Feb 08

It’s not as bad as it seems

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Thursday the S&P500 plunged, erasing all of Tuesday and Wednesday’s rebound and undercutting Monday’s lows. In the blink of an eye, the market transitioned from one of the most docile in history to one of the most turbulent.

Again economic headlines remain relatively benign and this is more of a sentiment driven move than fundamental. Since the 2009 lows, skeptics have criticized this market’s lethargic growth and negative real interest rates. Now that we are returning to more normal growth and inflation levels, these same people are running scared and claiming the sky is falling.

Even with today’s plunge to fresh lows, we are still at levels that were record highs only a few months ago. As I have been warning readers for a while, our relentless accumulation of gains was unsustainable. The higher we went without a consolidation, the harder we were going to fall. And that is exactly what happened. We went from setting the record for the longest period without a 5% dip, to a full-blown stock market correction in two weeks.

But that is water under the bridge. What everyone really wants to know is what comes next. And to be honest, I think the market look pretty good. Risk is a function of height and this is the least risky point in several months. Traders should be embracing these discounts, not running from them. Unfortunately most people feel better paying premium prices and chasing record highs. Cheap prices scare them and they bailout “before things get worse”. This reactive strategy of buying high and selling low is why people lose money in the market. Few recognized risk was off the chart in January and that this big decline is giving us a far better place to jump in.

Even though the risks are lower, that doesn’t mean we cannot keep slipping over the near-term, but I actually think this selloff is running out of steam. The lack of an economic catalyst means this selloff won’t go very far. The first big down leg came last Friday when employment and wage gains were “too good”. How dumb does that sound? Sure, the Fed will increase interest rates to more historically normal levels, but that is a good thing. The economy is doing well and most definitely not teetering on the edge of a recession. If anything, the recent tax cuts would cause the economy to ramp up. When’s the last time anyone worried growth was too strong? This economic expansion will end like every economic expansion before it, but that point is still a ways off.

This market’s problems are entirely technical. This week’s selloff went too far and did too much damage for us to rebound straight back to the highs. Traders are no longer blissfully complacent and willing to chase prices higher with reckless abandon. But this isn’t a bad thing. Dips and consolidations are a normal and healthy part of every move higher. Unfortunately the market likes symmetry and by going too long without a dip and consolidation, meant the inevitable dip was going to be a lot larger than we are used to. That is why this week has been so painful. The greater the good times, the longer the hangover.

Tuesday and Wednesday’s rebound failed because we are not ready to bounce back to the highs. But just because we cannot jump back to the highs doesn’t mean we need to fear a larger selloff. We have stumbled into a period of extreme volatility, but that means excessively large moves in both directions. Expect this choppiness to continue over the next few weeks, but don’t fear it. The worst is already behind us and these dips are a time to be buying aggressively, not selling fearfully.

Long-term investors should ignore this noise and stick with their favorite positions. Short-term traders should exploit this volatility by buying weakness and selling strength. Buy the dip, sell the rebound, and repeat.

Unlike the equity market, Bitcoin is experiencing a bit of a resurgence, up more than 30% from this week’s lows. Big bounces are part of every selloff and we are in the middle of one of those sharp rebounds. We plunged under $6k, capitulated, and then bounced hard. And most likely this bounce will continue higher, even flirting with $10k. But as much relief as this bounce gives “hodlers”, this is just another dead-cat bounce on our way lower. These bounces are selling opportunities and should not be chased. At best, this collapse won’t end until we slip under $4k, but it will take us a few months to get there. Until then, expect sharp and tradable moves in both directions.


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Feb 05

Is it time to panic?

By Jani Ziedins | Free Content

End of Day Update: Special Edition

Typically I publish free posts on Tuesday and Thursday evenings, but Monday’s bloodbath warrants a special edition. The financial press loves a catchy headline and they cannot resist calling this the worst selloff in market history. Technically they’re correct if we measure points, but that is misleading and it is far more useful to compare percentages. And while today’s 4% loss wasn’t anywhere near the worst (-22%), it did rank as the 33rd worst loss in history.

The most shocking thing about this 33rd worst loss is we didn’t have a significant headline driving it. Far smaller selloffs accompanied Trump’s nuclear standoff with North Korea, the U.K. abandoning Europe, government shutdowns, sequesters, fear of the Euro collapsing, and every other headline since 2011. The last time the market fell this far was when S&P downgraded U.S. debt because Republicans were threatening default.

There have been countless frightening headlines over the years, but few of them have spooked the market as badly as it was spooked today. And even more strange is the economic outlook today is no different than it was last week. In fact a big part of the reason people started selling last Friday is because things were “too good” and the Fed might be forced to hike interest rates faster than previously expected. Since when does “too good” trigger one of the biggest down days in market history?

Obviously this selloff is not driven by fundamentals because the fundamentals are fine. And while valuations are a little stretched, they are not obscenely overvalued given the strong economic outlook. The only thing left is technical and structural selling. Many sellers were selling for no other reason than we passed some arbitrary stop-loss level. The first wave of stop-loss selling pushed us down and triggered the next wave of stop-loss selling. It didn’t take long before this reactive selling pushed us so far we broke underlying structural components. Weeks or months from now we will learn an over-leveraged hedge fund found itself in a world of hurt and margin calls forced indiscriminate selling, adding fuel to the already hot fire. Or maybe one of these exotic leveraged, inverse, and derivative ETF’s blew up spectacularly. Apparently XIV, an inverse volatility ETF that was worth $1.5 billion a few days ago lost 90% of its value in after-hours trade when the derivatives it was based on became worthless.

I’ve been warning readers the market is never easy and at some point this relentless climb was going to come back to haunt us. And while I’d love to take credit for predicting this collapse, not in my wildest imagination did I expect it to trigger the 33rd worst day in market history. I knew we were vulnerable and the risks were elevated, but I was expecting a normal and routine dip back to support so we could consolidate gains. The selloff would be a little larger and more dramatic than normal due to the size of the run-up, but I most definitely didn’t foresee a collapse. And maybe the market started with a normal pullback, but the routine selling unexpectedly spiraled out of control and triggered bigger waves of panic selling, which in turn lead to failures in hedge funds and exotic ETFs.

But all of this is already old news and most of us want to know what is coming next. There is another blood bath in overnight futures and things don’t look good for Tuesday. If we open at these levels, every buy over the last four-months will be underwater, and that could lead to another round of indiscriminate and reactive selling. But the thing to remember is there is nothing of substance behind this selloff. Maybe we went a little too-high, too-fast, but that doesn’t justify a market collapse. The plus side of this selloff is we can now stop talking about how many days it’s been since a 5% selloff. We checked that one off and if we open at these overnight futures levels, we can cross a 10% selloff off the list too. But there is still nothing to this selloff and we are close to the end.

For those of us that took risk off the table during this run-up and have cash to spend, this dip is extremely attractive. The most profitable opportunities come from the most emotional times. Traders are scared selling at steep discounts “before things get worse”. But I don’t think it is going to get a whole lot worse. Tuesday will likely start ugly, but a mid-day rebound from the lows could be the end of the selloff. And while it feels risky to jump in, remember risk is a function of height and it’s been several months since the market was this safe. It was risky to chase stocks higher last week. It is a hell of a lot safer to chase these discounts today.

I wanted to write about Bitcoin’s plunge, but that will have to wait until tomorrow.


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Feb 01

Predicting the market is easy

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Thursday the S&P500 closed nearly unchanged for a second day in a row. Not bad considering the week started with one of the biggest selloffs in over a year. Volume has been above average, telling us traders are clearly paying attention.

2017 was a great year for stocks, but even it couldn’t compare to the way 2018 kicked off. But as I’ve been writing over recent weeks, the rate of gains was clearly unsustainable and running out of steam was inevitable. This isn’t rocket science and knowing what is going to happen is the easy part because the same thing always happens. The challenge is knowing exactly when it will happen. Never forget, we are paid for getting the timing right, not predicting what will happen.

To be honest, I didn’t expect this to go as high as it did, but I was smart enough to know it was powerful and wasn’t about to get in its way. But I also didn’t need to be apart of it either. Unsustainable moves are unsustainable. If you miss it, or get out too early, don’t worry about it, there is no need to chase because there will be another opportunity to get in when the risks are lower.

As I wrote Tuesday, we didn’t need to fear this dip because it wasn’t driven by a spooky headline. Instead we tumbled because we went a little too far, too quickly. Fear mongering headlines trigger large moves. Imbalances in supply and demand lead to relatively modest price swings. Rather than overreact to Monday and Tuesday’s weakness, the lack of a headline catalyst told us the move wouldn’t be all that big and there was no reason to sell fearfully or short aggressively. This is a normal gyration and we should respond in kind.

If we close above 2,820 Friday, then Monday and Tuesday’s selloff is done. That doesn’t mean we cannot selloff next week, but any further weakness will need a new catalysts. Crashes are frighteningly quick and holding 2,820 support for four days is anything but frighteningly quick.

I would love to see us dip a little further and create a more attractive dip buying opportunity, but the flat trade the last couple of days tells us confident owners are still confident and their lack of selling is keeping supply tight. If this selloff had greater potential, we would have felt it by now. Unfortunately this dip leaves us in no-man’s land. Not deep enough to become oversold and create a safe entry point, but so shallow that there is still risk underneath us. There is no reason to bailout of our favorite buy-and-hold positions and there is not enough potential to make a short-term swing trade worthwhile. And so we keep waiting for something more interesting to come along.

As I wrote on Tuesday, Bitcoin’s inability to escape $10k support meant lower prices were coming. And today’s selloff knocked another $1k off the price as we find ourselves at the lowest levels in months. Anyone who bought December’s parabolic rise higher is sitting on losses, as is anyone who was brave enough to buy the dip.

Last month’s greed has quickly turned into this month’s fear. The thing to remember is major selloffs take a long time to play out. We are already more than six weeks into this and we won’t find the real bottom for several more months. It will be a very choppy ride lower and that means lots of big bounces along the way. I expect prices will fall under $8k real soon, but we will rebound as high as $10k. But remember, this is a pattern of lower highs and lower lows. Buy the dips and sell the rips.

For the “hodl” crowd (aka hold for those of born in the last century), they better be prepared for much larger losses. In 2013 BTC fell nearly 80% from the highs. If history repeats itself, which it looks like it is doing, I wouldn’t expect to find a bottom until we slip under $4k sometime this summer. Every bounce continues to be a selling opportunity because the worst is still ahead of us.