Sep 07

A warning for Bears

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 finished Thursday mostly unchanged. Even though we find ourselves inside a holiday shortened week, volume picked up and has been above average the last three days, something that hasn’t happened in over a month.

Summer is winding down and big money managers are finally returning to work. For most of the summer we’ve been stuck in neutral because smaller traders don’t have the firepower to drive a sustainable move. nstead every directional move fizzled and reversed because big money wasn’t there to join the buying and selling. Now that they are finally back at work, we should finally see some life come back into this market.

The big question is if institutional managers will keep throwing money at these record highs, or if they will chicken out and start taking profits ahead of the widely forecast tumble.

As a contrarian I get suspicious every time I hear something from too many different sources. And this includes current predictions of doom and gloom. It’s been a really rough few months. Healthcare reform failed in a spectacular way. There’s been a revolving door at the Trump administration. Trump’s frequent criticisms of Republican leaders is not helping either. Then there is this North Korea thing that just won’t go away and keeps getting worse. And finally two hurricanes to cap it all off.

Any one of these items is more than enough to takedown a fragile market. Combined they are as formidable as a hurricane. Yet here we stand, less than 1% from all-time highs. Surely something isn’t right.

One of the most effective ways to study the market focusing on what it is NOT doing. What should the market be doing, but it isn’t? Given this flow of overwhelmingly bearish headlines, clearly this market should be in freefall. But it isn’t. What gives?

There is a lot of headline uncertainty surrounding this market, but it doesn’t care. The thing to remember about headlines is they get priced in over time. That’s because anyone who is afraid of those headlines sells to dip buyers who are not concerned. This turnover in ownership replaces weak with strong, creating a robust foundation.

For nearly a month this market has withstood one bearish headline after another. We slipped under the 50dma for a brief period. All of this selling cleared out most owners who could be convinced to sell. Now all that is left is people who don’t care about these headlines. No matter what people think “should” happen, when there is no one left to sell a headline, it stops mattering.

This is an important thing for bears and most especially shorts to understand. You have been given a golden gift in this relentless barrage of negative headlines. There has been more than enough to cripple a vulnerable market. But the thing to keep in mind is selloffs are breathtakingly quick. Sell first and ask questions later is the only way to survive a market crash. Yet here we stand nearly a month into this “selloff”. If we were going to crash, it would have happened by now. If this relentless barrage of headlines couldn’t scare owners into selling, I don’t know what it will take.

Anyone who is still short this market is probably only a little in the red. Rather than hope and pray for the selloff that isn’t happening, a smart trader admits defeat and takes his losses while they are small. This bearish trade has been given every opportunity to work, but this simply isn’t the right environment to be short. Be proactive and close a trade that isn’t working when the losses are small, rather than wait until the pain of losing money gets so strong it forces you out.

Keep doing what has been working and that is sticking with your favorite stocks and adding on weakness. Bears need to admit their short trade isn’t working while the losses are small because the biggest risk remains to the upside. If we were going to crash, it would have happened by now.

Jani

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Sep 05

Why this selloff is no different

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Tuesday the S&P500 tumbled for the third time in as many weeks. Midday selling pushed us under the 50 day moving average, but fortunately we bottomed not long after and closed well off the lows. Volume was the highest in nearly a month and this was one of first above average volume days in quite some time.

North Korea was the primary culprit yet again as they tested a nuclear bomb over our extended holiday weekend. That was enough to send shudders through global markets. But the thing to remember is this was their fifth nuclear detonation over the last decade. If the first four didn’t trigger a massive selloff, then there is a good chance this one won’t either.

Last week we rallied when the flow of negative headlines abated for a few days, but Tuesday abruptly ended that reprieve. In addition to North Korea, Trump added political uncertainty when he distracted Congress from budgets and the debt ceilings when terminated Obama’s Dreamer program for underage illegal immigrants. Then attention turned to Hurricane Irma, a category 5 storm headed for Florida. Taken together, these three headlines were more than enough to ruin last week’s jovial recovery.

But is the rebound really dead? Three things tell us not to be so hasty.

First the late-day rebound put us back above key support. The 50 day moving average was a ceiling for most of the last few weeks. But overhead resistance often turns into support after we break through. Today’s late recovery suggests that is the case here. Rather than spiral out of control, supply dried up when we tested this key support level.

Second, volume was one of the highest days we’ve seen in recent weeks. All the other sharp down-days also included elevated volume. But rather than portend of worse things to come, these high-volume days were capitulation and we rebounded within a day or two.

Third, all of these headlines are recycled. There is nothing new here. If one of these stories was going to take us down, it would have happened already. Selloffs are breathtakingly fast. Hesitate for a moment and it is too late. Sell first and ask questions later is the first rule of surviving a crash. But this North Korea selloff is going into its fourth week. The market never gives us this much time to think rationally and act calmly before a punishing selloff.

Simple supply and demand is behind this market’s strength. Those that are afraid of Trump and North Korea have long since bailed out of the market and been replaced with confident dip buyers. That is why today’s dip ran out of sellers so quickly. If the current crop of owners didn’t sell the first or second North Korea scare, why are they going to sell this one? Today’s limited selloff tells us they held their ground.

Markets don’t give us this long to sell the top and this one is no different. If we were going to crash, there have been more than enough reasons for us to plummet. The fact we are still standing strong near the highs tells us this market is more solid than most people give it credit for. Keep doing what has been working. Stick with your buy-and-hold positions and keep adding on any dips.

As I’ve been saying all month, a market that refuses to go down will eventually go up. Don’t lose your nerve now.

Jani

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Aug 31

Why bears couldn’t break this rally

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Thursday the S&P500 extended Wednesday’s breakout above the 50dma. Despite escalating tension with North Korea and a category four hurricane, stocks continue trading near all-time highs. As I’ve been saying all month, a market that refuses to go down will eventually go up. That is exactly what is happening here.

Even though the news flow has been overwhelmingly bearish this month, stocks have barely budged from record highs. At our deepest and darkest period in August, we were down a whole 2% from all-time highs. Bears were giddy with excitement and kept telling us to wait for it. But the crash never happened. That shouldn’t come as a surprise to anyone who reads this blog. Market crashes are breathtakingly fast, not drawn out affairs. If the initial headlines couldn’t knock us down, the follow-up headlines were even less likely to do so.

It all comes down to simply supply and demand. The first North Korea headlines scared off the traders who fear such a thing. The next time those same headlines popped up, there were fewer people left to sell the recurrence. Instead, these fearful sellers were replaced by confident dip buyers who demonstrated a willingness to hold the risk. This churn in ownership is how news gets priced in and why it stops mattering.

Tuesday North Korea launched a missile over Japan, but paradoxically that was our buy signal. Everyone who feared those headlines had already sold and the market was setting up to bounce on tight supply. We capitulated early Tuesday and have been racing up ever since.

Nervous and fearful traders were wary of what they claimed was weak market. But they got it exactly wrong. Withstanding the relentless barrage of negative headlines confirmed how strong this market was. If we were vulnerable to a collapse, any one of those headlines would have sent us tumbling. The fact we stood up so well tells us this is a strong market, not a weak one.

In all my years of trading, one of the most reliable trading signals comes from identifying what the market is NOT doing. Despite all the headline uncertainty, this market was not tumbling. That told me there was good support behind these prices and the path of least resistance remained higher. That told us the latest drop in price was still a dip buying opportunity.

The last few weeks of selling purged many weak owners from the market and replaced them with confident dip buyers. This firmed up support and this bull is even stronger than it was last month. This base building process is setting the stage for the market’s next move to all-time highs. The path of least resistance remains higher and 2,500 is easily within reach. From there we need big money to start buying to keep the rally alive.

The market is up around 10% for the year. While this has been slow this summer, I don’t expect that to last. Volatility is already picking up and that will continue through the fall. While many bears warn about downside volatility, I actually think bigger risk is upside volatility. Many cynical money managers are underweight this market and they have been patiently waiting for a pullback. The latest 2% dip is about as good as it is going to get. When they realize this market is far more resilient than they thought, they will be forced to chase prices higher or else risk explaining to their investors why they lagged behind the indexes so badly this year. That desperate chase for performance is going to fuel a strong rally into year-end.

While that is the most likely outcome, there is a chance Trump and Republicans fumble tax reform and the market uses that as an excuse to take profits. This could lead to a wave of reactionary selling that drops us near breakeven for the year. That said, this is a low probability event because the fumbling, bumbling Republicans cannot get anything done and expectations for tax reform are already quite low. I doubt many people will be surprised if Trump and the GOP get nothing accomplished this year. That lack of surprise means we won’t see much of a selloff. If we were vulnerable to high expectations, we would have seen a much stronger reaction when the Senate failed to pass healthcare reform.

This is an incredibly strong market that is ignoring every excuse to sell off. Keep doing what is working. Stick with your buy-and-hold positions and buy every dip until further notice.

Jani

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