Cracked.Market

Feb 23

Sell When We Don’t Want to Sell

End of Day Update:

The S&P500 broke through 1,940 resistance Monday, driven by hopes of an imminent OPEC production cut. But the good times were short-lived when the Saudis and Iran threw cold water on those expectations Tuesday. That sent us tumbling back to the 1,920s where we finished near the lows of the day on lighter than average volume.

During choppy periods like this, we are often our worst enemy. Almost all of us come to the market with a bullish or bearish bias. Either we think the economic dominos are already falling and it is only a matter of time before stocks wake up to this reality. Or all these headlines and fear mongering are nothing more than Chicken Little and stocks will rebound once people realize the sky isn’t falling. The problem with thinking with a bias is it causes us to get sucked into every breakout or breakdown that confirms our outlook. Slip to the lower end of the trading range and bears are greedily shorting with reckless abandon. On the other side, bulls are buying hand over fist every time we approach the upper end of this range. Unfortunately these have been the worst moves to make at the worst possible times because moments later prices have reversed sharply. Buying breakouts and selling breakdowns is a great strategy in trending markets, the problem is we are stuck in a range bound market and smart money is buying weakness and selling strength. While bulls and bears are duking it out on social media, the pragmatist is making money in the market.

Two-weeks ago owners were emotionally selling stocks at steep discounts near 1,800 because they were desperate to get out before things got even worse. I told readers of this blog that was the exact wrong move to make. Markets move in waves and it is a mistake to sell at the bottom of a wave. If they held that long, then they should continue holding and wait for the inevitable bounce. Now that we rallied 140-points, the previously fearful owners are now getting cocky and patting themselves on the back. But rather than gloat over their good fortune, they should recognize we are nearing the upper end of this range and this is a far better time to be selling defensively. Holding when we are scared and selling when we feel good is hard to do, but going against our emotions is often the best trade to make.

The reason stocks remain range bound is most traders are stuck on their bullish or bearish outlook and no headline or price move is going to dissuade them. Stubborn owners keep holding even when the headlines and price-action are dire. But no matter what headlines proclaim, if owners don’t sell, then we stop going down. That happened in January the first time we tested 1,800 support, and lo and behold the same thing happened when we retested 1,800 support two-weeks ago. Owners that didn’t want to sell in January also didn’t want to sell this time. While that kept a floor under prices, we are also bumping our heads on a ceiling near 1,940. This is where those with cash are no longer interested in chasing stocks given this economic uncertainty. In the same but opposite phenomena, when we run out of buyers, stocks stop going up.

Until one side is unequivocally proven right and the other wrong, expect this stubborn standoff of wills to continue through at least the end of the first quarter. Prices move when people change their mind and adjust their portfolio. Be on the lookout for that new development that persuades one side to give up and join the other. That is when we will finally break out of this sideways market.

As for a trade, 1,900 support will be a key test over coming days. Hold this level through early next week and it is building the foundation for a run to 2,000 resistance. Tumble through 1,900 over the next few days and expect another test of 1,800 support.

Jani

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Feb 18

Strategies for Trading this Rebound

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Thursday was a rest day for the S&P500 following three-days of powerful gains that recovered 100-points of the recent selloff. Given how far and fast we moved, it’s neither a surprise nor unhealthy to take a small step back. The question is if this is nothing more than a pause before continuing higher, or hitting our head on resistance before returning to 1,800.

The last few days have been painful for bears and no doubt a big chunk of the buying has been propelled by a short-squeeze. But short covering and dip-buying only represents a small sliver of the demand necessary to sustain a larger move higher. While this smaller group can kickoff a move, they don’t have the buying power to keep it going. For that we need big money. The thing about big money is it is far more conservative and hates chasing fast moves. These more experienced and patient investors wait for the dust to settle and prices to pullback before making their move. And in a bit of a self-fulfilling prophecy, their lack of buying actually causes the pullback and buying opportunity they are waiting for.

Long-time readers of this blog know markets move in waves and were expecting this pause near prior resistance. What is less clear is what happens next. There are three possibilities. We are off to the races again tomorrow. Unfortunately the higher and faster we move, the less sustainable the move becomes and we will like stall near 1,960 and the 50dma before crashing back to earth. The next possibility is a gentile pullback to 1,900 support over the next several days. These minor discounts and subsequently stability will be enough to convince big money it is safe to buy at these levels and their demand will in turn drive the next leg of the rebound. The last possibility is we slice through 1,900 support on our way back to the lows of the trading range. Stocks stumble from unsustainable levels fairly quickly and it won’t take long before we know if this is happening or not.

The biggest differentiator between these possibilities is time. The unsustainable climax surge higher will happen on Friday if it is going to happen at all. If the market wants to return to the lower end of the trading range, it will show its hand by Monday at the latest. On the other hand, if we can hold 1,900 support into Wednesday, then things are stable and present good entry for those that missed the first leg of the rebound.

Jani

Feb 16

1,900: Now What?

By Jani Ziedins | Intraday Analysis

S&P500 Daily

End of Day Update:

Tuesday the S&P500 continued its rebound from last Thursday’s lows and is now just shy of 1,900 resistance. Not a bad turn of events given how awful things looked last week. This strength came on the coattails of a bounce in oil prices due to a rumored OPEC meeting and prospective supply cuts. The meeting happened, but they only agreed to cap production levels, not cut supply as hoped. Failing to live up to expectations sent oil prices tumbling Tuesday, but amazingly enough, the S&P500 closed at the day’s highs despite oil’s reversal. This is highly noteworthy because it was one of the few days this year where oil finished at the lows but stocks managed to close at the highs. Are stocks finally breaking this unhealthy correlation to oil prices? One datapoint doesn’t create a trend, but it is certainly a good start.

In last Thursday’s free blog post I caught flack from hecklers for suggesting that was the wrong time to sell defensively. Luckily for me hecklers are the most bold just before a reversal. While I am in no way suggesting we are out of the woods, a person who resisted the urge to bail out last week was rewarded with a nearly 100-point rebound from the lows. If a person wanted to sell defensively, today was a far better opportunity to do it than at any point last week. Everyone knows markets move in waves, unfortunately most forget that in the heat of the moment.

While I wrote about a rebound to 1,900 last week, I sure didn’t expect it to happen over two-days. But that is the way the market works. Either it takes so long to make a move that it convinces us we are wrong before proving us right. Or it does it so quickly we barely have time to register what happened. Clearly this bounce off of Thursday’s lows falls into the latter camp.

It is nice to talk about what happened, but what everyone wants to know is what comes next. For those that cannot handle this volatility, selling proactively near 1,900 makes a lot more sense than reactively selling near 1,800 and isn’t a bad decision for anyone needing a timeout from this chaos. A few weeks ago I wrote about us falling into an 1,800 to 1,940 trading range and I haven’t seen anything yet to suggest this has changed. Even though we might continue higher in the near-term, this rebound will likely fizzle and almost without a doubt there will be another opportunity to get in near 1,900 in the future. Sideways markets are the worst for longer-term owners because they hold the risk of a larger decline but are not getting paid for it with an appreciating stock price. This isn’t a problem for the resolute buy-and-hold owner, but those with less conviction are at a greater risk of reacting poorly to the choppiness inside a trading range.

Those of us that have a little larger appetite for risk, Tuesday’s price action was encouraging. As I already mentioned, it was a significant development when oil finished at the day’s lows and equities at the highs. Historically oil prices and the broad equity market have a very weak correlation and at some point this unhealthy relationship will end. Could this be the start of that? While OPEC didn’t give us what many were hoping for, production caps are a good start. Much of the fear fueling this plunge in oil prices was producers ramping up volumes to offset their declining incomes. A break from this runaway ramp in supply is a good start. If oil stabilizes around $30, while not a healthy number, at least equities can price it in and move on. As I shared in a previous post, we have fallen far enough that we shouldn’t plan for a v-bottom and instead expect this sideways choppiness to persist through at least the end of the quarter. But for the nimble swing-trader this presents a trading opportunity. Buy weakness and sell strength until something new comes along.

Jani

Feb 11

Your Next Move

By Jani Ziedins | End of Day Analysis

End of Day Update:

Thursday was another rough day for the S&P500 as we were taken down by overnight weakness in Asia, Europe, and the oil market. There wasn’t anything new driving this global selloff and it seemed to be more of the same global growth fears that have been hanging over us since the start of the year.

Two-weeks ago everyone felt better when oil surged above $33 and stocks reclaimed 1,940. As relief spread across the market, it felt like the worst was behind us. Unfortunately that was nothing more than the calm before the next wave lower hit us. Here’s the thing, everyone knows market move in waves. Rationally we understand we should buy stocks when they are cheap and sell when they are expensive. But if we know better, why do most people buy when we go up and sell when we go down? That makes as much sense as telling your neighbor that you refuse to buy gas at $1.75 and will take public transit until prices return to $3.00. How stupid is that? Well that is exactly what most people do in the stock market. They greedily buy stocks when they are expensive and fearfully sell them when they are cheap. No wonder most people have a hard time making money in the market.

Looking at equity and oil prices on Thursday, are we at the upper end of a wave, or the lower end? Sure looks like the lower end to me. Armed with this knowledge and using the rational side of our brain, should we be selling or buying stocks on days like these? Of course some people will justify selling because they are getting out “before things get worse”. Well unfortunately I’m afraid I have some bad news for you, if you are down 15% things are already worse. That’s because we are closer to the end of this move than the start. Over the last 65-years we have only fallen 30% from the highs five-times. And it’s actually better than it seems because two of those times we only exceeded 30% losses for a handful of days before rebounding sharply. For all practical purposes only three-times in 65-years has a 15% loss been closer to the beginning than the end. That averages out to one time every 21.7 years. Not exactly a high probability event.

Sure we might fall another 5% from here, but if someone is already down 15% and we only have another 5% to fall, should they be selling defensively now, or just riding it out since they already came this far? The time to sell defensively is before these things get away from us, not after the damage has been done. January 4th when we were still above 2,000 I told my subscribers to get out because things didn’t look right. That is the proper way to sell defensively. Waiting until the pain gets too great is nothing more than trading emotionally and the best way to give away money.

Three-weeks ago I told readers of this free blog that it was the wrong time to sell because we were getting close to bouncing and a couple of days later that is exactly what happened. Then I warned readers that the rebound was bound to stall near 1,940 as we carved out a trading range that would take us into the second quarter. If a person wanted to sell defensively, that rebound was their best chance to get out. Now that we find ourselves at the lower end of the range, this is where we should be looking to buy the dip, not sell it. While we could fall a little further and undercut recent lows, there is nothing new to these global slowdown headlines and no reason for them to take us dramatically lower. Expect the market to bounce over the next few days and return to 1,900 over the next few weeks. If someone wants to get out, selling at the higher end of the trading range is a better time to do it.

Jani

Feb 09

Get Ready for the Bounce

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 ended a turbulent day exactly where it started. But given the headlines and early losses, a flat close is actually a win. Japanese stocks were gutted 6%, oil plunged 5%, and Europe was down nearly 2%. In the face of these tremendous headwinds, our market held up amazingly well by not succumbing to the global panic. Unfortunately flat might not be good enough.

Typically oversold markets rebound with explosive force. While that bounce might arrive Wednesday, if it doesn’t, that means we have a little more downside remaining. Two-weeks ago I suggested we are on the verge of entering an 1,800ish-1,950ish trading range and so far that is exactly what has happened. We rebounded off the January lows when we ran out of fearful sellers and existing owners were no longer willing to discount their stocks any further. That put a floor under the market and helped stocks rebound to 1,940, but beyond that point those with cash were no longer willing to chase prices higher in the face of this looming uncertainty. The resulting lack of demand pushed us back to the lower end of the trading range. At least to this point, stock owners are once again showing a reluctance to sell at lower prices and is why we found support the last two days. This confidence is keeping a lid on supply and propping up prices. No matter what the global headlines say, when few are willing to sell, prices remain resilient.

While it is easy to say this is little more than a normal and routine trading range, it sure doesn’t that way. But the thing to remember is nothing ever feels routine in the market. By rule every move has to be dramatic. If it didn’t, no one would sell. And when no one sells, we don’t go down. Therefore every time we go down, it must feel real. This is circular logic, but it happens every, single, time. The only time a market looks easy is when we are reviewing a chart months after the fact. And to this point, I have little doubt that two-months from now it will seem painfully obvious what we should do. But without the benefit of hindsight, making a trading decision today is anything but easy.

If we don’t bounce Wednesday, that tells us we haven’t found the capitulation bottom. As I stated earlier, rebounds from oversold levels are decisive and meandering around this level for three-days is anything but decisive. The ideal capitulation bottom is a relentless intraday selloff that slices through January’s lows and breaches 1,800. But just when it looks like we are going over the waterfall, we run out of sellers and bounce. That will be our buy signal to buy and hold a return to the upper end of this trading range. But in this instance it is better to be a little late than a lot early. Wait for the bounce to ensure we are not in fact plunging off a gigantic waterfall.

Jani

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Feb 02

The Trading Range is Here

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 failed to hold Friday’s gains and we challenged 1,900 support Tuesday. But regular readers of this blog expected last week’s rebound and this week’s retrenchment. A week ago I told them to prepare for a 1,820ish to 1,940ish trading range to develop and to this point the market is acting like it should. January’s 10%+ pullback did a little too much damage to put in a v-bottom, meaning we should expect a sideways consolidation and trading range to develop in the near-term. While most of us come to the market with a bullish or bearish bias, we need to resist the temptation to overreact these swings. Instead of buying the breakout or selling the breakdown, anticipate these reversals and trade against them. Take profits when the crowd is rushing in and buy when they are giving away stocks at steep discounts.

Trading ranges develop when both sides are entrenched and unwilling to yield. If a stock owner didn’t sell last August’s China meltdown and this year’s oil collapse, what are the chances they will bailout due to a recycling of these same headlines? The is also true on the other side. Recent sellers abandoned the market because they are convinced things are only going to get worse. A modest bounce is unlikely to convince them to buy stocks with reckless abandon anytime soon. With such strong and opposing viewpoints, we settle into a trading range until something new shakes up the status quo.

Jani

Jan 26

Three Ways to Trade this Volatility

By Jani Ziedins | Intraday Analysis

End of Day Update:

Choppiness in the S&P 500 continued Tuesday when we recovered most of Monday’s selloff, the day that erased most of Friday’s gains. Three-days of nearly equal and opposite moves, but the one constant through all of this has been the driver: oil.

Equity traders cannot make a move until they first see what oil did overnight. Then, and only then, can they decide if they should buy or sell stocks. This trading mentality lead to a nearly perfect 98% correlation between oil and equities since the start of the year. This is the tightest link in more than 25-years, far eclipsing previous periods of elevated correlation that only approached 80%. Clearly this an abnormal link that cannot last, but as long as equity traders think the only thing that matters is the price of oil, that is the card we have to play.

The most impressive thing about today’s 1.4% pop is it came on the heels of a Chinese stock market meltdown. Shanghai fell more than 6% Tuesday and their bear market rout is carving out new lows. Chinese weakness triggered our January meltdown, but it seems traders have moved on to obsessing over oil prices and are increasingly indifferent to Chinese stocks. But this divergence might be short-lived since China, oil, and S&P 500 futures are tanking in overnight trade. If this weakness persists, the fourth whipsaw will unwind the bulk of Tuesday’s gains.

But as I warned in my last few blog posts, we should expect and be prepared for this type of volatility. Corrections larger than 10% rarely result in v-bottoms that rebounds to recent highs. Instead we see choppy trade as dip-buyers, regretful owners, and over-confident bears fight for control. One day we are saved, the next day the world is ending. And so the cycle continues until the market has battered, bruised, and humiliated bears, bulls, and everyone in between.

In normal, trending markets buy-triggers and stop-losses work well, but these are clearly are not normal times. Trading predetermined levels is the quickest way to give away money in choppy basing patterns like this. If you set a stop-loss 20-points under the market, you pretty much guaranteed yourself a 20-point loss. That doesn’t make a lot of sense, so how do you trade this market?

The simple answer is you don’t. The safest approach is to wait for normalcy to return where traditional risk management techniques protect you instead of guarantee losses. The other approach requires an iron stomach as you buy the dip, watch the market move against you, and rather than get scared out, buy even more. Every dip in the history has bounced and this one will be no different. Buy when other people are fearful is easy to say, but far harder to do.

That being said, the market is most likely forming a trading range between 1,940 and 1,820. Baring brief excursions we should expect to trade inside this range through the remainder of the quarter. Earnings were the one thing that could have saved us, but so far it hasn’t worked out that way. On the other side, runaway selloffs happen over days, not weeks. It’s been a week since we bounced off 1,810 and at this point the panicked rush for the exits abated. While we will almost certainly retest those lows, the second time we approach a level is less scary than the first. The initial dip triggered a surge of automatic stop-losses and flushed out the weak, but all of that selling already behind us and second retracement will have a harder time building critical mass.

For the ambitious, trading against this range is a third possibility. But since we are near the middle of this range, the prudent move is to wait until we approach one extreme or the other before trading against it.

Jani

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Jan 21

Is the Bottom In?

By Jani Ziedins | Intraday Analysis

End of Day Update:

It’s been a dramatic couple of days. Wednesday the S&P500 cratered over 3.5% in midday trade. But just when things looked their worst, we bottomed and recovered a majority of those losses with a powerful, 50-point rebound into the close. Volume was staggering and the second highest level in several years. The only day when more shares traded hands was August’s 5% bloodbath, a day also noteworthy for forming the bottom of the Fall selloff.

Thursday morning we slipped into the red but the situation changed decisively when the ECB hinted more stimulus is on its way in March. Then a less bad than feared U.S. oil inventory report sent crude spiking 5%. Between the apparent capitulation volume on Wednesday, more easy money from Europe, and rebound in oil, have we put in a bottom?

While Wednesday’s massive selloff did a lot of damage, it also purged most of the weak supply between here and 1,810. If anyone had a stop-loss, it was triggered when we plunged well beyond August’s lows. If an owner could have been spooked out, they were spooked out. But for every person who went running for cover, their was a bold buyer willing to take advantage of these emotional discounts. Removing weak owners and replacing them with confident dip-buyers is a very constructive development. Since we cleared most of the stop-losses under 1,850, it will be far harder for another dip under this level to trigger a runaway selloff.

But before we get too excited and start buying with reckless abandon, this correction fell well past the point where a V-rebound to previous highs can save us. This 10% selloff pushed us back into correction territory for the second-time in six-months and nerves are frayed. That means we should expect this erratic trade to continue as we carve out a base. Similar whipsaws occurred during the September bottoming and we should plan for the same choppiness here. In the near-term that means selling strength and buying weakness as we settle into a multi-month trading range. Be prepared for a retest of Wednesday’s lows at some point and expect regretful owners to flood the market with supply everytime we try to rally above 1,900. While it is tempting to trade our bullish or bearish bias every time the market feigns a breakout or breakdown, the best money over the next couple of months will come from trading against these moves.

Jani

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Jan 19

What Does History Tell Us?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 opened with strong gains Tuesday morning following overnight stability in China, Europe, and the oil markets. But the comfort of a rebound was short-lived as we slid more than 30-points from the early highs. Only a late surge prevented us from closing deep in the red.

While a lot that could be said about Tuesday’s price-action, it has already been superseded by plunging S&P500 futures in Asia’s Wednesday morning trade. We don’t have to look far to find the usual suspect; oil slipped another 2.5% and is now under $28 for February delivery.

Counting this overnight weakness, we find ourselves down nearly 14% from last year’s highs. While this feels terrifying, where does this rate historically? Over the last 65-years the S&P500 has fallen more than 10% twenty-times, or about once every three-years. Losses of more than 15% occurred eleven-times, meaning nearly half of all 10% selloffs never made it past 15%. But if we pass 15%, things don’t look as rosy because nine-times we shot straight through 20%.

What does this historical data tell us? That selloffs between 10% and 15% tend to bounce while those that exceed 15% tend to keep going. While at first this phenomena seems perplexing, it actually makes sense when we look at the makeup of market participants.

We can segment stock owners into two groups, those that follow the market closely and those that don’t. Sentiment measures that include AAII, Stocktwits, option buyers and sellers, newsletter writers, and all the other popularly quoted sources tell us the opinions of active participants. These people tend to trade more frequently and drive daily market moves. A 10% selloff will push the sentiment of the active owners into the cellar where more often than not capitulation selling results in a rebound. But occasionally the panic and fear mongering achieves such intensity that Wall Street’s dirty laundry reaches Main Street. Losses above 15% is when we start waking up a whole new segment of owners and this larger supply allows the oversold condition to intensify. Currently we find ourselves just above this inflection point. Drop a few more percent and we risk Main Street joining in this circle-jerk selloff.

Does this mean current owners should get out now while they still have a chance? Not necessarily. It all depends on timeframe. Nimble day-traders and swing-traders who are good at spotting capitulation can profit from near-term weakness and the inevitable rebound, but most everyone else should be thinking about buying this dip, not selling it. The other thing that history tells us is only three of the nine 20%+ selloffs were under 20% for more than a few weeks or months. While we sliced through 20%, we bounced back nearly as quickly six out of the nine-times. The odds are clearly more in favor of buying these discounts than selling them.

Screen Shot 2016-01-19 at 11.06.40 PM But what about those other three-times? I suppose each of us must decide of this oil weakness is a one-in-twenty selloff that completely trashes our financial system. We saw prolonged losses from the 1970’s stagflation and oil embargo. Then there was the grossly overheated tech bubble that came crashing down. And lastly the housing bubble where the most valuable asset people owned plunged in value. If you think a slowing China and falling oil prices ranks up there with the worst financial calamities of the last 65-years, then you should be selling. But if you have a less fatalistic view of the world and our economy, then this is just another buyable dip on our way higher.

While it is never easy to hold through volatility, the time to sell was when the first cracks started forming, not now that we are approaching a capitulation. I told my subscribers on January 4th that the price-action was deteriorating and I moved to cash. Now a couple of weeks later I’m on the verge of buying this weakness. If people want to sell me stock at a steep discount, I’m more than happy to oblige them. Their loss is my gain.

Jani

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Jan 14

How to Trade This Weakness

By Jani Ziedins | End of Day Analysis

End of Day Update:

Thursday was a good day for the S&P500 as it recovered a big chunk of Wednesday’s bloodbath. While we are still struggling to make headway, this was the third up-day out of the last four. How you interpret this price-action largely depends on your biases, but it is a notable change from last week’s relentless selling. This also marks the seventh consecutive day of above average volume. Thursday’s trade reached the highest levels since December’s options expiration and September’s option expiration before that. Clearly a lot of people were paying attention and trading this volatile session.

The weekly AAII sentiment survey revealed optimism is at the lowest levels in over a decade while pessimism reached multi-year highs. In this historically bullish survey, bears outnumber bulls by whopping 250%. Anyone claiming the market is overly bullish is delusional with confirmation bias because they clearly don’t see everyone running around with their hair on fire. While we might not be at the bottom yet, this dramatic swing in sentiment and huge volume means we are getting close. The last time we saw this much volume was back when August’s selloff was bottoming.

Screen Shot 2016-01-14 at 7.33.18 PM The only thing moving this market is the price of oil. Does this make sense? No, but this is how the crowd is thinking and thus the only thing that matters. But with each passing day and tic lower, we are shedding owners who fear falling oil and replacing them with buyers who don’t mind cheap oil. Maybe these calm buyers realize oil production represents less than 1% of U.S. GDP. Maybe they are experienced investors who know these stories always come and go. Remember the Bird Flu pandemic? No? What about the Fiscal Cliff? Sequester? Taper? US debt downgrade? This tells you just how big of a deal most of these things turn out to be.

But oil isn’t the only thing scaring investors. We have a strong dollar and slowing global growth that will allegedly crush our exporters. But the thing is all our exports together only represent 13% of GDP and only 5% of that demand comes from Asia. While knocking off a few percentage points won’t help our sluggish recovery, it certainly won’t cripple our largely self-centered, service and consumption based economy either.

But the market never lets common sense get in the way of a good stampede for the exits. There are two ways to trade the stock market. Buy at a premium and sell at a discount. Or buy the discounts and sell them later at a premium. Just like any successful business, buy at wholesale and sell at retail. Just think about that when you are tempted to join the emotional sellers. There has never been a dip in the history of the stock market that wasn’t buyable and this one is no different.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

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Jan 12

Running Out of Sellers

By Jani Ziedins | End of Day Analysis

S&P500

End of Day Update:

The S&P500 managed to finish in the green for the second day following last week’s brutal kickoff to 2016. In just over a week we erased 150-points as a struggling China and plunging oil reignited fears of a global slowdown and financial contagion. Similar headlines triggered August’s 10% correction and the sequel proved nearly as damaging. The question on everyone’s mind is if this is the capitulation bottom or just a dead-cat bounce on our way lower.

Oil briefly slipped under $30 Tuesday for the first time in over a decade. Only a few months ago predictions of $30 oil were met with skepticism and ridicule, but the market has a nasty habit of pushing us to the “obscene number” before the crowd capitulates. Thirty-dollars was that obscene number and we finally tagged it following a nearly two-week free fall. But just when it seems like there is no end in sight, we run out of sellers and bounce. That happen today when the market rebounded almost immediately after flirting with the high $20s. This modest rebound in oil was enough to lift the S&P500 off the intraday lows, allowing us to finish just under 1,940. And the party is continuing in the overnight futures markets with the S&P500 up another 15-points in Asia.

At the very least we should expect a few day bounce as the market recovers from a near-term oversold condition. Expect this scramble to push us back to 2,000 resistance. From there we will see if short-squeezing and chasing transitions to real buying. Or if we stall continue the global slowdown selloff. The key to surviving this market is trading proactively. Take profits often and don’t get married to a position because it will likely reverse days later. Be pragmatic, not dogmatic.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

If you want more check, out my premium subscription that delivers this analysis every day during market hours.

Jan 07

Focus on What Matters

By Jani Ziedins | End of Day Analysis

S&P500

End of Day Update:

It’s been a brutal week for the S&P500 as we experienced one of the worst starts to a year in market history. We’ve fallen 140-points from last week’s highs as traders continue to be terrorized by Chinese uncertainty. We’re down five out of the last six sessions while Chinese regulators have suspended trade twice this week due to selloffs exceeding 7%. Given this turmoil it is no surprise to see AAII’s sentiment survey approach historic levels of pessimism. If we take trading cues from the crowd, clearly this is the best time to panic and dump stocks at steep discounts before the selloff gets worse. But since I make money trading against the crowd, I am looking at this move in a far different way.

We’ve only closed under 1,950 a handful of times since 2014. If we view risk as a function of height, buying and owning stocks here is one of the least risky times to be invested in over a year. While it certainly doesn’t feel safe, I’m sure most would agree buying and holding stocks today is a far better idea than buying and holding them last week. Everyone knows we are supposed to buy when people are fearful and sell when they are greedy, but that is far harder to do. When the crowd is running scared and our trading screen is filled with red, it is way too easy to succumb to the crowd’s seduction.

In Friday morning trade the Chinese stock market is holding up relatively well after their government unwound some the currency moves that unnerved markets. This bumped their market and halted what could have been another day of relentless selling. They also abandoned the ill-conceived 7% percent circuit breaker that exacerbated recent volatility. Together these have been enough to at least temporarily delay another wave of panic driven selling. As a result US and European futures are higher in sympathy.

Assuming China can hold it together for the rest of the trading day, the next big event is the US monthly employment report. Normally this is a headline event, but it has been forced to the back pages as global volatility dominated the financial media’s attention. The most important thing to remember is the S&P500 responds to US corporate sales and earnings, not Chinese. If our recovery continues to chug along despite Chinese weakness, our stock market do the same.

China has been slowing for over a year and no one believes the overly optimistic economic growth numbers the communist government is putting out. If China weakness was going to take us down, it would have happened by now. The US is largely a self-centered, consumer and services based economy. Our vulnerability to a Chinese slowdown is far more limited than an export dependent economy like Germany. And the proof will be in the pudding. Another strong US employment report Friday morning will show these Chinese and oil fears are overblown. Soon traders will shift their focus from these global-macro distractions to the actual performance of our economy as demonstrated by employment and fourth quarter earnings. While it’s been a lot of fun following the Chinese and oil markets the last few weeks, it is time to get down to business and focus on the things that really matter when determining stock prices.

Jani

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Dec 29

Looking Ahead to 2016

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Analysis:

Santa was a little late this year, but better late than never. Tuesday the S&P500 finally reclaimed both the 50 and 200 day moving averages and is only three-percent from all-time highs. While it isn’t appropriate to draw long-term conclusions from this week’s light holiday trade, it is encouraging to see the path of least resistance is higher despite the relentless onslaught of ominous headlines. In a year where we’ve been given every excuse to sell off, this market has stubbornly hung in there.

Since this will be my last post of 2015, I will share the 2016 outlook I wrote for Investing.com.

What does 2016 hold for us? The best place to start looking for answers is in our past. Over the last 50-years the S&P 500 finished higher 78% of the time with a median gain of 18%. But what about those pesky off-years? The remaining 22% of the time we finished in the red, but with a more modest 10% median loss. These phenomenally favorable odds explain why the S&P 500 is up a staggering 10,800% over the last 50-years. Without anything else to go on, clearly the smart move is sticking with the market.

But everyone wants to know if 2016 will be a typical year. Even though the S&P 500 is within a few percent of all-time highs, bearishness remains unusually elevated in most sentiment surveys. It seems the crowd is far more concerned about this six-year-old bull market than excited to embrace it. And who can blame them? Looking at the last 12-months of headlines, it is far easier to recall bearish stories because there were so many of them.

But as a contrarian, the crowd’s cynical outlook is constructive because it means a lot of negative sentiment is already priced in. I fear markets that stop going up on good news, not ones that fail to sell off on bad news. Inevitably the news cycle will shift and we will stumble into a wave of positive headlines. The S&P 500 that struggled to move beyond 2,100 throughout 2015 will explode higher when these cynics are transformed into believers.

While it is impossible to predict the surprises we will encounter over the next 366 days, given this sentiment skew and the fact we ran out of owners willing to sell bad news, the odds of a good year for US markets are even more favorable than the historical averages suggest.

Happy New Year!
Jani

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Dec 22

Better Than It Seems

By Jani Ziedins | End of Day Analysis

End of Day Update:

It was another good day for the S&P500 as it continued Monday’s rebound from 2,000 support. In typical fashion volume is trailing off as we approach the Christmas holiday. Since so many institutional money managers are on vacation over the next two-weeks, we cannot read too much into these daily gyrations because they are driven by “home gamers” overreacting to every move as if it is the next breakout/breakdown. It won’t be until January when we have the full force of the market giving us more meaningful data to interpret.

That being said, it is constructive to see last week’s selloff stall and bounce at support. That reaffirms the lack of owners willing to emotionally react to every spooky headline or drop in price. No matter what the “experts” think we should do, if owners don’t sell, it is difficult to kickoff the much-anticipated correction. The longer this market refuses to breakdown, the more likely it is the next leg will be higher.

Jani

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Dec 17

Don’t Worry, Be Happy!

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It’s been a volatile week as three strong up-days were followed by Thursday’s sharp decline that unwound all of Wednesday’s Fed pop. Volume has been consistently above average as plenty of traders are participating in this pre-year-end tug-of-war.

Between robust employment gains, rate hikes, falling oil, and a strong dollar, the market cannot decide on a direction. This leads to choppy trade where every apparent breakout/breakdown fizzles and reverses days later.

The biggest driver of recent weakness is plunging oil prices that cannot find a bottom. Fears of a decimated energy sector and the resulting bond defaults are making equity traders nervous. But as spooky as the headlines feel, the stock market is far less bothered by these developments than the analysts and talking heads. While oil has been cut in half from its 52-week high, the S&P500 is down a far more palatable 4%. Even though it feels like we are in the middle of a protracted bear market, the actual evidence is far less convincing.

This year we endured a near Grexit, Russian aggression, multiple acts of terrorism, Chinese stock market crash, global slowing, plunging oil, and a surging dollar. Looking only at the headlines, it’s been a horrible year. But somehow the equity market is down a modest 4% from all-time highs. Hardly the doom-and-gloom that most traders feel. Bears have been calling for a major selloff all year, but with only a couple of weeks left in 2015, they are starting to look more like Chicken Littles than insightful and savvy speculators.

The biggest thing working against bears at this point is everyone is well aware of their investment thesis. That means anyone who agrees with them has been given plenty of time to sell and as a result, the current crop of owners are not bothered by these prognostications of doom-and-gloom. No matter what the market is “supposed to do”, when no one sells the news, it is really hard to trigger a major selloff. In fact as a contrarian I take the opposite view. If these dire headlines cannot dent this market, just imagine what will happen when it actually stumbles across the inevitable piece of good news? Disagree with this market at your peril.

Jani

Dec 10

Thankful for Irrational Traders

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

Thursday was the first up-day this week as the S&P500 struggles to resist oil’s slide to multi-year lows. But “up-day” is a relative term since we only finished four-points to the positive following three-days of losses that shed more than 40-points. Today’s volume was the weakest since we topped a couple of weeks ago. But even more ominous was the lethargic intraday trade over the last-two sessions where early strength fizzled and we closed near the lows. If this market was oversold and poised to launch higher, early strength would have sent us on our way. It is hard to be constructive when every rebound is overwhelmed by another wave of selling.

Oil has been in a nearly one-way selloff since early October. While everyone has largely been aware of the low oil prices, concern didn’t get acute until Monday when we broke under $40 for the first time in seven-years. This development moved oil prices from the commodity page to the front-page.

In Tuesday night’s post I wrote about how nonsensical it was for the market to lose its mind as oil went from down 60% to down 63%. Really? We can handle a $60 drop, but $63 is just too much for the market to bear? How much more damage can another $5 or $10 fall do when we already shed $60 over the last year and some?

Previously there was a legitimate argument that falling oil prices was due to a weakening economy and dropping demand. While there is a nugget of truth here as the global economy slows, it is becoming increasingly obvious that oil’s biggest problem is supply, not demand. The lower oil prices fall, the more producers are forced to pump to compensate for the lower prices. This isn’t a consumption problem, it is a structural problem for an industry with high capital expenditures and low operating costs. With pumping prices around $20 per barrel, producers are incentivized to pump as much as they can even at $37 per barrel. And this line of thought played out at last week’s OPEC meeting where the group failed to agree to production limits to prop up prices.

All of this means equities tight correlation to oil prices this week is total B.S. If financial contagion, multiple acts of terror, a plunging Chinese stock market, and all the other bearish headlines we survived this year, should we really fear another $5 dip in oil? But this is the logical argument and it often takes the market time to come around to the obvious answer. Given the awful way we traded this week, that appears to be the case. There is no merit to this selloff, but that doesn’t stop reactive and emotional sellers from joining the herd. But I cannot complain too loudly because without the crowd’s irrational trading decisions, it would be far harder to make money. If people want to sell me perfectly good stocks at a discount, who am I to argue with them?

While this dip is buyable, we are not quite there yet. Wednesday’s and Thursday’s weak trade tells me there is a little more downside before we reach a capitulation bottom. We are hovering so close to recent lows that a dip under these levels is almost inevitable. If we break support and rebound sharply on high volume, that will be our sign the fever has broken and we can jump back in.

Of course the next major headline is the Fed meeting next week, but I’ll save that analysis for next time.

Jani

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Dec 08

Does $3 Really Matter?

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 dropped another dozen-points Tuesday as obsession over weak oil prices continued for a second day. Volume was above average on this fourth-downday out of the last five-trading sessions. But as much red as we’ve seen, we remain within a few percent of all-time highs. Clearly there is a disconnect here, but who is getting it wrong, the bulls or the bears?

Oil fell $3 over the last two-days and is under $40 for the first time in seven-years. We’ve been hearing for months how a strong dollar and weak energy prices would crush this market and over the last two-days that is exactly what happened. But was this weakness just the start of something far larger, or a feeble knee-jerk reaction to a headline?

While it is impossible to come to the market without a bias, let’s try to put them aside for a moment and look at the facts. Many people are currently predicting a large selloff in the broad market following this $3 drop in oil. Does this outlook stand up to the facts? If we take a step back and review a two-year chart, we will see oil has fallen more than $60 over that time. The bulk occurring in 2014 when the stock market notched a 13% gain. If a $60 plunge in oil failed to crush the equity market, what are the chances this $3 selloff will do it?

Clearly the market is in a half-full mood at is obsesses over everything that is wrong. Weak oil prices mean plunging energy sector profits. The strong dollar is crushing US exporters. That is the story we hear repeated day in and day out. What no one is talking about is the benefits of low oil and a strong dollar. For every loser there is a winner and this situation is no different. Two-dollar gasoline is the same thing as sending a $2,000 stimulus check to the average family. (2 cars x $2 per gal x 12,000 mi / 25 mpg = $1,920) The strong dollar? While that hurts domestic exporters, it is a boon to companies that rely on foreign inputs. Anyone that buys products, parts, and materials from overseas is going to see those discounts flow straight to the bottom-line. Where are all the people talking about the positives of weak commodity prices and a strong dollar? Back in the booming 90’s oil was $15/bbl and 80-cents could buy a Euro. Last time I checked, the 90s were a pretty darn good time to own stocks.

While this fear of weak commodities and a strong dollar is clearly misguided, as traders we have to trade the market we are given. It is foolish to sell these headlines, but that doesn’t prevent the emotional and impulsive from making poor trading decisions. And to be brutally honest, all our profits come from these people so we cannot be too quick to criticize them. But even when we are right, we can still get run over by the crowd so we have to be careful here. The market continues making higher-lows as it recovers from the Fall correction. While this is constructive, we need to be wary of a drop under last week’s lows. That could trigger a wave of stop-loss and reactive selling, pushing us back down to 2,000 support. But if we hold these levels, expect this nervousness to evaporate and position yourself for the Santa Claus rally.

Jani

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Dec 03

Is It Time to Panic?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It was another brutal day for the market. The S&P500 extended Wednesday’s selloff, erasing well over 50-points across these two sessions. Volume was the highest we’ve seen since we were stuck in the throws of November’s pullback.

Yesterday Janet Yellen rained on the bull’s parade. Today it was Mario Draghi’s turn. While the European Central Bank expanded its easy money policy, it didn’t go as far as many traders were hoping. That sent European markets plunging over 3%. The sour mood quickly spread to US markets where we embarked on a relentless sympathy selloff that eroded prices throughout the day. Given the dreadful headlines and all-consuming uncertainty, we found ourselves with an oversupply of nervous owners desperate to get out, but few buyers willing to step in front of this mess. The nearly nonexistent demand meant sellers had to continue offering lower and lower prices to attract buyers. But in a vicious cycle, those discounts convinced even more owners that they needed to get out. This downward spiral didn’t stop until the closing bell saved us.

Today most sellers embraced a “sell first, ask questions later” risk management strategy. The reason I know this is because nothing changed economically between today and last week. We find ourselves inside a frustratingly slow economic recovery with repressed energy prices, a strong dollar, and a looming Fed rate hikes. Just like last week, and last month.

If the fundamentals didn’t change traders’ outlook, then it had to be something else. Few things are more contagious than fear. When confident owners watched the value of their account drain as everyone else hit the sell button, they lost their nerve and joined the herd. The unfortunate thing is the market has a nasty habit of humiliating reactive traders. It almost has a sixth-sense for knowing exactly where our pressure points are and pushes us one inch beyond them. Rather than reward a reactive seller by allowing him to escape a far larger selloff, most often the market adds insult to injury by rebounding as soon as the emotional seller finishes giving away his stock at steep discount.

The looming fear is what if Friday’s Jobs Report adds more fuel to the selloff. While that is a real possibility, successfully trading is a game of playing odds. We know the vast majority of stock owners are indifferent to these minor gyrations. They are the blissfully ignorant 401k investor or the large institution that is so ginormous they cannot dance around these daily price swings. That means most of this daily volatility is driven by the small segment of active traders. The thing about active traders is while they throw their weight around with great effect, they don’t have a lot of ammunition. Once they jump from one side of the market to the other, they used up the only vote they get and it takes a new trader to keep a move going. As awful as today feels, lets not forget we are only 4% from all-time highs. This is still a long way from waking up the oblivious masses who rarely look at their brokerage statements. If today’s selloff is just another hysterical move driven by overly active traders, it will stall and reverse as quickly as every other “fearful” selloff we’ve endured this year. The scarier it feels, the closer we are to the bottom.

Jani

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Dec 01

Why Did This Happen?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

The S&P500 finally climbed through 2,100 resistance Tuesday on below average volume. The last time we found ourselves this high, the rebound stalled the next day and we tumbled back to the low 2,000s. Will this time be any different?

It was hard to identify a bullish catalyst that fueled these gains. The biggest headline was a disappointing manufacturing report showing the first contraction since 2012. If we put our “inverse-logic” hat on, maybe traders were hopeful this revelation would further delay the Fed’s impending rate-hike. But that wishfulness is a stretch since the Fed already recognized a stronger dollar and slowing global growth would pressure exports. If traders were buying this headline, they were grasping at straws.

The most likely explanation is the one I’ve been talking about for weeks. It is getting harder and harder to find owners willing to sell their stocks regardless of the headlines. If terrorism and a NATO nation doing a Russian jet won’t spook stock owners, are one or two points on a manufacturing report going to make a difference? Given today’s price-action, apparently not.

While we have countless reasons to sell-off, it is far more insightful to look at the market’s response to these bearish headlines. Rather than argue with the market and demand it go lower, we should acknowledge this uncanny strength in spite of the bad news. If we are open-minded enough to listen, the market is telling us it isn’t bothered by these widely known issues because they are already priced in. While a stubborn trader refuses to believe bad-news could be priced in near all-time highs, what he is failing to account for is where we would be without these economic and political headwinds. 2015 has largely been a bust because we are trading at the same levels the year started at. This is in comparison to the nearly 20% yearly gains we’ve averaged over the last six-years. If we continued to receive positive economic news throughout the year, there is every reason to expect we would trading near 2,500. That means slowing global growth, a strong dollar, slumping energy prices, and a sluggish US recovery have already taken 400-points out of our market.

It’s been a bumpy ride this Fall as we digested these headlines. Over the last four-months, nervous traders have been given plenty of excuses and opportunities to bail out. If the headlines didn’t scare them out, then no doubt the plunging prices did. But just as things looked their worst, we bounced. This recovery wasn’t driven by good news, it came from running out of sellers. Anyone who wanted to get out sold their stock at a steep discount to a far more courageous dip-buyer who demonstrated a clear willingness to hold these risks. Flushing out weak owners and replacing them with confident ones is what solid bases are built on. These new owners bought when the hysteria was at its worst, so it shouldn’t surprise us when they shrug off far more trivial headlines. As long as they remain confident, supply stays tight and prices continue defying “logic”. Don’t think about what the market should do, figure out what other traders are thinking and trade the resulting supply and demand. Strength in the face of bad news is extraordinarily bullish and only a fool would argue with this market.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

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Nov 24

What Just Happened?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It was a dramatic day for the S&P500 in this holiday shortened week. A NATO nation intentionally shot down a Russian fighter jet and fears of a military escalation sent traders scrambling for cover. European markets plunged 2% on the news and the selling spilled over to US markets when we opened. But by midmorning the reactive selling stalled and we found support at 2,070. Not only did the market find a bottom, but by the close we recovered all the losses and finished in the green. Without a doubt this counterintuitive price-action left a lot of bears scratching their heads.

Russia is clearly upset about what happened and the world is anxious to see what happens next. Realistically Putin only has two options, retaliate or complain. While a military escalation between Russia and the West is terrifying to contemplate, Russia would suffer tremendously if he chose this route. Putin is most definitely a bully, but he is not a madman. He has little to gain from a direct confrontation with NATO and everything to lose. Inflammatory rhetoric is the only sensible tool for him to wield because he cannot afford to do any more. Maybe he could withhold oil and natural gas, but even that is cutting off his nose to spite his face because this would do far more damage to the Russian economy than Europe. Traders waking up to this realization is what allowed us to recover from those early, reactive losses.

Since this is a holiday week, most big-money, institutional investors are on vacation. Without their guiding hand, we often see increased volatility as smaller and more impulsive traders take over. Had these events occurred during a more typical week, most likely we would not have fallen as far since cool-headed money managers would have snapped up the irrationally discounted stocks. Without big money’s help this morning, the only thing that saved us was running out of sellers. The thing that kept these losses relatively modest was the fact that we’ve seen a tremendous amount of turnover through the last few months. August’s plunge purged most of the weak-kneed owners and replaced them with far more confident dip-buyers. Anyone who bought the fear and uncertainty over the last few months clearly has thick skin and they demonstrated that again today by not reacting to this mornings headlines. While most people are confused by the market’s reaction today, if you understand the underlying factors, this modest dip and decisive rebound make perfect sense.

As for how to trade this, it is hard to get more bullish than this type of response to bad news. If we won’t sell off on falling energy prices, slowing global growth, a surging dollar, disappointing earnings, rate-hikes, terrorism, and now military conflict with Russia, it is hard to imagine a scenario that will scare these confident owners into selling. Bearish headlines don’t matter if no one sells them. Given this environment, plan on another Santa Claus rally this December.

Jani

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