May 11

Still finding support

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:45 EDT

Stocks are in positive territory this morning in the face of JP Morgan’s pressure on the financial sector.  The bank reported $2b in ‘hedging’ losses.  How that happened is anyone’s guess, but lack of risk management and oversight of the trading operation seems to have crucial role.

As for the indexes’ price-action, they continue to trade slightly above recent lows.  It is nice to see we have not triggered an avalanche of sell-orders, but the buy-the-dip crowd is also unable to move the market higher.  The one thing that remains intact is the series of lower-highs and lower-lows and it will take a material move from here to reverse this pattern, requiring the markets to break multiple layers of resistance before reclaiming the highs of two weeks ago.  We have the former support at 1360 that is now acting as resistance, the 50dma, and then finally moving through the 1415 and 1422 highs.  Not that it can’t be done, but these are several speed bumps along the way that will potentially slow down any move higher.

The thing that still concerns me is the lack of panic selling.  Typically the market bottoms by flushing out weak holders as it becomes irrationally over-sold.  It is this emotionally impulsive selling that lets savvy contrarian traders step in for quick profits.  In many instances orderly sell-offs are far too rational to form solid market bottom.   The lack of panic selling indicates there are still a lot of optimistic bulls out there and sentiment needs to come down a notch or two before we can bounce and head higher.  Of course I don’t have a crystal ball and the market is going to do whatever it wants to do regardless of what I think, but using history as a guide, it seems like we still might have more room on the downside.  But either way we need to take our cues from the market and respond accordingly.

Stay safe.

May 10

How do you un-bake a cake?

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 12:51 EDT

The market is finding modest support after the recent sell-off.  It opened higher, but has since retreated from the opening levels.  Even for the bull these up-days should be met with skepticism since it takes four days to confirm a rally.  If a person counts a down-day with an upside reversals as a rally attempt, today’s price action would only be day two.  With that in mind, any bull should wait for the confirmation before jumping on any potential rebound so they don’t get caught up in a suckers’ rally.

It is interesting to hear experts talk about Greece pulling out of the Euro.  I find it shocking that experts actually think this is a realistic possibility.  Everything is so intertwined it would be like trying to separate the sugar, flour, and egg from a baked cake.  It just can’t be done.  Since everyone’s bank deposits, loans, and salary is currently based on the Euro, how do you decide what money gets converted to Drachmas and what stays in Euros?  What if a Greek homeowner took a loan from a Spanish bank?  Euro or Drachma?  And even between a Greek borrower and a Greek bank?  Is the bank really going to keep the same interest rate between a Euro loan and a Drachma loan?  And for depositors, you’d be crazy to leave your money in a bank that will convert Euros to Drachmas.  Knowing that, everyone will cash out their savings and the banks will implode because they don’t have the reserves to let everyone cash out.  If you hear anyone mention Greece pulling out, that is a sign they just don’t understand what they are talking about.

The far simpler remedy is to preserve the Euro and have rest of Europe to pay Greece’s debts, or alternately let Greece go bankrupt and walk away from their debts.  And of course this might need to be repeated for most of the PIIGS, but hey, that is what money printing presses are for.  Its worked well for the US so far, so why not Europe too?  The funny thing is how opposed Germany is to money printing.  As one of the largest global exporters, a weak currency would benefit their export economy as it becomes more competitive globally.  Who would buy a Ford if you could get a BMW for the same price?

Anyway, there is a lot more to this story and it will play out over the next year.  The thing for the investor to be wary of is how this will effect sentiment and prices.  The rally over the last 6 months occurred because the markets largely discounted the Euro crisis as old and inconsequential news.  The rally in effect removed the risk premium associated with the Euro mess.  So where does that leave us right now?  With the risk premium taken out, that means a positive resolution will have little impact since it has already been accounted for.  But a Euro crash landing could hit the markets with a 50% haircut if the worst plays out.  Taking this into account, the Euro crisis effect on the markets ranges from +0% to -50%.  And for the +0% event to occur, it would require a very civil, orderly, and quick resolution to the problem.  Something that is highly unlikely to occur. Looking at those odds, it seems like the risk/reward is not in the bulls favor and they should proceed with extreme caution.

But don’t get me wrong, I’m not predicting doom and gloom for the global banking system or economy.  There is little reason to expect the Euro will unwind the global economy and I fully expect a reasonable resolution to this crisis, but the market will fret over the risk and this will pressure equity prices over the near-term.  Success for a trader is not about making economic predictions, but anticipating how other traders will react to the renewed uncertainty.

How I expect this to play out is the new leaders in France and Greece will make lots of noise to appease the base that pushed them into office, but once they come to the nitty-gritty details of hashing our a resolution with the rest of Europe, they’ll come to a similar conclusion as their predecessors because any other outcome will be even worse.  As we’ve seen in this country, it is far easier to criticize and make promises as an outside challenger than it is to lead and take responsibility for the outcome.  It will take some time for reality to set in for these new govts, but at this point they have little other choice.  But the period between now and then will be filled with landmines for the markets just like it was last summer.

Anyway, back to the markets and how to trade these insights; most likely any strength should be used as an opportunity to get out or initiate shorts.  Wait for the market to get overly bearish before looking to get back in.  And of course we might already be at that point if there are too many people with views like myself.  If that is the case, we could bounce any time now.  But either way, I’d rather be late than risk getting in too early.  Profit opportunities are like a city bus, if you miss one, another one will be along any minute, but losses are forever.  A similar saying, it is better to miss the bus than get run over by the bus.

Stay safe.

May 09

Bulls putting up a fight

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 1:07 EDT

Bulls are not rolling over dead and they continue putting up a good fight.  Yesterday the market rallied off of lows and closed in the upper end of the day’s range.  Today the market gapped down at the open, but has since bounced strongly off of the lows.  Is this resilience an encouraging sign, or a symptom of stubborn denial?

Often market participants are slow to identify shifts in the market’s personality as they cling to strategies that have been working.  This is the classic case of chasing last year’s big winners hoping for a repeat performance, but this approach is often a day late and a dollar short as it fails to account for changing conditions and sentiment.

For the last 6-months, anyone who bought the dips made good money.  And it seems a lot of traders are continuing with this same strategy as they try to bottom-pick this decline in anticipation of the next rally.  But in the markets, things work until they don’t.  And with every successful event, we move one step closer to the one that fails.

In the markets nothing is certain and to be successful we must anticipate and trade probabilities as we balance the risks and rewards.  No doubt we could bounce higher from here, but given how long the previous rally was, we need to be on alert for a shift in market personality.  Rather than chase the market, our goal should be to get in front of it as we anticipate these transitions.  For example, a great time to close positions and take profits is when you feel on top of the world and start daydreaming about what you will buy with all your expected profits.  And on the other side, when you have given up all hope and are convinced the market is about to plunge even further is when you need to start looking for stocks to buy.

Given the bounces over the last couple days, I expect we still have more room on the downside because the bulls and buy-the-dip crow has not been completely demoralized.  Once we reach that point of maximum pain, they will all run for the exit, and that capitulation will signal the end of the sell-off.  If we continue to get spooky headlines out of Europe, that point might not come until we break 1,300 on the S&P500.  This is not a prediction, but simply listing one of several possible outcomes.  And even if we fall down to 1,300, it might not be a straight line and we could saw-tooth our way lower as the buy-the-dip crowd continues to put up a fight.

As for leading stocks, they are dropping like flies as speculators are losing their appetite for risky investments.  Some of these high-fliers were holding up well, only to get whacked days later.  Little doubt these are exceptionally risky places to hideout in a correction.  And even if some of them will make it through this, if you hold 5 stocks, will the one strong stock make up for the losses in the other four that implode?  The deck is clearly stacked against retail investors in terms of knowledge, skill, experience, information, and resources, but the biggest and clearest advantage we have is our nimbleness.  We can get in and out of positions in seconds, something big money is extremely envious of.  If we fail to take advantage of our nimbleness, then we give up the only advantage we have in this game.

Stay safe.

May 08

Broken Neck

By Jani Ziedins | Intraday Analysis

S&P500 Daily @ 1:37 with Head and Shoulders

A horrible day to own speculative growth stocks as the IBD50 is getting crushed, down over 3%.  RAX ‘s 12% haircut looks modest in comparison to FOSL’s horrifying 37% plunge!

European political discord has pushed the broad markets under previous support and broken the neckline of a head and shoulders, a common reversal pattern.  Given negative headlines/fundamentals and now technicals, the bulls have little to hang their hat on as the pendulum is swinging solidly into the bear camp.

It is periods like this that challenge the home-run hitter’s resolve as they try to stomach these precipitous sell-offs in their core positions.  These are the times when following your portfolio daily can be a hindrance to a buy-and-hold investor’s performance because moves like these tempt them to sell at the wrong time due to emotional weakness.  The only way to make good money in this game is to sell on the way up or hold through the pullbacks.  Getting shaken out during normal pullbacks is the exact wrong thing to do and is what prevents most amateurs traders from capturing worthwhile profit from their good ideas.

No doubt the market could go either way, but it sure feels like this move has more room on the downside as the market demoralizes the buy-the-dip crowd and former bulls turn tail and run for cover.  Often dips make for great entry points, but this doesn’t feel like the time or place for that kind of contrarian thinking.  The best short-term trade continues to be moving to cash or for the bold, shorting.  Of course for the home-run hitter, my longer-term prognosis is for this weakness to pass and the market to resume higher in the second half of the year.  But for my nerves and account balance, I’d rather sit out the decline and wait for the rally to get back in.

Stay safe.

May 07

European upheaval

By Jani Ziedins | Intraday Analysis

S&P500 daily, end of day

Interesting to see the outcomes of French and Greek elections.  The Euro crisis fell off the front page last fall and now it looks like it is trying to nudge its way back into spotlight with key political upheavals in France and Greece.  But with all the negative talk by market pundits, the indexes held their ground today and were flat in the face of this news.  Much of that can be attributed to the market expecting these results as they were telegraphed by pre-election polling over the last few weeks. But while the actual result was expected, the consequences might not be priced in.

The problem with new govts in Greece and France means the political negotiations that took place last summer will need to be rehashed and all the uncertainty and infighting that went along with last summer’s volatility will be front and center yet again.  Since we’ve already been there and done that, I don’t expect the same amount of uncertainty, volatility, and sell-off as we saw last summer, but as everyone knows, the market hates uncertainty and no doubt this will weigh on equities.

Today’s lack of a sell-off is most likely due to the expectations that France’s and Greece’s new ‘socialist’ govts will give up the economic crushing austerity plans and instead support a more growth oriented easy money agenda.  And ultimately I think this will be a good thing for Europe and the global economy, but the near-term battles with fiscally conservative Germany will muck up the waters and the market hates uncertainty. Can the markets continue ignoring the Euro mess as it has done for the last several months, or will new infighting and breakdowns bring the story back to page one?

Ultimately I expect this will all work itself out, but over the near-term it will be hard to justify the bull-case in the face of this turmoil and the market could struggle over the summer because of it.  The market is facing an uphill battle between headline-risk and if we fall a little lower, the technicals will also be supportive of a sell-off.  For the adventurous looking to make money on the short side, now would be a good time to ready a watch-list with high-flyers that have struggled recently.  Look for the market and these watch-list stocks to break resistance on high volume and jump on board the downdraft.  But I expect this downward move will be fairly moderate, so be prepared to lock-in worthwhile profits and don’t let yourself get greedy.  Just like last fall, I expect the market will find its footing once the it realizes the fear is unjustified and the outcome becomes more clear.  This will lead to another nice year-end rally.  Of course the further away the predictions are, the less reliable they become so we will need to continue revising our expectations as events and price action unfolds.

And as always, I could be 100% backwards in this analysis and the market might rally strongly in the face of what it should do because that is how the market rolls.  The number one rule in investing is the market is bigger than we are and it can bankrupt us no matter how sound our logic is.

As always, stay safe.

For those following the blogs over the weekend, there was a technical glitch that produces a post full of gibberish.  I apologize for that and it has since been corrected.  If you wish to read that post, it will follow this post on on the main page of the website.

May 05

Disappointing employment numbers

By Jani Ziedins | Intraday Analysis

S&P500 daily, end of day

Friday’s employment numbers came in under expectations and were the lowest net gains we’ve seen in six months. In addition, this was the second consecutive month employment came in under expectations and the situation was ripe for a sell-off.

But while the results were disappointing and the market sold-off, volume was relatively constrained and the indexes have not retreated to new lows. This shows waves of panic selling didn’t hit the market and the decline was relatively orderly. Some might suggest this is a positive revelation, but ironically I find the lack of concern by market participant a concern. Panic sell-offs rebound quickly, but orderly sell-offs have legitimacy and are far less prone to bouncing. No doubt markets overdo things, but they usually overdo them in dramatic fashion and we have yet to see that drama, so I expect we could have more room on the downside before we see a bounce.

IBD moved the Market Outlook into Market In Correction, so that means we need to see four days of constructive price-action before we get the green light for new purchases. And given the sentiment of other traders, that seems to be the prudent move at the moment. It makes sense to lighten up on existing positions showing any weakness and is a good excuse to weed-out under performing stocks.

INVN daily, end of day

As for individual stocks, INVN blew up in spectacular fashion, plunging 25% as they reported disappointing 250% growth. Hard to fault management for that performance, but the market can be a brutally judge, jury, and executioner as they set far higher standards. This is a painful reminder of how volatile small-cap growth stocks can be and why often it is prudent to lock in gains when you can. No doubt INVN was a trading vehicle and fundamentals took a backseat to gambling-like speculation. The interesting thing was to see the far more modest 5% loss in Thursday’s after-hour and Friday’s premarket trading, yet when the stock opened for trading it plunged beyond belief. No doubt much of that anomaly was structural in nature as the decline triggered countless autopilot stop-loss orders and it was all downhill from there. This was a dramatic flush out and it has the potential to clean the slate for INVN as it drove of most of the speculators. It will be an interesting stock to keep on the radar given its impressive earnings growth and the fact that the reduced guidance was due to external factors. No doubt is is far from a buy candidate in its present form, but I’m not convinced INVN’s run is over.

May 04

Uptrend under pressure

By Jani Ziedins | Intraday Analysis

Leading stocks had a rough day, falling far more than the modest pullback in the indexes. Live by high-beta stocks, die by high-beta stocks. While today was ugly, taken in context of last week’s progress, we have only given up a portion of the recent gains and are not in hot water yet. We continue have a some cushion before we risk breaking resistance and making new relative lows.

The problem for the current market comes when bringing in the volume of the up-days vs the down-days. The largest volume days have either been down-days or stalling-days ending with little gain.

As it stands, the market seems more skewed toward the bearish case and that is why IBD’s Big Picture moved its market outlook to Market Under Pressure, but all that will be rendered irrelevant if Friday’s employment numbers are outstanding. Meeting expectations or missing expectations will most likely allow the bear case to develop. At this point it is too late to predict what the employment numbers will be and we are left reacting to the aftermath once it is released. Regardless of the fundamentals, we need to trade our plan and respond to the price action no matter what we think should happen.

As for individual stocks, KORS, FRAN, INVN, and others had rough days giving up a large chunk of their recent gains. But that is the nature of trading high-beta stocks. One day you are a hero, the next you are a goat. But there is no such thing as easy money in the markets and the stocks with the greatest potential also are the most gut-wrenching. If it were easy, everyone would do it. Stick to your rules and use those to dictate how you respond to this market and try to keep emotional impulses in check.

Stay save and lets hope for the best Friday.

May 02

Lack of conviction continues

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 1:17 EDT

The markets had a disappointing finish yesterday, giving back most of their intra-day gains in the last hour of trading.  And this morning the market continued that reversal, opening modestly lower, but on a positive note have since bounced off of the daily lows by early afternoon.  As for absolute levels, the S&P500 is holding up reasonably well, but sticking with the ongoing lagging theme, the NASDAQ retested its 50dma again and is less technically strong.  From the price action of the indexes, it appears money managers are rotating out of the aggressive tech and small cap names and moving their money to more defensive sectors.

Given the lack of conviction by either bulls or bears, it is not surprising the indexes are continuing to churn sideways and breakouts either direction quickly lose steam.  Both headlines and sentiment have been mixed preventing a more sustained move either direction.  Maybe Friday’s employment numbers will be the catalyst that finally tips the scales one direction or the other.

LULU daily @ 1:17 EDT

KORS is adding on to yesterday’s strong move off of the 50dma.  LULU is also exerting itself, powering to new highs today.  LULU’s move doesn’t have the duration to qualify as a base and is simply a bounce off of the 50dma.  The buy range for 50dma bounces are from the 50dma all the way up to 5% above the previous high.  From that measure, both LULU and KORS are still in the buy range.

May 01

Nice rally day

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:32 EDT

The indexes are up nicely today, reinforcing last week’s technical breakout above the recent 50dma consolidation.  Obviously my reluctance regarding the market so far has been misguided and no doubt an army of people feeling the same way I do is partially responsible for the upside we are witnessing.

The interesting thing will seeing how far this can go.  A big push behind last quarter’s monster rally was institutional investors playing catch up as the market left them in the dust.  At the moment the second quarter is in the red, so there is no pressure for big money to chase the market.  Of course that could change if we start making new highs with a few more days like today.

Friday’s employment number will be a big headline grabber, but it seems like it is less of a market moving event than it was earlier in the economic recovery.  No doubt a big surprise either way will shock the market, but anything that approaches expectations should not create too much of a wave by itself.  Of course that doesn’t mean investors won’t use it as an excuse to trade a preconceived bias they have and that could potentially trigger a larger move if enough people jump on board as part of self-fulfilling prophecy.

KORS daily @ 2:33 EDT

FIRE is having a great day, up 13% after earnings and is adding to its already impressive gains since its Feb breakout.  KORS is jumping off of its 50 in strong volume today, giving a solid entry or add point for a bull.  BWLD is flirting with its 50, but struggling to hold above it in afternoon trade.  AAPL found support at the 50 earlier in the day, but has since given back all those gains and is currently flat.

I added a tab to the CrackedMarket website with a watch-list of the stocks I am following.  This is far from a comprehensive list and many big winners will not make the list simply because by design it will be highly exclusive instead of inclusive.  The goal is not to find every stock that makes a big move, but instead be focused on identifying a highly targeted list with as few false-positives as possible.  Because of the advantages of scalability in stock investing, we only need to identify one or two big winners each year to produce great results as long as we allocate enough capital to each good idea.  The bane of a portfolio is getting stuck with dead money stocks that don’t move and water down any winning positions.  This is why I am merciless when cutting otherwise good stocks from consideration.  Further, the goal is not to find obscure stocks no one knows about yet, but instead target stocks that are starting to show up on my radar multiple times and in the early stage of generating buzz across the larger investing community.

Apr 30

Buy the dip or sell the rally?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:05 EDT

Indexes are selling-off modestly for the first time since breaking above the recent trading range.  Is this a good time for people who missed the recent run to get in, or a last chance for those still holding stocks to get out at a decent price?  In typical fashion, the arguments for both directions are equally compelling.

If we use the strength of the follow through day and the performance of the recent rally’s general, AAPL, as a benchmark, it seems less than an ideal foundation for a material move higher.  But on the other side, the markets often climb a wall of worry and it is this very uncertainty that provides the best opportunity to buy early weakness and hold for a profit as other investors slowly come around.

 

FRAN daily @ 1:05 EDT

I am fighting a negative bias and I don’t want to let it skew my outlook, but I still find myself suspicious of this rally.  There are a lot of good stocks holding up well in this weakness, but I have yet to pull the trigger on any of them since the follow through day.  FRAN is having a great day, up 5% in a continued bounce off of its 50dma.  LNKD is also showing impressive strength after its own 50dma bounce.  SWI is holding on to an impressive move off of last week’s earnings.  On the other side, AAPL is extending a 3-day slide after its blow-out earnings.  It is pushing down toward its 50dma and a bigger risk will potentially be a test of the recent $555 low.  It seems at the moment everyone who wants AAPL already owns AAPL and no one is left to rush in and prop up the declining price.