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By Jani Ziedins | Scorecard
Weekly Analysis and Scorecard:
It was one hell of a week for the S&P500. Trump’s escalating trade war and the Chinese retaliations dominated headlines. At last count we ran through three rounds of tit-for-tat tariffs and subsequent retaliations. Combined both sides are looking at $300 billion in products being taxed at up to 25%. If the two largest economies battling a trade war doesn’t send a shiver through global growth, I don’t know what will.
Early in the week there was optimism this was little more than posturing ahead of far more sensible negations and compromises. By midweek the markets surged higher in relief and left Monday’s lows in the dust. But any feelings of relief were short-lived because Thursday night Trump lashed out at China’s “unfair retaliations” and tripled the size of his proposed tariffs. That sent markets into a tailspin Friday and we finished the week near the lows.
Trump promised us he didn’t want a trade war, but his actions say otherwise. What started as a complaint about Chinese policies is now threatening hundreds of thousands of American jobs and higher prices will plunder middle America’s discretionary income. If that is how Trump looks out for hard working Americans, they would probably be better off if he stopped trying to help them.
I wrote a fairly critical post Thursday evening. If Trump is your guy, then you probably won’t like it. But if you want to understand what is going on and how it affects the stock market, it is a worthwhile read.
As for next week’s outlook, expect the volatility to persist. The market was willing to give Trump the benefit of doubt and is why prices rebounded nicely in the middle of the week. But Thursday night’s betrayal will stick with traders for a while and they will be far less willing to give him a pass next time. Even though this trade war will most likely cool down over the next few weeks, don’t expect traders to chase stock prices higher anytime soon.
Weekly Scorecard
Even though it was a challenging week for the market, my analysis proved to be quite insightful and profitable.
Last week I warned subscribers:
While the market’s resilience is impressive, we could still see a little more near-term weakness before this is over. Rebounds from oversold levels are shockingly fast. Instead of rebounding higher, we seem to be drifting sideways. The market rarely gives us this long to buy the bottom and that means we might not be at the bottom yet. This is still an attractive level to buy the discounts, but any dip-buyers need to be patient and be prepared for a little more weakness.
This was the Friday before Monday’s dramatic, 2.3% plunge.
But rather than run for the hills, on Monday I told subscribers:
Most likely this [trade war] won’t amount to much over the near-term and prices will rebound once the headlines cool off. But until then, expect volatility to persist. Thing will get ugly if Trump and China turn this into a major trade war, but that is the worst case scenario and is weighing on the market today. Anything short of that will be a relief and prices will rebound. We could see further near-term weakness, but most likely this is the time to be buying, not selling.
Two days later the market was 100-points.
Tuesday’s analysis proved to be prophetic in both directions:
Trump is the biggest wild card in this. If he says the wrong thing, that could lead to another 3% down-day. If he says nothing, then prices rebound and dip-buyers make a lot of money. Without a doubt that makes this a challenging time to own stocks, but the only way to make money is by taking risks. By the time things are safe, the discounts will be gone.
That afternoon stocks exploded higher when Trump held his tongue following China’s second retaliation. For a brief moment in time traders thought the worst of the trade war headlines were behind us. And Wednesday the surge higher continued. But Thursday night Trump proved everyone wrong by tripling down on his trade war. Thursday Night I told free blog readers:
Are today’s threats simply more political posturing ahead of negotiations? I wish I knew. But the one thing I do know is the market hates uncertainty and I don’t think the stock market is going to forgive Trump as easily this time. Fool me once, shame on you. Fool me twice, shame on me. It will be interesting to see how this turns out, but this is one of those things that is better watched from the safety of the sidelines…
…I was one of those confident dip buyers and everything looked awesome this afternoon as my profits were piling up. But all of a sudden I’m not as confident anymore. I have a reasonable profit cushion, but I’m definitely less confident than I was this afternoon and I will seriously think about locking in profits tomorrow. If too many people feel the same way, Friday could be an ugly day. The only thing we can do is wait for China’s response and hope that confident owners stay that way.
On Friday the stock market actually recovered a big chunk of those overnight losses. But that was as good as it got because not long after the stocks rolled over and we didn’t stop until we fell more than 2%, erasing nearly all of the week’s prior gains. I was lucky the market opened fairly strong and I was able to lock-in profits before things got a lot worse.
Now I will be the first to admit I was a bit lucky in calling this week’s moves so well and it often isn’t this easy. But the better we understand the market, the more lucky we tend to be.
Looking ahead, even though I locked-in profits this week, Friday’s volatility is setting up another buyable dip and I will be looking to jump back in soon. The best profit opportunities come from the scariest markets. Not all that long ago people were begging for a pullback. Now that the market has answered our wishes, don’t lose your nerve.
Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
Thursday was another strong day for the S&P500. Unfortunately that doesn’t matter anymore because after the close Trump announced he wants to triple the Chinese tariffs. It seems China hurt his feelings when they “unfairly retaliated” against his first and second rounds of tariffs.
Clearly someone doesn’t understand how trade wars work. Unfortunately that person is the president of the United States. To save one-thousand jobs in the steel and aluminum industry, Trump is now threatening hundreds of thousand, if not millions of Americans jobs in other industries. Even the steel and aluminum industries are opposed to his trade war because it doesn’t matter what aluminum and steel prices are if their manufacturing customers’ businesses are crumbling.
The overnight futures plunged 1.5% on the news. If that’s all that happens, then we should count ourselves lucky. The market’s latest rebound was based on the idea that the worst of the trade war is behind us. That the last couple of weeks of threats were nothing more than posturing ahead of far more reasonable negations and thoughtful compromises. Unfortunately Trump threw cold water on that idea and now the market has been thrown back into turmoil.
I wish I could say this will turn out fine and this is nothing more than the start of another buyable dip. An opportunity for those that missed Tuesday’s rebound to jump aboard the rally. Unfortunately no I longer have those convictions. Things would be different if I knew we were dealing with a “rational actor”. Someone who made sensible decisions based on the facts and chose what was in his own best interests. But clearly Trump is not acting this way. Nearly every member of Congress, both Democrats and Republicans alike are unified against this trade war. Very rarely do both sides of the aisle agree on anything, but they are quickly coming together over this. The business community is equally unified in their opposition to Trump’s trade war. And 100 years of economic experience learned the hard way taught us it is impossible to win trade wars. Too bad Trump isn’t listening.
Are today’s threats simply more political posturing ahead of negotiations? I wish I knew. But the one thing I do know is the market hates uncertainty and I don’t think the stock market is going to forgive Trump as easily this time. Fool me once, shame on you. Fool me twice, shame on me. It will be interesting to see how this turns out, but this is one of those things that is better watched from the safety of the sidelines.
There is a chance Trump could quickly backtrack on his threats. And maybe China’s leadership will be the bigger man and won’t respond to Trump’s threats. But no matter what, traders are quickly learning to distrust Trump. The market hates uncertainty and the way Trump handles himself does nothing but stir up controversy and uncertainty. Mr. Trump, thank you for the tax cuts, but the rest of us would appreciate it if you didn’t touch anything else.
It’s really hard to say how the market will respond to these headlines. A lot of nervous owners have been selling the tariff headlines over the last few weeks. They have been replaced by confident dip-buyers who were unafraid of these headlines because they assumed everything would work out. Which until this evening looked like it was happening. Will these confident dip buyers remain as confident when Trump is threatening to escalate the trade war for a third time? Will they confidently sit through China’s inevitable retaliation? Maybe. Or maybe they will lose their nerve and “get out before things get worse”.
I was one of those confident dip buyers and everything looked awesome this afternoon as my profits were piling up. But all of a sudden I’m not as confident anymore. I have a reasonable profit cushion, but I’m definitely less confident than I was this afternoon and I will seriously think about locking in profits tomorrow. If too many people feel the same way, Friday could be an ugly day. The only thing we can do is wait for China’s response and hope that confident owners stay that way.
Jani
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By Jani Ziedins | Free CMU
Cracked.Market University
One-hundred years ago a person was lucky if they could find weekly stock quotes. Fifty-years ago most traders lived off of daily quotes from the newspaper’s financial section. Thirty-years ago we got 24-hour news networks. Twenty-years ago the internet gave us 20-minute delayed quotes. Five-years ago real-time and after-hours quotes came free with most trading accounts. And now countless phone apps give us access to global stocks and futures around the clock.
The question few are asking is if this abundance of information is actually helping the average investor? Given the success rates of the typical retail investor, the answer is clearly not. The question then becomes if this is not helpful, is it actually hurting investors? There is a pretty compelling case that information overload causes a person to make more mistakes, especially when it comes to something as tricky as the market.
Who among us hasn’t found themselves transfixed by an intraday move? We get an alert on our phone and stop what we were doing to read the linked article. Then we tune the TV to the financial news to find out what the “experts” think. All of a sudden we went from having a good day at work to being worried the latest selloff means will delay our retirement five years. But we won’t be innocent bystander. We won’t be a victim to the market’s wrath. Instead we take control of our financial destiny by whipping out our phone, logging into our brokerage app, and start selling. And best part is we do it all in the five minutes before our next meeting.
Unfortunately what started the day as a buy-and-hold investment quickly turned into a “sell everything before things get worse”. The problem for most long-term investors, turned spur-of-the-moment traders is that over the last 30 years, there have only been two instances when “sell now before things get worse” was actually a good idea. The 2000 dot-com bubble and the 2008 financial crisis. Two and only two times over the last 30 years was reacting to the fearful headlines a good idea. Compare that to the 1,000+ plus phony stock market crashes that spooked investors out perfectly good positions just before rebounding. Would you rather put your money on the 499, or the 1? Unfortunately most retail investors are so afraid of the next stock market crash that they have an irrational fear it is hiding around next corner. Combine those emotions with an endless stream of market headlines and stock quotes and that is the perfect recipe for over trading.
And I will be the first to admit this happened to me. I used to trade newspaper quotes. Buy something, forget about it for a few weeks or months. Check the newspaper and “wow, I just made 20%, cool!” Then the internet revolutionized trading and let me follow the market more closely. But the 20-minute delay kept me from obsessing over it too much since the prices I saw were already old news. I’d buy what I wanted to buy and then get on with my day. Then high-speed internet came along with real-time streaming quotes. Now I could put charting programs and stock tickers on my second monitor (because one monitor definitely isn’t enough), and now I could start counting pennies. It would have been nice if it stopped there, but now my phone gives me access to S&P500 futures around the clock. (speaking of stock futures, they are up nicely in Asia as I write this at 10pm MDT) And the worst of all, if I wake in the middle of the night, it is hard to resist the temptation to see what the futures are doing in Europe. If my trade isn’t working, then I have to pull out my iPad and find out what happened. And people call this progress???
I’ve been there and done that, as have many of you. I can and will attest this most definitely didn’t help my trading. In fact, the access to endless information made me miserable and my trading suffered. These daily gyrations got to me, even small moves against me inevitably lead to second thoughts. Second thoughts lead to doubt. Doubt lead to anxiety. And anxiety lead to impulsive and emotional trading. All of this certainly makes me miss the old days of waiting for the daily newspaper, looking up my stocks, and then spending the rest of the day not thinking about the market.
More is most definitely not better and the addiction to endless streams of information is something we need to resist. Without a doubt the worst thing a person can do is check stock quotes in the middle of the night. Don’t do it. It doesn’t help and all it does is lead to crushing anxiety and sleepless nights. Same goes for getting alerts on your phone. Turn them off. If you are not a day-trader, you don’t need to have real-time quotes and charts on your computer. If you are a buy-and-hold investor, don’t look at daily quotes. Don’t even look at weekly quotes.
The most important thing to regaining control of your trading is only looking at the market with a frequency that is appropriate for your holding period. Retirement accounts? At the very most look at them quarterly and even then only for rebalancing. It would be better if you limited checking retirement accounts to once a year. Swing-traders who hold positions for days and weeks should limit themselves to daily quotes. Only day-traders need streaming quotes and live charts. For everyone else, all it does is shake your confidence and lead to impulsive and emotional trades. The first step to beating the market is getting your addiction to stock quotes under control.
Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P500 bounced back Tuesday, recovering a big chunk of Monday’s selloff. Things got ugly Monday after China announced 30 billion of retaliatory tariffs in response Trump’s steel and aluminum tariffs. Fortunately the worst fears dissipated by Tuesday and the S&P500 reclaimed the 200dma and 2,600 support. While we are still on thin-ice, it was encouraging to see traders more inclined to buy the dip instead of turning Tuesday into another bloodbath.
The stock market fell in love with Trump and his tax cuts in 2017. Unfortunately the relationship has been far less blissful in 2018. Trump’s protectionist stances are contrary to the market’s preference for free and open trade. To this point the announced tariffs and retaliations have been modest and manageable. But the fear is round one could lead to rounds two, three, four, and five. The problem with trade wars is once they get started, retaliations and counter-retaliations get out of hand quickly. And so far China claims they are willing to go tit-for-tat with Trump. The biggest question is how far Trump is willing to take this.
The situation got even more complicated Tuesday afternoon when Trump announced a second round of tariffs specifically aimed at China’s anti-competitive practices. While overnight futures are down some, they are actually holding up relatively well for what looks like the start of round two of these trade wars.
It is encouraging to see the futures market only give up a small portion of Tuesdays gains. While things could change during Wednesday’s regular session, the longer these tariff headlines play out, the more they get priced in. That’s because owners who fear a trade war with China have been bailing out of the market for several weeks already. Once a pessimist leaves the market, he is replaced by a confident dip buyer who is willing to hold these headline risks. This turnover in ownership, replacing fearful owners with confident dip buyers, is what helps the market find a floor. While it is too early to say the worst is behind us, the potential for a larger selloff diminishes with each successive round of fearful headlines. Nervous sellers can only sell once. After they leave the market, their opinion no longer matters. And maybe, just maybe this is what is propping up the market here. If it doesn’t react strongly to Trump’s second wave of Tariffs on Wednesday, then the market has already largely priced them in.
And none of this surprised those of us that were paying attention. As I warned subscribers last week, holding near 2,600 for several days was an ominous sign. The inability to rebound decisively left us vulnerable. The longer we hold near support, the more likely it is we will violate it. And that is exactly what happened Monday. While I had no idea what the headline would be, I knew we were vulnerable to a reactionary selloff and the risks were elevated. But I also told subscribers that a dip under support was to be bought, not sold. As I wrote earlier, the longer a story plays out in the news, the more it gets priced in. The first dip is always the most shocking. But each successive dip gets smaller and smaller. While Monday’s headline losses were shocking, most of what we gave up were last week’s rebound. The actual dip under support was far less significant and bouncing so quickly after crashing through support was an encouraging buy signal.
A couple of months ago people were begging for a dip so they could get in at cheaper prices. But now that the dip is here, those same people are too afraid to buy. The thing to remember about risk is it is a function of height. Despite how it feels, the lower we go, the less risky owning stocks is. That’s because a lot of the downside has already been realized. While we could slip even further over the next few days and weeks, without a doubt it is better to have bought at these levels than at much higher prices when it felt safe. The most successful traders are the ones who buy when other people are fearful and sell when everyone else feels safe. Even though prices could slip a little further, this is still a very attractive place to be buying. We were asking for a dip and the market gave it to us. Don’t lose your nerve now just because everyone else is freaked out.
Bitcoin continues to struggle. Even though prices bounced on Tuesday, a few hundred dollar rebound from recent lows is a pathetic bounce for BTC. We are still most definitely in a strong down trend and there is no reason to think the worst is behind us. The thing to keep in mind is prices bounce decisively from grossly oversold levels. It is hard to claim last week’s dip to $6,500 was anything like the shocking free falls over the last few months. And the same can be said of today’s few hundred dollar rebound. If we haven’t reached shockingly oversold levels yet, then we are not done falling yet. Expect prices to undercut Feburary’s lows over the next few weeks and that violation to trigger a large wave of defensive selling. Don’t expect prices to bounce until we fall into the $4k range. Then and only then will it be safe to buy the bounce.
The tech trade has also been weighing on the stock market lately. But the fever broke Monday when FAANG stocks failed to undercut their recent lows (unlike the broad market). That relative strength told us prices were actually firming up because owners were less inclined to sell them. As the saying goes, the stock market predicted nine of the last five recessions. The same can be said for the market predicting the demise of the tech trade. In a few weeks time most people will be kicking themselves for not buying this dip.
Jani
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