Oct 23

Why even bears should expect a near-term bounce

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Monday’s session 0.2% in the red.

Unfortunately, the 0.6% midday gains didn’t stick into the close, but the modest loss was still comfortably above the opening lows that undercut 4,200 support.

This was one of those half-full/half-empty days that gave both sides something to crow about. Bulls saw a nice test of 4,200 support that held. Bears saw a skid into the close that keeps 4,200 support under pressure.

Which side will win? There are tons of opinions, but only time will tell.

I really liked the midday bounce because the violation of 4,200 support failed to trigger wider waves of defensive selling. We broke support, and most owners shrugged and kept holding. That tells us there is not much supply under current prices. If there were, it would have shown up as waves of selling early Monday morning.

On the other side of the argument, it takes a lot more than a lack of selling to prop up a struggling market.

I’m an optimist by nature because stocks spend far more time going up than down. In addition, everyone knows stocks move in waves, so it makes sense that after a bit of down, it is time to expect a bit of up. In fact, the biggest and fastest gains occur during bear markets.

Taken together, both of these things mean the odds of some near-term relief are actually working in our favor. In fact, even bears should be expecting a modest bounce near 4,200 support.

Of course, I’m not a buy-and-close-my-eyes kind of guy. I liked Monday’s early bounce, and I bought it. But as a new position, I started small and kept a nearby stop under Monday’s lows. If the rebound continues on Tuesday, I add more. If the selling resumes, I get out and wait for the next bounce.

As the saying goes, stocks climb a wall of worry, and by that measure, there are plenty of things to worry about. That’s good for stocks because things almost always turn out less bad than feared. Investors should fear the things no one is talking about, not the stuff that has been on the front pages for weeks, if not months.

I’m a buyer as long as 4,200 holds, but violate support, and I’m out of here.

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Oct 19

The obvious mistake the cynics keep making

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 lost 0.9% Thursday after the index slipped under 4,300 support for the first time in nearly two weeks.

Powell said rates are not too high and the Fed could continue raising rates if economic activity is too strong to allow inflation to continue cooling.

This week’s selling is another attempt at the “good is bad” trade. Somehow, people think a strong economy is bad for stocks because it means the Fed will keep hiking rates. But here’s the thing: stock prices are primarily based on corporate profits, not 10-year yields. And when it comes to corporate profits, a robust economy matters far more than 5% interest rates. In fact, one interpretation of the recent increase in Treasury yields is the bond market expects the economy to be strong next year. Does that sound like a good reason to dump stocks?

Regardless, I trade the market, not my opinion. That means I got dumped out of my long trade early Wednesday when the market slipped under my trailing stops near last week’s lows.

Sure, this wasn’t the trade I was looking for, but the market rarely gives us what we want, so I had to make do with what I got. This week, that meant getting dumped out of a partial position for a small loss after buying Monday’s bounce that didn’t work.

But this isn’t a surprise. Bounces fail twice as often as they work. While that doesn’t sound like good odds, if we lose money on partial positions with nearby stops and we make money on full positions with further away price targets, the math works very nicely in our favor.

Monday’s partial trade didn’t work, and now I’m left watching prices fall from the safety of the sidelines.

As I alluded to above, I don’t believe in the “good is bad” trade, and I will keep buying bounces as long as this stubbornly robust economy keeps defying the skeptics. Maybe the market gives me a very tradable bounce on Friday. Maybe the bounce won’t arrive until next week. Either way, I know it’s been forever since the “good is bad” trade worked, and the odds are good this instance will blow up in the cynics’ faces, too.

Until further notice, I’m looking at these dips as buying opportunities, not an excuse to run and hide. The sky is not falling.

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Oct 17

Why the “good is bad” trade is so stupid

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Tuesday’s session unchanged, but that flat result hides some important psychology hiding in the intraday price action.

The index slipped Tuesday morning after retail sales smashed expectations and the “good is bad” crowd hit the panic button. But as I’ve written many times before, the “good is bad” trade is as dumb as it gets. It hasn’t worked for a long time, yet that doesn’t stop people from rushing to sell every time we get a piece of good economic news.

Stock prices are ultimately based on corporate profits. Interest rates and everything else are just noise. As long as corporate profits are strong, stocks will be strong—end of story. Forget all this, “But that means the Fed will keep raising interest rate nonsense.” Strong earnings = strong stock prices Q.E.D.

And no surprise, it didn’t take long before more sophisticated buyers jumped in and bought Tuesday morning’s discounts. There are plenty of reasons for stocks to fall, but stronger-than-expected retail sales are not one of them.

Of course, I shouldn’t complain too loudly because it would be much harder to make money without all of these dumb traders giving it away. Their loss is my gain.

At this point, I don’t see anything that concerns me about this market. Last week’s selling gave bears a golden opportunity to take control and send prices much lower. Instead, prices bounced in their face. That’s a sign of strength, not weakness.

Until we fall under recent lows, this market deserves the benefit of the doubt. Keep holding and lifting stops if/when we get through 4,400. Let those 3x ETF profits come to us.

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Oct 16

Why the contrarian trade could be betting on the rebound

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Monday’s session with nice 1% gains after none of the market’s big worries got worse over the weekend.

I was looking for the index to make a move this week, either continuing last week’s bounce or resuming the September selloff. It only took a few minutes on Monday for the price action to tell us investors are still in a buying mood.

I locked in some very nice 3x ETF profits early last week and spent the weekend in the safety of cash because I wasn’t sure what the market wanted to do next. Following Monday’s positive open, I started buying this early strength because that’s what my trading plan told me to do.

I treated this like a new position and stepped into the market with a partial position and a nearby stop. That way if Monday’s early strength proved to be a false bottom, I could get out with minimal damage.

When the index kept acting well through the afternoon, I added more. While not a zero-risk trade yet, trading in partial positions with nearby stops manages my exposure and is a low-risk way to trade.

Nothing really changed since Friday, but that’s the point. 2023 has been the year of “less bad than feared,” and nothing got worse over the weekend, so stocks are rallying in relief. 4,400 still looms large over us, but the longer we hold these levels, the more likely we will continue through them. If we are going to break down, it will happen soon.

Sometimes the contrarian trade is buying high when the crowd thinks prices are too high. We are not in the clear yet, but stay up here for another day or two, and higher it is.

There are risks in buying these levels, and that’s why we are smart about it, but more often than not, high gets even higher. If stocks don’t tumble on Tuesday or Wednesday, that’s where we are headed. Something that refuses to go down will eventually go up.

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