Nov 20

Weekly Analysis: The biggest problem with this market

By Jani Ziedins | Weekly Analysis

End of Week Analysis:

The S&P 500 finished the week down a modest 0.8% but remain within a stone’s throw of all-time highs.

As expected, the rate of gains slowed as we approached last week’s intraday highs and the market is quickly settling into a 3,500(ish) to 3,650(ish) trading range ahead of the Thanksgiving holiday.

Stocks rallied 10% in early November and anyone predicting that rate of gains to continue clearly doesn’t understand how this game works. I still like this market and am anything but bearish, but two steps forward, one step back. That’s how this works. Always has, always will.

Most of the big headlines are already behind us. Investors who are afraid of this spike in Covid infection rates have already sold. Those that wanted to buy the vaccine breakthroughs have already bought. And now everyone is sitting around waiting for what comes next.

Maybe these infection rates moderate naturally without oppressive government-imposed shutdowns. Or maybe we fall back into another round of punishing stay-at-home orders. At this point, no one knows for sure.

While things turn out less bad than feared most of the time, the biggest challenge for this market is prices are already near the highs. That means there isn’t much margin for error. Stocks are priced for a good outcome and any hiccup will send us lower.

Limited upside if things go right and lots of downside if things go wrong. That makes this a poor place to own stocks. I don’t mind holding long-term investments because that time horizon is measured in years, not months. But for anything shorter-term, we need to be careful because the risk/reward is currently skewed against us.

More interesting trading opportunities will come along soon enough. This just isn’t one of them.

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Nov 19

How to trade ahead of the holiday week

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped at the open, extending yesterday’s weak close. Fortunately, those early lows were as bad as it got and prices bounced into the green in the second half of the day.

Coronavirus headlines continue to be dreadful, but investors don’t price stocks based on where we are today, but where they think we will be six or twelve months from now.

As bad as these headlines are, most investors don’t want to sell their stocks at big discounts when they know things will get better if they hold on a little longer. And it is hard to argue with that logic. Between the expected stimulus, ultra-low low-interest rates, and highly promising vaccine candidates, the light at the tunnel gets brighter every day.

As I wrote last week, it looks like we are settling into a 3,500(ish) to 3,650(ish) trading range. And so far that’s been the case. There isn’t a reason to throw fresh money at stocks near the highs and there isn’t a reason to abandon good positions either.

Swing traders should take profits near the highs and those with cash should wait for something more interesting. Short a break under 3,500(ish) or buy a breakout above 3,650(ish). Until then, there isn’t much to do other than wait for the next trade. (and enjoy the holidays!)

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Nov 18

Don’t get forced into making an impulsive trade

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Wednesday afternoon got a little rough for the S&P 500. The day started off well enough with the index posting modest gains. Unfortunately, that was as good as it got. Prices started skidding shortly after lunch and the selling accelerated into the close.

There wasn’t a single headline driving this selling. Instead, it was mostly a counter-action to the latest runup in price. Two steps forward, one step back.

Cognitively, most traders understand this is the way markets work, yet they get caught off guard every time prices take a step back.

As I’ve written over the last few days, it’s been a great run since the start of November. A 10% run over a few weeks is outstanding. (It was even better in a 3x ETF!) But rather than get greedy, savvy traders recognized their good fortune for what it was and were taking profits above 3,600, not chasing prices higher with reckless abandon.

We buy before it is obvious and we take profits when the latecomers are showing up.

I am in no way bearish and am not predicting a crash. But it’s been a good run and stocks need to rest. Maybe that means a near-term pullback to support. Maybe it means trading sideways for an extended period of time. Either way, this is a better place to be taking profits than adding new money.

If you haven’t gotten out yet, make sure you have a thoughtful plan in place so you don’t get pushed into making an impulsive trade if the market continues moving against us.

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Nov 17

What to expect headed into the holidays

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped modestly Tuesday, but this shouldn’t surprise anyone. The index rallied 11% in November alone and we’re barely two weeks into the month! Anyone holding out for more gains is getting a tad greedy.

Two steps forward, one step back. That’s the way this works. Always has, always will.

Without a doubt, momentum is higher and we could coast up to, and even though, last week’s intraday highs (3,646), but we shouldn’t count on stocks going a lot higher. This is definitely a better place to be taking short-term profits than adding new money. Novices chase prices after an 11% runup. Savvy traders are the ones taking their money.

Stocks consolidate gains one of two ways. The far more predicted way is stepping back to support. But far less appreciated is the sideways grind. Stepbacks are quick and great for swing trading. Sideways moves bore us to tears. Unfortunately, we don’t get to choose what the market gives us.

Heading into the year-end holiday season, we should dial back our expectations. Most of the big buying has already happened and institutional money managers are either going skiing or flying south for the holidays. That means little guys are taking control. And while little guys make absurd trading decisions, they don’t have a lot of money and cannot drive the market very far. That means choppy moves that don’t go very far before reversing.

Expect stocks to trade sideways into year-end. Maybe we grind up to 3,650 resistance. Maybe we dip back to 3,500 support. Either way, plan on stocks bouncing back from these support and resistance levels, not extending into a much larger move.

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Nov 16

Is it safe to chase this strength?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Monday was a good day for the S&P 500. It reclaimed the psychologically significant 3,600 level one week after momentarily cresting above this level exactly seven days ago.

In a bit of a groundhog day, today’s pop was also driven by a different vaccine candidate that proved 95% effective in preventing Covid. That makes two separate vaccines that can get us out of this mess and the light at the end of the tunnel keeps getting brighter

Without a doubt, our reality is far less bad than people feared six months ago when we were falling into the Covid abyss.  But there is a huge difference between “less bad” and “good”.

Now don’t get me wrong, I’m all for buying stocks during uncertain times because that’s where the best profit opportunities come from. But what makes those periods so profitable is buying stocks at irrationally steep discounts and then waiting for sanity to return.

Unfortunately, that’s not the case here. At this point, the S&P 500 is 6% HIGHER than it was BEFORE Covid! Does anyone actually believe this Covid pandemic has been good for corporate earnings?!?!

There is no way I would ever allow myself to trade against a strong market, but we shouldn’t fall in love with it either. (The AAII Investor Sentiment Survey is near record highs!) Trade this market for what it is: strong momentum with questionable fundamentals. Just be sure to always keep the big picture in view. Long-term gains will be far harder to come by, especially if 2021 falls into a more conventional economic recession due to the growing number of permanent layoffs.

While I’m wary of this strength, I know better than to fight it. There are a lot of shorts getting run over by this strength. In fact, a big chunk of recent buying is coming from bears scrambling to get out of their painful short positions. Remember, savvy traders always trade in the direction of the market, not in the direction of their opinions.

Assume this market is rangebound until we have evidence that it isn’t. That meant buying last week’s dip near 3,500 and selling this week’s bounce near 3,650. While stocks could keep going higher over the next few days, we always need to protect our profits. Often that means selling too early. But that definitely beats holding too long and watching those profits evaporate. If this market breaks out next week or next month, we can always jump back in when it exceeds the prior highs.

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Nov 13

What this week’s price action taught us about what comes next

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis: 

It was an eventful week. After five days of counting, Biden was finally declared winner of the election Saturday. Monday morning we got outstanding news one of the vaccine candidates tested 90% effective in preventing Covid infections. And Friday, Covid-19 infections smashed all previous records and topped 150k daily cases for the first time.

Mix all of those gigantic headlines together and the S&P 500 ended the week higher by 2%. Not bad.

The vaccine headline is obviously outstanding news. Biden’s win is good or bad depending on who you were pulling for, but mix those two viewpoints together and it is largely a wash. And 150k daily Covid infections are most definitely dreadful.

From this smorgasbord of hugely bullish and hugely bearish headlines, stocks had free reign to do whatever they wanted. If the market wanted to crash, there were far more than enough excuses to trigger a stampede for the exits. On the other hand, if stocks wanted to explode higher, Monday’s 4% gap higher was more than enough to trigger a wave of breakout buying. And what did we end up with? A modest move higher.

This muted reaction tells us this market is not vulnerable to a collapse lower and it is not ready to explode higher. Sentiment is good enough to keep us near the highs and even drift modestly higher, but that’s about it. If the market was on the verge of a huge move in either direction, it would have happened this week.

As I wrote earlier this week, prices were setting up for a 3,500 to 3,650 trading range and I don’t see anything from week’s price action that changes my mind. It is okay to own this market, but keep a stop near 3,500 support and the adventurous should be ready to short a violation of this level. But as long as the index holds above 3,500 support, things are actually looking pretty good for stocks despite these dreadful Covid headlines.

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Nov 12

The simplest, no-brainer trade to make during opportunities like this

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 lost 1% Thursday. The recent spike in Covid infections unnerved investors and Monday’s bullish vaccine headlines are already old news.

Are we standing on the edge of a precipice or at the lower end of a longer-term trading range? That’s a great question and there are a million different opinions being shared online. And to be honest, both sides have great arguments.

What’s a person to do when the market could break either way? As obvious as this sounds, follow its lead! If stocks are going to breakdown, prices will have to cross 3,500(ish) support first. If we’re staying in a trading range above 3,500, then obviously prices will remain above 3,500.

This isn’t rocket science. Short a break under 3,500(ish) and buy a bounce off it. Put a stop on the other side of 3,500(ish) and wait to collect your profits. If the first move proves to be a false alarm, no big deal, close and trade in the opposite direction.

Emotional markets give us some of the best trades because they are prone to large, one-way moves. No matter which way this goes, grab ahold and collect your profits a few days later. It doesn’t get any easier than that.

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