Dec 06

Q: Who is right, Bulls or Bears? A: Neither!

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

It doesn’t get wilder than Thursday’s crazy ride in S&P 500. Prices plunged at the open after the US had the CFO of a major Chinese tech company arrested for violating Iranian sanctions. That was a significant escalation in Trump’s confrontation with China and it crushed all positive feelings following last weekend’s trade truce.

The selling intensified and by late morning we were down more than 3%. But then something happened. We ran out of sellers. And more than just run out of sellers, the market erased almost all of those losses and closed practically flat. We went from one of the worst days of the year, to a trivial 0.15% loss. Talk about an epic reversal.

A big chunk of the afternoon’s strength was fueled by the Fed’s slowing stance toward future rate hikes. Rather than dole them out at regular intervals like they have been doing, the Fed is quickly shifting to a wait-and-see outlook. A similar ideal launched last week’s 2.3% surge higher and today it erased 3% of losses.

But this market’s resilience shouldn’t surprise readers of this blog. After Tuesday’s 3.24% collapse, I wrote the following:

“I expect global stocks to get hammered Wednesday as the world reacts to the U.S. market collapse. But after that, expect cooler heads to prevail. As I’ve been saying for a while, this is a volatile period for stocks. That means large moves in both directions. But so far these wild gyrations have been consolidating October’s losses, not extending them. There is no reason to think this time is any different.

Trading so close to 2,700 support means there is a good chance we will violate it. But as long as the selling stalls and bounces not long after, that tells us most investors would rather buy these discounts than sell them.”

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I will be completely honest, I expected us to poke our head under 2,700 and bounce. There is no way I could have foreseen those Huawei headlines sending prices cratering nearly all the way to 2,600 and then bouncing. Even I am dumbfounded by today’s resilience. But it still isn’t a complete surprise.

It isn’t controversial to say the majority investors know the stock market trades sideways most of the time. But the paradox is that most of the time, the same people also almost always assume each day’s gyration is the start of the next breakout or breakdown.

It is shocking to see the amount of gloating going on every time the market moves to one edge of the trading range or the other. We’ve been bouncing between 2,600 and 2,800 for most of the last two months. Today’s dip and reversal count as the 7th time the market challenged and failed to break out of this range.

But rather than use “common” sense and assume each dip is a great buying opportunity or rally a time to take profits, these impulsive bulls and bears ignore the evidence and proclaim this is finally the big move they’ve been waiting for. Monday it was the bulls. Today it was the bears. And both sides got it exactly wrong.

The ironic thing is by the time these chronic bulls and bears realize we are stuck in a trading range is right before we break out of it. No one said trading is easy. But it is a lot less hard if we know what to pay attention to.

As for what comes next, the US taking one of China’s top business executives into custody isn’t going to go over well and this story is a long way from being done. We should expect the situation to evolve and that will exacerbate volatility, but as long as investors would rather buy these discounts than sell them, we should be in good shape. The bottom of every market selloff feels like things are about to get a lot worse, and this time won’t be any different.

By this point, most of the Trump’s trade war is already priced in and the only thing that would worry me is we start shooting at each other. Barring that, this is just another buyable dip.

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Dec 04

How to profit from Tuesday’s collapse

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

In the market, a lot can happen in a few days. My last free blog post was last Thursday after the S&P 500 smashed through 2,700 resistance. A buying frenzy pushed prices up to the 200dma after the Fed Chairman suggested interest rates were approaching his neutral target.

But rather than cheer those gains, I cautioned readers in that post from last week:

The market was a great buy Monday and Tuesday. But risk is a function of height and Wednesday’s large gains make buying now a lot less attractive. A big chunk of Wednesday’s buying came from chasing and short-covering. Those are both fleeting phenomena and now that they’ve come and gone, we need another group of buyers to come in and push us higher. Unfortunately, many of those with cash remain nervous, especially following such a large move higher. Their fear of heights will likely keep a lid on prices for a few days. And even a dip back to 2,700 wouldn’t be a surprise. Two steps forward, one step back.

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While I expected this step-back, even I was caught off guard by the speed with which it happened. But even that isn’t a surprise. The market operates in two speeds, infuriatingly slow, or breathtakingly fast. This time the hivemind got together and turned the last few days of frenzied buying into a mad dash for the exits. Easy come, easy go.

While it was nice to see this weakness coming and prepare for it, that was then and this is now. What readers really want to know is what comes next.

Stock prices popped Monday after Trump and China reached an agreement this weekend to de-escalate the trade war. But that relief proved fleeting as traders started analyzing the details. The primary catalyst for Tuesday’s collapse was Trump disclosing the strings attached to his pledge to not increase tariffs on Chinese imports. The shine further wore off when Trump reiterated his pledge to impose tariffs if the Chinese didn’t make substantial concessions. That sent risky stocks tumbling and safe-haven bonds soaring. So much for the relief.

But the thing we have to ask ourselves is if Tuesday’s collapse was lead by rational and thoughtful selling, or if it was nothing more than herd selling because people sold for no other reason than other people were selling.

There are few, if any, 3.25% declines that are led by rational and thoughtful selling. Today was no different. We opened near yesterday’s close and slipped to normal losses by lunchtime, but slipping under Friday’s close triggered an avalanche reactive stop-loss sell orders that didn’t stop until we shed another 60-points. As I wrote previously, 2,700 was a key support level and the market found support and bounced off that critical level in afternoon trade. Unfortunately, the bounce proved fleeting and we closed right back at 2,700 on the nose.

The market is closed Wednesday in observance of a national day of mourning for President George H.W. Bush. No doubt the inability to trade Wednesday caused many would-be dip-buyers to sit on their hands knowing they would be unable to trade for a day and a half. Better safe than sorry. But the other thing this extra day off does is give traders a chance to collect themselves and decide if they really want to be selling these discounts, or if they should be buying them instead.

I expect global stocks to get hammered Wednesday as the world reacts to the U.S. market collapse. But after that, expect cooler heads to prevail. As I’ve been saying for a while, this is a volatile period for stocks. That means we large moves in both directions. But so far those wild gyrations have been consolidating October’s losses, not extending them. There is no reason to think this time is any different.

Trading so close to 2,700 support means there is a good chance we will violate it. But as long as the selling stalls and bounces not long after, that tells us most investors would rather buy these discounts than sell them.

I bought the Thanksgiving massacre and sold the frenzied relief rally up to 2,800. And I will do the same thing again this time. If impulsive traders want to keep giving away free money, I will gladly continue taking it.

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Jani

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Nov 29

The real reason the market surged

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Two days ago my free blog post was titled “Why Tuesday was a great day.” Even though the index only finished 0.3% higher, the market’s resilience was impressive given the bearish trade war headlines dominating the financial press.

“There are few things more bullish than a market that fails to go down on bad news. That tells us most of the bearishness has already been priced in. Over the last two months, we have witnessed a ton of selling. But what happens every time a fearful owner bails out? He sells his stocks at a steep discount to a confident dip buyer who is willing to own those risks.

Over time these fearful sellers are replaced by confident buyers and there comes the point in every dip where we run out of fearful sellers. Once everyone who fears the headlines sells, there is no one left to sell and the headlines stop mattering. That is what happened today. Trump threatened to take his trade war nuclear, and the market yawned.”

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While I liked what I saw Tuesday, even I was caught off guard by Wednesday’s explosive surge higher in one of the biggest up-days of the year.

People often claim no one can predict the market, but that isn’t entirely true. I had zero idea the Fed Chairman would soften his stance on rate hikes Wednesday, but I didn’t need to know that to make an intelligent trading decision Tuesday.

I will be the first to admit I cannot predict the news. But the thing to remember is the news doesn’t matter, only the market’s reaction to the news. That one small shift in perspective totally changes how we go about figuring out the market’s next move.

Every day traders are bombarded with both bullish and bearish headlines. As traders, it is our job to decide how to interpret these conflicting signals. Sometimes traders gravitate to one piece of news while totally ignoring another one. But even more important than what traders think, is how they trade. Headlines don’t move markets. Neither does the opinion of traders. Only buying and selling moves markets and that is what we must pay attention to.

Trump’s latest threats to escalate his trade war and tax all Chinese imports at 25% was obviously a very negative headline. A big chunk of October’s correction was based on investors’ fears the trade war was damaging the global economy. There is no dispute Trump fanning those flames this week was bad. And given October’s plunge, clearly traders are worried about the trade war. But given all the negativity, why did the market finish Tuesday  0.3% higher?

It’s not because the news was good. Or because traders don’t fear the fallout of a trade war. It’s because everyone who fears the trade war already sold their stocks and they had nothing left to sell. Once an investor is out of the market, his opinion stops mattering.

We can think of the market like a stalled car on a hill. It takes almost zero effort to push the car downhill, while it takes nearly all of our strength to move it one foot uphill. There are times when the market is similar askew. This time it was nearly impossible for bearish headlines to push us any lower because we exhausted the supply of fearful sellers. But in the opposite direction, it only a few words from the Fed Chairman to launch one of the biggest buying frenzies of the year.

Without a doubt, it is impossible to predict the news, but if we know what to pay attention to, it isn’t hard to figure out which way the market wants to go. Then it simply becomes a matter of waiting for the right story to come along and give us a push.

And going back to what I wrote Tuesday because it is equally relevant today:

“The next most obvious target is reclaiming 2,700 support, and the 200dma after that. We are not out of the woods yet and we should expect volatility to stick around. But the swings are getting smaller and the fear of a collapse are dissipating. We currently find ourselves near the lower end of the trading range and are in a place where the market is brushing off bearish headlines. That tells me the near-term path of least resistance is higher. Things will look different after we run up to the 200dma, but we will discuss what comes after that when we get there.”

Everything played out as expected…..except I certainly didn’t expect to be talking about the market running into 200dma resistance 48 hours later. But here we are.

The market was a great buy Monday and Tuesday. But risk is a function of height and Wednesday’s large gains make buying now a lot less attractive. A big chunk of Wednesday’s buying came from chasing and short-covering. Those are both fleeting phenomena and now that they’ve come and gone, we need another group of buyers to come in and push us higher. Unfortunately, many of those with cash remain nervous, especially following such a large move higher. Their fear of heights will likely keep a lid on prices for a few days. And even a dip back to 2,700 wouldn’t be a surprise. Two steps forward, one step back.

But now that we reclaimed 2,700 support, we need to hold this level. Tumbling under this level tells us buyers have zero confidence in this market and lower prices are still ahead of us. But that is the less likely outcome. Right now things look good because big money would rather buy the discounts than sell the dip. Expect a near-term dip as we digest Wednesday’s huge gains, but after that, expect the rebound to continue up to and above 2,800 over the next few weeks.

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Jani

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