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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 shed another -1.5% Tuesday as last week’s fear trade comes roaring back.
Last week, it was the Fed telling us they will keep interest rates higher for longer than most investors were hoping for. This week, fear of a U.S. gov’t shutdown/default is adding to the pessimism. Of course, none of these headlines are new or unexpected, and this weakness simply reflects the never-ending swing of sentiment.
While it is hard to watch these losses pile up over the near-term, most investors knew these things were coming, so we shouldn’t expect a significant repricing of stocks based on widely known and expected headlines.
Sure, the US could actually default on its debt this time, sending the global economy into a tailspin. But we’ve been down this path so often that very few investors actually believe this will happen. Number one, this latest round of equity selling won’t turn into anything significant because the consequences of default are too dire and a budget deal is coming. But number two, if the unthinkable actually happens, the consequences are so dire a 20% crash in stock prices wouldn’t be enough.
That turns this into the infamous black swan trade. It most likely won’t happen, but if it does, it will be bad!
Lucky for us, we are nimble, independent traders, and we can pull the ripcord long before markets fall 20%. In fact, I pulled the rip cord last week and have been watching this week’s carnage from the safety of the sidelines.
As much as I want to buy these discounts, savvy traders don’t buy the dip, they wait for the bounce.
If history repeats itself, as it almost certainly will, Republicans and Democrats will eventually come together and save us from themselves at the eleventh hour. And more than waiting for this bipartisan agreement, stocks will rebound days, even weeks, before a deal is reached, so savvy traders are following the market’s price-action and not waiting on the headlines.
The market is in a bad mood, but like all bad moods, it will eventually improve. The only question is when.
We didn’t get a bounce last week, and we’re not getting one in the first half of this week, but that doesn’t mean it isn’t going to happen. While my inclination is to buy this oversold tumble, I need to see the selling capitulate and bounce first. That simple requirement is saving me a truckload of money this week.
Maybe prices bounce in the second half of the week, or maybe it doesn’t happen until next week. But as long as I wait for capitulation and the inevitable bounce (and keep a nearby stop), any false buttons won’t be a problem. More importantly, I stay alert and ready to go because the market loves symmetry and the inevitable bounce will come hard and fast. Wait a few hours too long, and you will miss a big pile easy and fast profits.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 started Friday’s session off well enough, bouncing back from Wednesday’s and Thursday’s bloodbath. Unfortunately, those feelings of optimism didn’t last long, and the index fell into the red by the end of the day.
Knowing what we know now, most people would think buying Friday morning’s bounce was a mistake. But I actually think it was a brilliant move, especially since I did it!
After two days of hard selling, the market was ripe for a bounce. Even the most brutal selloffs have up hours and even up days, so Friday’s early bounce shouldn’t surprise anyone.
But what we do with those bounces is where amateur and savvy traders separate themselves. As I wrote Thursday evening, I was angling to buy the next bounce:
Without a doubt, this could be the start of the next major bear market, and we need to protect our backside because there is no excuse to ride a losing position all the way into the dirt, but until I see something more compelling, I will keep waiting for the bounce. Even if this is the start of a bear market, a bounce is still headed our way because bear markets bounce too. In fact, some of the easiest and fastest money is made trading bear market rallies.
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And buying Friday morning’s bounce is exactly what I did. But I’m not an idiot, I was smart and strategic in buying. I waited for the bounce, I started small, I got in early, and I kept a nearby stop. Within hours, prices had risen enough that I could lift my stops to my entry points, and that’s when the magic happened.
Now, I’m sitting on a free trade. If the bounce takes off, I rake in piles of profits in a 3x ETF. If the index retreats, I get out at my entry point, no harm, no foul. Only a fool would pass up on a free trade, regardless of how it turned out.
Sure, the index could have retreated before I was able to lift my stops to my entry points, but since that was on a partial position with a nearby stop, it wouldn’t have hurt much. Even that was a worthwhile trade with a low risk and a high reward, especially when the market was ripe for a bounce after two days of brutal selling.
Critics will claim buying Friday morning’s bounce was a mistake, but it was a mistake I will happily make every chance I get. Bring on those free trades. While this one didn’t work, one of them will, and that’s when I will collect a mountain of free profits.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 gapped under 4,400 support Thursday morning and kept going as Wednesday’s fear trade continued. By the time it was all said and done, the index finished down a dreadful -1.7%. That was enough to make this the lowest close since June. Ouch.
The Fed didn’t say what investors wanted to hear Wednesday afternoon, and that kicked off this 120-point tidal wave of reflexive selling.
There are two ways this plays out: either we bounce, or we don’t. It really is that simple. Since I don’t believe Wednesday’s headlines changed anything, I’m looking for a continuation trade. After this wave of volatility and reflexive selling passes, the market will go back to what it was doing previously, which was consolidating this summer’s gains between 4,400 support and 4,400 resistance.
The thing to keep in mind is the market only changes its long-term trend every other year, give or take a few years. While something this vague can’t be used as a timing signal, it is a useful fact to keep in mind when debating if the market’s long-term trend has changed. If we get 400 sessions of continuation for every one change in direction, the odds always heavily favor a continuation, not a change in trend.
Until proven otherwise, I will continue giving the bull market the benefit of the doubt and will view this weakness as a buying opportunity.
Since the market didn’t pop Wednesday afternoon, that means I’m trading the dip and bounce. Maybe we bounce Thursday morning and never look back. Maybe we fall a little further under 4,400 support before bouncing. Either way, I’m waiting for the bounce and then jumping aboard. The lower this goes now, the more money I make buying the bounce in a 3x ETF.
Just because buying the bounce didn’t work on Wednesday or Thursday doesn’t mean that strategy won’t work on Friday or even next week. The market has a nasty habit of convincing us we are wrong moments before proving us right.
Without a doubt, this could be the start of the next major bear market, and we need to protect our backside because there is no excuse to ride a losing position all the way into the dirt, but until I see something more compelling, I will keep waiting for the bounce. Even if this is the start of a bear market, a bounce is still headed our way because bear markets bounce too. In fact, some of the easiest and fastest money is made trading bear market rallies.
Of course, Thursday’s price action reminds us why only fools buy dips. Low has a nasty habit of getting even lower, and this is definitely one of those times where it is better to be a little late than a lot early. Savvy traders wait for the bounce. Start small, get in early, keep a nearby stop, and only add to a position that’s working.
And if our first, second, and third trades get stopped out? No big deal. We make mistakes with small positions and nearby stops, while we ride the winner with full positions and a far larger profit targets. Follow this simple plan, and the math will work out in our favor.
As I wrote Wedensday, when I’m standing safely on the sidelines, I’m happy to be wrong. Bring on another wave of selling because the lower this goes now, the more money I make buying the inevitable bounce.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 shed 1% Wednesday after the Fed kept interest rates unchanged.
That non-move was widely expected, so stocks were not responding to the September rate decision, but to what the Fed said about the remainder of 2023 and 2024. At this point, the Fed’s data telegraphs one more rate hike this year and keeping rates that high through the end of 2024.
None of this surprises anyone because the Fed’s been consistent in their messaging for weeks, if not months. But it does poke a hole in the hopes that the end of this tightening cycle is closer than 2025.
That said, odds are good the Fed isn’t going to stick to its plan through the end of 2025 because when else have they correctly forecasted the economy a year and a half ahead of time?
Most likely, the Fed is simply leaving the door open to further hikes so they don’t disappoint investors if they need to hike again. This is the classic under-promise, over-deliver.
Since the Fed decision and outlook were exactly what the crowd expected, it is already priced in, and we shouldn’t expect Wednesday’s selling to turn into anything more than another test of 4,400 support. It takes new and shocking developments to send the stock market into a tailspin, and we didn’t get anything remotely close to that Wednesday afternoon. Two steps forward, one step back. Rinse and repeat.
As I wrote Tuesday evening, I am approaching this as a buying opportunity. The only question was if I was going to buy a pop Wednesday afternoon or wait through the dip and bounce:
I’m a buyer on Wednesday afternoon if the index trades well after the Fed statement. If prices fall, I’m still interested in buying, but I will wait for capitulation first. Maybe that happens Wednesday afternoon, or maybe we need one last puke-out Thursday. But no matter what, I am looking at this as a buying opportunity. The only difference is if I buy on Wednesday afternoon or wait until Thursday or Friday.
Since the market didn’t pop Wednesday afternoon, that means I’m trading the dip and bounce. Maybe we bounce Thursday morning and never look back. Maybe we fall a little further under 4,400 support before bouncing. Either way, I’m waiting for the bounce and then jumping aboard. The lower this goes now, the more money I make buying the bounce in a 3x ETF.
Anyone trading Wednesday’s decline like the world is ending clearly isn’t paying attention. The market is consolidating the summer’s gains near 4,400 support—nothing more, nothing less.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Tuesday’s session off a modest 0.2%. Not bad, considering the index was down nearly 1% in midday trade.
All eyes are on the Fed’s meeting. While there is near universal agreement the Fed will keep interest rates steady Wednesday afternoon, the crowd is far more interested in what they have to say about November’s meeting and beyond. Will they keep hinting at another rate hike this year? Will they mention the possibility of rate cuts next year? Those questions will drive the next waves of buying and selling.
That said, the Fed tries really hard not to spook the market, so we shouldn’t expect anything surprising. After a brief reflexive knee-jerk of volatility Wednesday afternoon, the market will quickly go back to what it was doing previously, which is consolidating the summer gains above 4,400 support.
Tuesday’s midday selling actually increases the odds of a decent finish on Wednesday afternoon. That’s because the market got rid of a bunch of weak-kneed owners, and once those people sell, their opinions don’t matter anymore.
As is typically the case, we can ignore the first 15-ish minutes after the Fed announcement because those knee-jerk swings often go in the wrong direction. But after 30-ish minutes, the market can’t hide its true intentions, and that’s when we have the green light to jump aboard the next trade.
I’m a buyer on Wednesday afternoon if the index trades well after the Fed statement. If prices fall, I’m still interested in buying, but I will wait for capitulation first. Maybe that happens Wednesday afternoon, or maybe we need one last puke-out Thursday. But no matter what, I am looking at this as a buying opportunity. The only difference is if I buy on Wednesday afternoon or wait until Thursday or Friday.
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