Nov 15

All good things must come to an end

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 added another 0.2% Wednesday, making this 11th winning session out of the last 13.

Not bad, considering sentiment was in the toilet three weeks ago after the index fell into correction territory (-10%). Yet, here we are, a handful of sessions later, within 2% of 52-week highs. Funny how that works.

Luckily, loyal readers were well-positioned for this whipsaw. As I wrote in my free analysis three weeks ago when this 400-point rebound was only one day old:

I have no idea if Monday’s bounce will stick, but it was a good start, and that’s all I needed to put on a partial position. Start small, get in early, keep a nearby stop, and only add to a trade that’s working.

If the index retreats on Tuesday, I will pull the plug for a small loss and try again next time. If the rebound keeps going, I will add more and lift my initial stops to near my entry points, greatly reducing my risk.

As I frequently remind readers, buying bounces is hard because two-thirds of them fail. But if we limit our losses on the false starts by entering with partial positions and keeping stops nearby, riding a winner higher with a full position will more than offset any previous losses.

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I will be the first to admit I didn’t see a 400-point rebound coming, but we must be standing in the right place at the right time before we can get lucky. And that’s exactly what happened. I didn’t know how far and fast this rebound would run, but I knew a bounce was coming, and I grabbed hold.

But 400 points later, it is hard to be excited by the diminishing rewards left ahead of us versus the growing risks looming underneath us. Everyone knows stocks move in waves, and just as obvious as it was that a bounce was coming our way three weeks ago, it is equally obvious that this rate of gains cannot keep going.

Now, to be clear, I’m not calling this a top and the index’s momentum could easily push us higher for a few more days, but common sense tells us the rewards above our heads are far smaller than the risks underneath us.

This has been a great trade, but all good things come to an end. We only make money when we sell our best trades, and this is the time to be collecting some very well-earned profits.

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Nov 14

Too much of a good thing makes me nervous

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 popped 1.9% Tuesday after the monthly inflation report continued moderating and is now at levels that make future Fed rate hikes unlikely.

As has been the case over the last twelve months, this continues to be a less-bad-than-feared market. Whether it is uncontrollable inflation or Fed rate hikes strangling the economy, reality has turned out far less bad than doom-sayers have been claiming.

The stock market still faces plenty of economic risks and uncertainty, but at this point, the bulls have been far more right about our economic trajectory than the bears.

Lucky for readers, we were positioned well for Tuesday’s latest run-up in prices. As I wrote Monday evening:

Last Friday’s rebound was buyable, and we could add more Monday with stops already lifted up near Monday’s lows. I don’t see a big pile of near-term upside ahead of us, but when we can enter a trade in a low-risk way, we don’t need a lot of profit potential to make it a trade worth making.

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Without a doubt, I underestimated the big wave of buying that would wash over us less than 24 hours later, but it definitely pays well to be caught on the right side of this trade.

But now that stocks are 400 points above recent lows and within 2% of 52-week highs, this is the time to be getting defensive, not greedy. We’ve been right in a huge way, but that only matters if we are willing to lock in worthwhile profits when we have them.

We don’t need to totally abandon a trade that’s working this well, but we need to be spending far more time thinking about protecting these profits. That means lifting stops and even considering locking in some profits proactively.

Remember, no one can consistently pick tops, so don’t try. That leaves us with two choices: selling too early or holding too long. I prefer selling too early because cash is the best place to be when the next trading opportunity comes knocking. Anyone who holds too long risks giving everything away. Just ask all of the bears that were boasting about their profits two weeks ago. Bears that collected profits early are sitting pretty, while bears that held too long watched a great trade turn into a painful loss.

Stocks move in waves, and as good as this rebound looks, that’s exactly what makes me nervous. We don’t need to sell everything, but lift trailing stops to protect the majority of our profits and consider locking in some partial profits proactively. It is amazing how much easier it is to ride the next wave when we have a pile of profits in our pockets and a lot less exposure to the next wave of selling.

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Nov 13

Don’t fight a trade that’s working

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Monday’s session down a modest 0.1%. More importantly, the index held on to 4,400 after breaking through this key resistance level last Friday.

Economic headlines haven’t changed in a meaningful way in months. Bears are just as bearish as they were last week, last month, and last year. The difference is we ran out of fearful sellers two weeks ago, and stocks popped decisively after supply dried up.

While 5% in one week is a tremendous amount, at this point, the market keeps acting like it wants to go even higher. No one should expect another 5% run over a few sessions, but given Thursday’s and Monday’s failed selloffs, the market is telling us the path of least resistance remains higher.

As I wrote early last week:

Hold near 4,400 resistance for a few more days, and these levels will feel less risky. That’s when some of those left behind last week will find the courage to start buying.

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Holding recent gains was the first step to breaking through 4,400 resistance, and that’s exactly how it played out over the last two sessions.

Of course, the easy gains are behind us, and there will be a lot more back-and-forth going forward, but only fools are fighting this market right now.

Last Friday’s rebound was buyable, and we could add more Monday with stops already lifted up near Monday’s lows. I don’t see a big pile of near-term upside ahead of us, but when we can enter a trade in a low-risk way, we don’t need a lot of profit potential to make it a trade worth making.

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Nov 07

Why smart money is already collecting profits

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Tuesday up a respectable 0.4% as the widely expected pullback from last week’s unsustainable rebound failed to materialize.

Traders have a natural fear of heights, and that causes buying to dry up after big runs like we saw last week. But demand is only half of the equation. At this point, owners are feeling confident and few are interested in selling this big rebound, keeping supply tight and propping up prices.

This inevitable tapering of buying was obvious and is why I was collecting profits late last week. As I wrote last Thursday evening:

To be clear, I’m not calling this a top, but with a big pile of profits in hand, it would be criminal to allow hubris to turn these profits into losses. Remember, we only make money when we sell our best trades. Nearly 200 points in a 3x ETF is good enough for me. At this point, the rewards ahead of us are far smaller than the risks underneath us.

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Hold near 4,400 resistance for a few more days, and these levels will feel less risky. That’s when some of those left behind last week will find the courage to start buying. Until then, prices will likely remain stalled under 4,400 resistance. (Unless the market starts putting the screws to the bears again, and they are forced to cover again at rapidly rising prices, but this is a less likely outcome.)

I like the market here, but the upside is not big enough to justify the risks underneath us. Give it a few more days, and the risk/reward starts to shift in the other direction. But until then, this is a better time to be more cautious than aggressive.

I collected profits, and I have zero regrets, even if Tuesday’s close is a few points above where I sold. Holding a big move too long risks giving it all back, and it would be criminal to allow greed to let last week’s profits escape.

Momentum definitely favors higher prices over the near to medium term, but the incremental rewards of holding for a few more days are nowhere near big enough to justify the risks.

We only make money when we sell our best trades, and for me, that was peeling off very worthwhile profits late last week. Another trade is coming, but I’m comfortable watching the consolidation of last week’s gains from the sidelines.

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