Nov 23

Why you should sell this pop

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Really strong rally on the abbreviated, post-Thanks Giving trading session.  Obviously volume was ridiculously light, but it was real money exchanging hands and low volume profits are just as real as their higher volume counterparts.

MARKET SENTIMENT

I didn’t expect today’s strong rally, but at the same time it didn’t surprise me either.  The press is attributing it to strong Black Friday sales, but that is baloney.  All of the decision makers were out of the office and today’s trade was nothing more than tripping autopilot buy orders.  Most of them were stop-losses from shorts, but there were also some breakout buying as we easily cleared resistance at 1400.  But rather than traders sitting in front to their screens making decisions to buy or sell, last week traders placed tripwires above and below the market as a risk management technique to prevent them from being caught with their pants down while they were on vacation.

The thing we have to be wary of with today’s trade is people are not as committed to these gains because most didn’t actively chose to buy these levels.  Instead it was automated risk management that triggered this pop.  Shorts were protecting against larger losses and longs were buying the breakout so they don’t risk being left behind.

This setup makes for an awfully fragile rally and we covered a ton of ground in five trading sessions.  There is no way the rate of this rally, mostly driven by a short squeezes, can continue.  The point of maximum pain for shorts is where the market will peak and turn lower.  Decisively breaking 1,400 could be that point.  Or we could regain all the post-election selloff and test the 50dma to fully humiliate bears before turning lower.  But either way we are far closer to the end of this thing than the start.

TRADING OPPORTUNITIES

Longs should lighten up after this strong run.  It is possible we’ll see a little follow-on buying when the market opens on Monday, but the smart money is taking profits here, not buying the breakout.  The goal isn’t to top tick the market, but to make the easy money and let someone else shoot themselves in the foot by holding too long.  We’re currently in a swing trader’s market as the pendulum swings back and forth between bears and bulls.  Expect some turbulence in the near-term intended to demoralize both bears and bulls before the market finally reveals its true intentions.

I expect a continuation of the current bull market because there is nothing new and unexpected lying in front of us.  It is the fear of the known, not the unknown, that presents the best profit opportunities for the savvy trader.  Everyone already knows about the Fiscal Cliff, Debt Ceiling, European Debt Crisis, Middle East conflicts, and slowing China.  The fact that everyone is already talking about, even obsessing about these issues means we can safely ignore them.  Their fear is our profit opportunity and it is the crowd’s reluctance to buy that creates the asymmetric trade.

For the time being, lock-in swing trading profits and anticipate for the impending pullback.  But over the medium term, plan for an upside breakout from this consolidation.

Stay safe

Nov 22

Holders are holding

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Markets added a little on this pre-Thanks Giving session.  As expected, volume was far under average.  But seeing the market close above the 200dma is encouraging as it demonstrates holders are not eager to flip their shares.

Friday’s shortened session will have even less trade and most likely make for another boring session.  But after the last couple months, boring is good.  Don’t expect any real buying or selling until next week.  There is always political risk in the Middle East, but outside of that not much should happen until big money managers return to the office.

MARKET SENTIMENT

It is constructive to see people continue holding stocks after the large bounce back to the 200dma.  That means most holders are waiting for higher prices and their continued holding will keep supply tight and support prices at these levels.  This current stability is demonstrating everyone who thought the world was coming to an end already sold and the current crop of holders has a longer-term view.  This shift in ownership is what put a floor under the market.

TRADING OPPORTUNITIES

If there is one thing the market doesn’t do well, it is finding the perfect balance point.  Instead it tends to overshoot on both the high and low side.  We sold off more than we should have and no doubt we’ll also bounce higher than we ought to.  Expect prices to continue higher next week, but don’t get greedy and be prepared to lock in profits because while the news might be random, the market’s reaction to it isn’t.  The market will get a little frothy, we’ll run out of buyers, and the inevitable negative headline out of DC, Europe, or the Middle East will send of lower.  And if we’re being honest here, it isn’t the headline that sends us lower because there are negative headlines every single day.  It is running out of buyers that knock the markets lower.   But people don’t realize this because the financial press gets paid for coming up with reasons and they always find something to blame it on.

After we peak and come back down, we might make a new low, or we might bounce prior to 1350.  But the great thing is it really doesn’t matter to the trader who is in cash and patiently waiting for the next trade.  The market will bounce when it bounces and the opportunistic trader will be there to make money.

The game plan is higher, lower, and then higher again.  Sounds easy enough, but the money is made in the details, in this instance, getting the timing right.  And that is why we watch to see what everyone else is doing so we can put the odds in our favor.

Stay safe

Nov 20

Holding the 200dam

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets traded flat in this low-volume holiday-week session.  Today’s action supported Monday’s rebound and we’ll probably see higher prices before lower prices.

MARKET BEHAVIOR

Stocks traded sideways after Monday’s tremendous rally.  Volume was light during this holiday week, but it is supportive to see the market close above the 200dma for the second consecutive day.  Light volume makes the market susceptible to manipulation, but the cynical bears were unable to dent yesterday’s big move.

MARKET SENTIMENT

Clearly the last 50 S&P points were primarily driven by late shorts rushing for cover.  Most often the obvious trade is the wrong trade and when your neighbor is telling you how he sold all his stocks because the market is going to collapse, you know the market is becoming a safer place.  And that is exactly what happened here.  All the emotional sellers sold, there was no one left to sell, and prices rebounded as soon as supply dried up.

But the thing any bull needs to remember is short-squeezes are not sustainable by themselves.  We need follow on buying from big money managers to continue this rebound.  And chances are they will take a wait-and-see approach, especially through the remainder of this week because most senior traders are out for the holiday.

TRADING OPPORTUNITIES

The markets are especially sensitive to headlines out of D.C.  There is probably more room to the upside and that remains the high-probability trade, but any bad headline could crush the markets.  No doubt our politicians are sensitive to this and are weighing their words carefully.  That doesn’t mean someone won’t make an off-the-cuff comment that spooks the market, but it is more likely our leaders will deliberately measure and parse each word carefully, fully cognizant of what will happen if they don’t.

We very well could retest 1350 in the near future, but we’ll probably push up to 1400 first.  Currently the market is split between passionate bulls and equally passionate bears.  This is a recipe for volatility and we should expect some wild swings as the market oscillates between one extreme and the other.  But this presents a beautiful trading opportunity for anyone willing to buy the dips and sell the rallies.  In this environment take your profits early and often because the market will snap back before you know it.  We’ll probably see several failed breakouts/breakdowns before this finally moves out of this range for good.

The optimist in me continues to believe all the bad news is already priced in and this will resolve to the upside as the world continues to dig itself out of this hole.  Many people want to argue with this view, but their cynicism is what will fuel the rally.  If everyone was excited about the future, then there is nowhere to go but down.

Stay safe

Nov 20

The squeeze is on

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Don’t listen to bears claiming the low volume invalidates today’s move, selling has dried up and bears are powerless right now.

MARKET BEHAVIOR

Volatility cuts both ways as shorts got blown out of the water.  A lot of bears are pointing to the low volume today, but in the markets we win and lose on of price, not volume.  In reality, all the low volume demonstrates is selling dried up like the Sahara Desert and there was nowhere to go but up, and by up I mean shoot up like a rocket.  I’ve been talking about this for a few days, so hopefully it didn’t catch anyone by surprise.

MARKET SENTIMENT

Bears got a little too cocky last week and that lead to their barbecuing today.  Some people think you need to chase off all the bulls before a market can reverse, but that is wrong.  No matter how bad things get, you will always have willing buyers.  If you don’t, the free market lowers prices until willing buyers can’t resist.  This principle is the core of free markets and supply and demand.  The market price is always the balance point between bulls and bears.  If supply or demand skews one way or the other, the market price automatically moves to regain balance between the two sides.

But if we can’t look at numbers of bears versus bulls, what do we use to identify potential reversals?  It’s not numbers that signal tops or bottoms, but the attitude of each side that we are looking for.  Arrogance, cockiness, timidness, and uncertainty are signs of an imminent reversal.  Last week bears were patting themselves on the back for their savviness and insight.  I bet they are not feeling so smart today.

Today’s low volume signals bulls are still timid and bears are rationalizing the bounce trying to play down the significance.  That means there is still fuel in the tank for additional price gains.  It could be tomorrow or a few days from now, but the market is primed to go higher and all it takes is a minor positive news story to make the market jump.

TRADING OPPORTUNITIES

Stating the obvious here, but today was a great day to be long as this was the biggest up-day in almost three months.  And little surprise it came on the heels of a sharp and emotional selloff.  Don’t be afraid of the light volume, that just shows other people are watching this from the sidelines and all those on the outside are potential buyers who will keep pushing this thing higher if they start chasing.

Hopefully everyone took my advice and either avoided shorting this market, or took their shorts off last week.  There is still some upside left in this move, but expect volatility as the market works through this reversal.  This is setting up nicely for swing trading; buy the dips and sell the rallies.  The market needs to trade sideways for a bit and chew up bears and bulls alike before a directional breakout will stick.

Stay safe

Nov 16

Could our politicians actually do the right thing?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Bulls flexed their muscles as Obama and Boehner took the worst off the table.

MARKET BEHAVIOR

Stocks notched a new low in early trade before surging higher following conciliatory commentary between Obama and Boehner.  It made for the highest up-day volume we’ve seen in months.  While we only finished higher by half a percent, the positive reversal was far more impressive when considering the depths we rose from.

One day does not make a trend, but it showed more feistiness out of bulls than we’ve seen in a long time.  That is one of the biggest paradoxes in the markets, the fewer the number, the stronger they are.  Thinning the bull ranks is what finally allowed them to mount a serious counteroffensive.

MARKET SENTIMENT

It felt like a sentiment shift took place as Obama and Boehner appeared to take the worst case off the table.   No doubt there will be hang-ups and elevated tensions over the coming weeks, but it seems both sides are fully committed to brokering a deal in a timely manner.  It won’t be pretty, but it will happen and the forward-looking nature of the market will be looking past the Fiscal Cliff before the end of the month.

Of course this doesn’t mean all is rosy with the world because austerity will undoubtedly be part of the brokered compromise, split between increased tax revenue and spending cuts. But the economy has most likely recovered to the point where it can hold its own without the fiscal and monetary props.

It is entirely possible we’ll see a minor dip in GDP, but addressing the debt and deficit concerns could provide a boost in sentiment and outlook from both investors and business leaders.  We live in a highly leveraged economy and perception about future opportunities is what drives commerce.  Removing uncertainty by putting the deficit on a more sustainable track will no doubt help build confidence, the economy, and ultimately jobs.

TRADING OPPORTUNITIES

Today’s move revealed a side of the market we haven’t seen in a while.  Chances are this is part of the bottoming pattern, especially if politicians continue showing constructive progress toward addressing the Fiscal Cliff.

At this point the spring is wound tight and any positive news could set off a huge short-squeeze.  On the other side, much of the pessimism is already baked into the markets, so it would take a very big piece of bad news to push pessimism even lower.  For these reasons, the asymmetric trade remains owning the market here; it is more profitable to be among the first buying the dip than the last selling the plunge.

Now don’t get me wrong, everything is not right with the world and there will be more volatility before this is done, but for a swing trade the smart money is long this market.  But when the market moves your way, don’t get greedy and lock in those profits before they evaporate in the next pullback.

Stay safe

Nov 15

A willing buyer for every seller

By Jani Ziedins | Intraday Analysis

 

MARKET BEHAVIOR

The market traded mostly sideways and found support at 1350 the day after Wednesday’s plunge.  Volume was elevated for such a modest move and a lot of shares exchanged hands with the weak selling to the bold.

MARKET SENTIMENT

The downdraft took a day off as there was a willing buyer for every desperate seller.  The constructive thing is this churn is replacing skittish, short-term holders with more courageous, longer-viewed owners.  All the Johnny-come-latelys who chased this Summer’s rally and were buying above 1400 are fleeing the market in droves.  At a certain point they will all be flushed out and replaced with calm, cool, and collected value investors who smell profits in other people’s panic.  Now this doesn’t mean the panic induced selling is over, but the lower we go, the closer we come to the end of this.

S&P500 daily at end of day

The Fiscal Cliff is all anyone is talking about, but the thing we have to ask ourselves is if the Fiscal Cliff frenzy can get any worse?  Can Obama’s or Boehner’s rhetoric get any worse?  Or are expectations of fiscal calamity already predicting the worst and there is nowhere to go but up from here?

TRADING OPPORTUNITIES

The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers has already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.

The upcoming holiday week could obscure trading as many of the big decision makers are away from their trading desks, but if we look back at last year, the Monday after Thanks Giving was a huge reversal and showed early strength that turned into the best Q1 rally in decades.  I’m not sure if the same thing will happen here, but it is certainly a possibility to consider, especially if we see constructive collaboration on the Fiscal Cliff.

Stay safe

Nov 15

Another leg down

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets added to the decline, clearly undercutting the 200dma and resting just above 1350.  Was this the capitulation point, or just the start of a bigger move lower?

MARKET BEHAVIOR

Big down day in the markets as we continued the Q4 slide on high volume.  The market is now 8% off the September high.  That makes this a material pullback, but still far from a major one at this point.  Remember, most often it is the slow-motion declines that do the most damage because people don’t notice it happening when the moves are not dramatic enough to make headlines.  Plunges like this get everyone’s attention and run their course fairly quickly.

Given the size and severity of the moves the last few weeks, I expect we have a hard bounce in our near future.  Will that be tomorrow?  Or will we have another few dramatic drops before bouncing?  I can’t say because my magic crystal ball isn’t working, but I do know the market doesn’t make huge directional moves without a dramatic reversal thrown in just to keep things from being too easy.

MARKET SENTIMENT

The bigger question is if this coming bounce will be a bottom or just a sucker’s rally before more selling.  That is the harder question to answer.  The market’s psyche is an interesting thing and it sure does its best to try to confuse even the most seasoned of investors.  There is enough uncertainty surrounding the markets that we should expect a return of volatile trade.  We’ve already seen those volatile down days, but also know there will be strong up days as part of this too.  Obviously the market can’t leave bears out of the pain trade for too long before putting the screws to them.

The Fiscal Cliff is the big thing on trader’s minds and the market reacts strongly to any comments out of our national politicians.  Today it happened to be Obama’s first press conference since being reelected.  But the thing to remember is the Fiscal Cliff is a completely artificial and manufactured phenomena that is 100% under the control of just a few men.  They might be playing a high-stakes game of chicken to leverage a stronger negotiating position, but remember this is all just showmanship for the cameras.  These guys will broker a last-minute deal because that is their job and any politician is too spineless to make a real stand and risk committing career suicide.

The thing to keep in mind when the news is hyping up how much damage falling off the Fiscal Cliff will cause our economy, they are quoting a Congressional Budget Office report that assumes we will go the entire year of 2013 without a deal.  I suspect we probably won’t even go a few weeks before a deal is struck, again our politicians don’t have any core values and will cave fairly quickly when the heat is on.  But honestly this is a good thing and part of why this country is so successful.  We need a compromise even if it is last-second and involves lots of posturing for the cameras.. The worst thing for us is ideologues throwing up permanent roadblocks and falling on their swords for their hardcore base.

TRADING OPPORTUNITIES

I didn’t expect today’s selloff and thought we might be firming up a bit.  No doubt expectation of a rebound will prove correct eventually, but in the markets being early is the same thing as being wrong.  This is why it’s good to have a defensive strategy in place.  No one can be right 100% of the time and success in the markets is about managing those losses when you are wrong so you don’t give back all the profits you made on the good trades.

I still expect the market will bounce at some point, but the market is not behaving the way I expect, so it is best to step back and wait for the market to start acting more predictably again.  Maybe that will happen on Tuesday as we bounce back from Wednesday’s selloff.  Or maybe we selloff for a few more days first   Either way the smart move is to wait for the right entry point.

The market could continue selling off here, but there is no way to guess how far and how long that will go, so I’m not going to short the market and will instead wait for the higher probability trade of buying the bounce and riding that for a quick swing trade.

Remember, we never need to be in the markets and the best place to be when the market isn’t behaving as expected is in cash.  There will always be future profit opportunities, but losses are forever.

Stay safe

Nov 14

What is the harder trade?

By Jani Ziedins | Intraday Analysis

Markets were lower, then higher, and finally lower again.  Is that u-turn an ominous sign or simply the indecisiveness of the market trying to fool everyone?  I keep hearing bears talk about the widespread optimism and hope filled market, but I sure can’t find any of those market optimists.  Maybe they are hiding from me.

S&P500 daily at end of day

MARKET BEHAVIOR

The market opened lower on Tuesday, but first couple hours showed a strong rebound rally and no doubt sent some late shorts running for cover.  Unfortunately the market rolled over not long after because additional buyers failed to step in and support those price gains rally.   The market covered a lot of ground, but volume was just average as neither bulls nor bear were driven off in large numbers.

The trend remains lower and Tuesday’s early price action marked a new low for this pullback.  A lot of times these selloffs climax in a ‘V’ bottom, but the longer we trade at this level, the less likely we’ll carve out a ‘V’ bottom.

MARKET SENTIMENT

I keep reading articles and investor opinions that say the market is too optimistic and filled with hope.  But the thing is I can’t find any of those reported articles full of optimists and hope.  Maybe I am looking in the wrong places, but I am finding very little hope and even non-investor types are debating the Fiscal Cliff with everyone they meet.  Heck, today I even read a well-reasoned article on why the Fiscal Cliff, Debt Ceiling, and Europe is going to send us back to the 2009 lows.  The guy was trying to make himself out to be a contrarian, but 10 to 1 the comments to his article were supporting his bearish theme.  It sounded more like an echo-chamber than legitimate contrarian views.

No doubt the bears could be right and we have only seen the tip of the iceberg, but traditionally the markets don’t work that way.  We don’t see 50% declines when the biastras at Starbucks go on about how screwed this country is.  50% declines happen when that biastra is bragging about the dot-com stock he just bought or how many investment houses he owns.  We are miles away from that type of widespread irrational exuberance that leads to bubbles and massive corrections.

As for the notion that our economy is on ‘life-support’, that is what every recovery looks like.  Selloffs are only buying opportunities because the crowd is too shortsighted to see the potential in the future.  Taking the other side is a great way to make money; buy shares cheap when everyone says what a bad idea it is to own stocks and sell them when everyone thinks they are headed to the moon.

TRADING OPPORTUNITIES

The market is still in a down-trend and it is risky to pick a bottom.  As I said yesterday, these levels look interesting and are far safer places to buy in at than at any point in the last several months, but I could easily be a bit early in expecting a rebound.  Maybe the market will bounce decisively this week, or maybe it will selloff a bit more before bouncing.  But either way, this is a horrible place to be short the market.  If we look at the market like a spring, the post-election selloff unwound a lot of the downside potential and there is not a lot left in the downside move.  At the same time the emotion driven selloff has compressed the spring to the upside.  I’m not always right, but I’m okay with that if my mistakes are small and my correct calls are large.

Stay safe

Nov 13

Quiet, but constructive day

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The holiday lead to a tight, low-volume day, but given what happened last week we can count that as a victory.   There is not a lot of hope left in the markets and many of the weak hands have been chased out as we crashed through key technical levels.  The abundance of pessimism is making an optimist out of me.

MARKET BEHAVIOR

The market is finding its footing, at least temporarily.  We closed 1377 on Thursday, 1379 on Friday, and 1380 on Monday.  Monday’s trade fell within a tight range, seven points between the high and low, on exceedingly light volume, no doubt due to Veteran’s Day.  It is encouraging to see we made it through the weekend without compounding last week’s crisis of confidence.

We continue trading under the 200dma.  All the stop-losses set under 1400 and the 200dma have already been triggered and that selling event has come and gone.  From here it is harder to identify an obvious stop-loss underneath the market.  This is good because it is far less likely the market will stumble through another large concentration of stop-loss orders, triggering a new avalanche of selling.

Between all the selling that has already occurred and the lack of a critical technical level underneath us, the bears are going to have to work a lot harder to extend this move lower.

MARKET SENTIMENT

It is challenging to find a positive news story in the financial press.  Fiscal Cliff this, Euro Debt Crisis that…..  The press is even reading body language and facial expressions of our politicians trying to figure out what is going on behind the scenes.  The question for us is how do we trade this?

The first thing to recognize is we don’t trade news.  News is largely random and unpredictable.  In addition, the modern internet era made it next to impossible for the average trader to get ahead of the crowd before headlines become priced in.

But if we can’t trade the news, what do we trade?  We trade other people’s expectations of the news.  This is a small but crucial nuance.  People, not events, create emotion-driven, asymmetrical trades and high-probability profit opportunities.  For example, if everyone fears a Fiscal Cliff, then we assume these traders have already priced it in.  Common sense tells you anyone expecting an imminent market crash would sell ahead of it and quite possibly short the market.  Using that logic, we can infer anyone talking about the perils of the Fiscal Cliff has already reduced their exposure.  Based on the chatter in the press and investor groups, the Fiscal Cliff risk is already largely priced in and much of the selling expecting this event has already occurred.

No doubt we could see more selling if conditions deteriorate, but what happens if the Fiscal Cliff is not as bad as everyone fears?  This is where the asymmetrical trade kicks in.  The market fears the unknown and often prices in a larger risk premium than the event deserves, meaning much of the downside has already been accounted for.  If things did in fact get ugly, there isn’t a lot of downside remaining.  But if on the other side, if things go as expected, the market will rally because the uncertainty, fear, and risk of the worst is removed.  And if things go better than expected, the market will surge ahead.

This is what creates the asymmetrical trade.  The market will selloff more if things go worse than expected.  The market will rally if things go as expected.  And the market will pop if things go better than expected.  In one case the market moves down, in two cases the market goes up. And not only are the discrete outcomes in our favor by a factor of two to one, so are the probabilities and magnitudes of those outcomes.  The expected and most likely resolution will lead to a rally because it removes risk and uncertainty.   Only the low probability, worse than expected, will lead to further price declines.  And even if we do see prices decline, a large portion of the selling has happened ahead of time, meaning there is less downside remaining.

In the markets there are no guarantees, but there are probabilities.

TRADING OPPORTUNITIES

By no means is it completely safe to own stocks down here at 1380, this is the stock market after all, but without a doubt buying stocks today is far safer than it has been at any point over the last four months.  In fact, the riskiest time to own stocks was back in September when we were trading over 1450.  That is the paradox of the markets; it is safest when it feels the most dangerous, and it is most dangerous when it feels the safest.

We will know in a few days if the selloff continues or bounces.  The market has already made two legs down and that is usually enough to refresh a bull market.   If we are moving into a bear market, there are often three legs down, meaning we could see another bout of selling before the market temporarily bounces.

We have a chance for a strong rebound that takes out the shorts, or one more leg lower.  Those are not horrible odds for owning stocks at these levels.  My guess is pessimism has climaxed and we’ll head higher.  As mentioned earlier, news is largely random and without a doubt we could have a headline take our legs out, but if things stay the same or improve modestly we should see the markets bounce back.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

Nov 09

Selloff takes a breather

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The market ends flat, but many traders and pundits expect further weakness, a sign that can be interpreted as much of the selling has already occurred.    We might have lower-lows in our future, but look for a bounce here as late shorts get squeezed out of the market.  Near-term volatility will make this a swing-trader’s market.

MARKET BEHAVIOR

Market finished mostly flat on Friday after some ups and downs, but given the price action of the previous two days, this is a significant victory.   Volume was higher than average, but less than either Wednesday or Thursday.  For the time being, panic driven selling has abated.  This is a good thing because selling can trigger even more selling in a snowball effect.  The pause today gives traders the weekend to regroup and reevaluate their portfolio.  After some time away from the markets, investor’s nerves might calm down and we might see more rational trade next week.

MARKET SENTIMENT

Given the plunge over the last couple days, almost all the weak hands have been shaken out.  But the thing to remember is this pessimism is creating the fuel that will power the next rally.

People who are excited about the market are fully invested and can’t move the market any higher.  A pessimist is out of the market and the only thing he can do is buy stocks and push the market higher.  This is why contrarian investing works.  Optimists are powerless to move a rally higher, only pessimists can do that.  Too much optimism and a rally stalls; too much pessimism and things are primed to take off.  Learn to fear confidence and embrace pessimism.

From where we stand, it is hard to imagine the fear over headlines getting worse.  If you talk to any investor, the only question is whether Obama, the Fiscal Cliff, or Europe will crush the stock market first.  That kind of widespread pessimism, confusion, and fear among retail investors creates golden opportunities.  If these guys want to give away their money, I have no qualms taking it.

TRADING OPPORTUNITIES

The market looks very buyable here.  The panic driven selloff paused and gave investors a chance to regroup.  An avalanche of selling is a dangerous thing to jump in front of, but after the dust settles there are deals to be found.  If the market continues to find support here, look to wade in.  No reason to plunge in all at once.  Buy a little, let that show a profit, and then buy a little more.  If the market rolls over, your portfolio risk is mitigated because you are holding a smaller position. Chalk that loss up as a cost of doing business and look for the next entry point.

If we do rally next week, it will be interesting to see what kind of rally we get.  Often we can see a powerful surge higher as the shorts get blown out of the water.  These pops rarely last long before collapsing, so if we see big gains, get ready to lock in profits and wait to buy the pullback.  If we churn sideways and grind higher slowly, you can continue holding for an extended period of time.

We could see some near-term volatility as the market tries to figure out which way it wants to go and most likely we will be in a buy-the-dip, sell-the-rally mode through the end of the year.  If a savvy investor takes profits early and often over the near-term, it really doesn’t matter if the market heads higher or rolls over, you’ll win either way by trading the swings.  The only advantage individual investors have in this game is our nimbleness; don’t fail to take advantage of it.

Stay safe

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