare is upheld.  The markets prefer certain bad news than the unknown because the markets tend to price in the worst when dealing with uncertainty.

With IBD moving the market in correction, disciplined CAN SLIM investors need to resist the temptation to buying shares before the market triggers a follow-through-day, which is a large up-day on large volume at least four days after the market put in a low.

Stay safe

Jun 25

Slide continues

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:22 EDT

The market rallied into Friday’s close, but the move was obviously not sustainable given this morning’s dismal open and early trade.  It appears Friday was nothing more than a head-fake, sucking in premature bottom-pickers and shaking out weak shorts.  If this morning’s 1.5%+ decline holds, it will result in the market falling back into Market in Correction.

I suspect this down-leg is at least halfway through its move as many of the previous bulls and breakout buyers have already bailed on their recently initiated long positions.  1300 is easily within reach, but the bigger question is when will the market bounce?  If this remains a technical correction, it will run out of sellers soon.  Outside of unexpected bad news, the market will most likely find support between 1300 and 1280.  Of course sell-offs can develop a life of their own as selling begets more selling, but I think there is a strong possibility this leg down does not mark a new low.  Of course over the intermediate-term I still think the market is stuck in a trading range and the best way to trade this market is swing-trading; ie buying the dips and selling the rallies.  It will most likely be another month or two before we can buy the breakout.

Much like my March 13th analysis of a head-and-shoulders pattern, we also need to make steady progress transitioning from impulsive traders moving the market to real trades coming from institutional managers driving the market.  Impulsive trades rarely stick because there is no weight to this short-lived phenomenon.  Once all the impulsive traders make their move, the market quickly reverses because it lacks follow-on buying (or selling) from big money.  But with each successive failed move, the balance shifts from impulsive to real as the impulsive trader is less like to participate in the follow-up moves after being burned and losing money on the first or second failed breakout.  With the impulsive traders sitting out subsequent breakouts, it is far more likely for those to stick because these later moves are driven by a larger percentage of real buying (or selling) from the big institutions.  I did a better job explaining this phenomenon in my March 13th post if you want to read more about it.

I continue neglecting my watchlist in this environment simply because high growth stocks are so volatile.  They are up and down in dramatic fashion depending on the whims of the market.  The only good time to own high-beta stocks is when there is a strong and consistent wind at your back during a nice up-trend.  I’m still trading, but through index ETFs because these are far less volatile and more predictable in this environment.

As for predicting the market, many gurus say it is a fool’s game, but obviously I beg to differ.  The big difference comes from what data people use to make predictions.  It seems most experts are looking at the wrong things when their predictions fail to work out.  Sports make for a good analogy to this phenomenon.  A defender always looks for clues for which way the ball carrier is headed.  It is our natural tendency to look for cues in the head and eyes, but this can often be misleading and is the source of the term head-fake.  The ball carrier will often fake out the defender by moving his head and eyes one direction while moving in the other.  An inexperienced defender falls for the head-fake and goes the wrong direction, allowing the ball carrier to easily run by.  But a more experienced defender ignores the head and eyes and instead focuses on the hips.  While it is easy to move your head and eyes, the hips are far more difficult to fake.  You go where your hips are pointed and is why a defender who cues from the hips will have far more success than one who follows the head and eyes.

When it comes to the markets, it is also always trying to fake out traders and many times the fundamental and technical data send out misleading clues.   (I’ll get into why this is in a later post)  This is why I don’t put much weight in news or technical levels.  Most of my analysis is figuring out what other market participants are thinking and how they are trading the market.  The market is nothing more than a trillion-dollar popularity contest.  Get in the mind of other traders and suddenly the irrational and unpredictable behavior starts making sense.  It is never about what the market should do; it is about how market participants are positioned and what they expect.  Follow those clues and you’ll have far better success in anticipating the market’s next move.

Stay safe

Jun 22

Buy the dip or sell the weakness?

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:51 EDT

As everyone already knows, yesterday was a tough day.  Second biggest decline of the year.  A big news story didn’t trigger the slide and the sell-off was fairly methodical without big gaps or dramatic drops.  It was simply a domino effect as one stop-loss triggered the next.  Lacking a major headline, the market simply ran out of buyers and it’s little surprise a technical rally ends in a technical correction.   No doubt the media is trying to identify some culprit, but when dealing with crowds you don’t always need a reason for the herd to make a move.

This morning the markets bounced half a percent in early trade.  Is this the rebound hopeful bulls are praying for, or just a head-fake to suck in bottom pickers?  The question on everyone lips is if this correction is done or not.  Can we buy the dip, or should we sell the weakness?  If we look at the market as a spring, comparing yesterday’s pullback to the recent rally, it’s hard to claim yesterday’s move was overdone and no doubt there is more downside potential.  For the market to stage a recovery, we need fundamental investors to step in and buy these discounted shares.  Are they ready to do that in this environment?  More often than not these more conservative investors will take a wait and see approach after a sharp decline.  I expect prices will need to decline a bit more before value investors see prices as too attractive to pass up.  Of course that doesn’t mean we won’t see a feeble rally to suck in bottom pickers and shakes out late shorts.  And by early afternoon, the indexes are trading in a tight range as both bears and bulls are taking a wait and see approach.

Looking back at the last 12+ months of index price moves, it is hard to find a major down day that was part of a continued uptrend.  Using history as a guide, that indicates a high probability there is more downside left in this move.  But if it really is a technical sell-off, meaning people are selling simply because the price is falling under their stop-loss, this move lower might be more limited.  Technicals can move the market around a few percent here and there, but a major move requires new fundamental data and a change in outlook.  Barring anything new and unexpected, the technical slide will probably peter out around the 1300 level.  I don’t expect this down leg to make a new low unless the market starts getting spooked by its own shadow.  Once the technical selling exhausts itself, we’ll reverse higher.

As for what comes next, we’ll probably trade sideways for the remainder of the summer and won’t resume the uptrend until all the senior institutional traders are back from their summer vacation.  By that time there will be a little more clarity regarding Europe, the election, and economy.   As long as all these things hold together, we should see a year-end rally.  While not the same size as last year’s rally, it will still be very tradable.

FB daily @ 12:51 EDT

It appears FB found a bottom and is rebounding from its grossly oversold levels.  Chances are several dollars of upside remain, but I expect it will run into significant resistance at the $38  IPO price.  No doubt a lot of people dyeing to get out at breakeven and given the gigantic number of IPO buyers, this will be a huge wall to breakthrough.  If it breaks above $38, that would be highly bullish, but realistically I expect it will turn back after running into insurmountable resistance at $38, at least over the near term.  If anyone is swing trading this move, plan on taking profits before it reaches $38.  You can always get back in if it stages a breakout above $38.

Stay safe