Mar 13

Was this the V-bottom?

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Look Ahead

This has been a week for the record books. The oldest bull market in U.S. history died Thursday following the S&P 500’s worst day in over 30 years. As bad as that sounds, this week would have been even worse if it weren’t for Friday’s spectacular 200-point rebound that erased a big chunk of the midweek losses. In the end, the index “only” took a 10% haircut this week and is now 20% under the all-time highs set just a few weeks ago.

“The bull market is dead, long live the bull market.”

The end of one thing becomes the birth of something else. While bears want us to believe this crash is only just getting started, history is not on their side. This Coronavirus selloff bottomed at 27% this week and only a handful of times over the last 150 years has the market fallen even further.

While prices could absolutely continue making new lows next week, we are definitely a lot closer to the end of this move than the start of it. And even more reassuring, markets love symmetry and dramatic crashes typically capitulate in a V-bottom. If things get even uglier next week, it won’t be long before the market ricochets off the oversold bottom and creates the sharp right-hand recovery side of the Vee. (There’s even a good chance Thursday/Friday was the crash and rebound of the Vee capitulation.)

While I cannot tell you when this will be over, the one thing we know for certain is next week will be extremely volatile. That means big moves in both directions. One day’s up will be followed by the next day’s down. No doubt a lot of traders will continue getting cutup by these whipsaws, nimble traders who move confidently and proactively will continue printing money.

The greatest strength we have as individual traders is our nimbleness. We can go from full long to full short in a few mouse clicks. Use this power responsibly and we don’t need to be victims of the market’s gyrations. The only thing we need to know is the market is going to make big moves. During periods like this, we’re not bulls or bears, we’re opportunists. It makes no difference which direction the market goes as long as it goes somewhere in a spectacular way. Simply jump aboard these moves early and keep a close stop. Buy the first signs of a bounce. If that fizzles and undercuts the lows, switch direction and go short. Then buy the next day’s rebound. Follow that by shorting the next day’s fizzle. When that bounces, jump back in on the long side. In markets that move this fast and hard, all we need to do is be there to catch the next big wave. Who cares which direction it goes. And most importantly, just when we’re feeling really good about our profits, lock them in. If we don’t, they will be gone in a few hours.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Mar 12

A trading plan for this worst of days

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The following is an updated excerpt of what I shared with subscribers today during the trading session. This explains how I feel about this situation and I wanted to share it with my free subscribers too:

The S&P 500 crashed at the open and the bloodbath triggered the second trading halt this week. A tsunami of headlines hit us yesterday between the NCAA basketball tournament closing its doors to the public, the NBA suspending its season, and Trump banning Europeans from entering the U.S. And not to be left out, the NHL, Nascar, Formula 1, and countless other leagues put the brakes on their seasons today too. This officially puts us in full panic mode.

The Fed tried to cheer traders up with promises of a fresh liquidity injection, but the enthusiasm was short-lived and prices quickly retreated back to the lows. Today ended as the single worst trading day since the 1987 crash and it officially killed the longest-lasting bull market in U.S. history. 

As bad as this sounds, it is important to keep in mind these selloffs bottom just when everything seems its worst. While the spread of the Coronavirus will continue to get worse before it gets better, we won’t see a perfect storm of successive headlines like this again. In fact, yesterday and today’s gut punches moved the bar so low that no matter what happens going forward, even horrible news will still be less bad than what many people are fearing right now. School closings and the MLB suspending its season are foregone conclusions. The only way for this to get worse is a national militarized lockdown. While that could happen, I don’t think any of our politicians are willing to make that draconian of a call for something that is realistically only marginally worse than the seasonal flu.

The Coronavirus is definitely running out of control, but without a doubt, fear of the virus will prove to be far more economically damaging than anything the actual virus does. While this is terrible for anyone that is seriously affected, for almost everyone else, it will be little more than an inconvenience. Humans are really good at rationalizing away risk. They will panic for a few days or weeks. But after the worst fails to materialize, people will get lazy and be less willing to tolerate the incontinence. They will wear masks for a few weeks, but after no one gets sick, they will stop bothering. Now parents are insisting schools close down. In a few weeks, these same parents will beg schools reopen. After 9/11, everyone claimed nothing would be the same. A few months later, the only thing that changed was airport security and a war half a world away. 

There is a good chance this is the market’s darkest day and everything starts getting better from here. I’m buying the dip, but I’m staying as cautious as ever. My positions are small and my stops are nearby. But even if I get stopped out, I’m going to try again tomorrow and the next day. The bottom is close, but in a world where markets move 5 and 10% per day, we definitely need to be careful. 


Trading Plan

Most Likely Next Move: The capitulation point is close and this headline tsunami could very well be our darkest hour. There is a good chance pessimism is peaking and going forward we will start seeing a lot more “less bad than feared”.

Trading Plan: Buy the bounce with a stop under the lows. Add to what is working but keep overnight position sizes modest until you have a comfortable profit cushion. If stocks bounce tomorrow, ride that wave higher. If they devolve into another panic, short the weakness. But when shorting, take profits early and often because the biggest up days always come in the worst bear markets. 

If I’m Wrong: The public starts dumping their 401k’s and this bloodbath is only getting started. Our stops will get us out and our plan will have us short further weakness. No matter what happens next, we are prepared and will profit from it.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Mar 11

Why the Coronavirus matters when Trade Wars and Brexits didn’t

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

Anyone following the market over the last few years came to appreciate this market’s Teflon nature. No matter what headlines were thrown at it, it shrugged them off and continued higher. Earnings recessions. Brexits. Trade Wars. Rate Hikes. Nothing slowed this market’s relentless climb to, and then beyond, all-time highs. That is until the Coronavirus came along and now we are in the middle of the biggest and fastest stock market crash since the 2008 Financial Crisis. Why this? Why now? What makes this different?

The simple answer is all of the other events were economically quantifiable. After a brief shock and a few percent corrections, traders were able to quantify the financial impact of 25% tit-for-tat tariffs between the US and China. The Brexit was a little less clear since no country left the EU before, but after a few gyrations, the market quickly realized both sides would work this out and even if they didn’t, both economies could survive the divorce even if it got ugly. Rate hikes? Been there, done that. All of these things were bad for stocks but after a brief bobble, traders got used to them, priced the news in, and moved on.

But the Coronavirus? Nothing like this happened in modern history. There is no telling how far the economic damage could go. Business travel is suspended. Conferences canceled. Festivals canceled. Sporting events canceled, postponed, or held without spectators. Even the Olympics this summer is threatened. Airlines are already reporting a bigger decline in bookings than they saw after the 9/11 terrorist attacks and there are few things more disturbing than the images we saw that day.

We haven’t seen anything like this in our lifetime and that makes it impossible to predict the economic fallout. By nature, markets hate uncertainty more than bad news. It can price in bad news and move on. But the unknown, how do you price that in? You can’t and is why many investors are taking a sell now, ask questions later approach to their portfolios.

And unfortunately, I don’t see the uncertainty clearing up anytime soon. But that isn’t all bad for the market. While the headlines will continue to deteriorate, with every passing day and each successive headline, there are fewer and fewer scared owners left in the market. Once the last of those have sold, supply dries up and prices bounce no matter what is going on in the news. While some people are waiting for a slowdown in the infection rate or a vaccine to be announced, the stock market will rebound from the lows long before then.

When will that bounce happen? The honest answer is I don’t know. And no one else does either. This is an emotional selloff and conventional rules don’t apply. Trendlines, support levels, moving averages, P/E ratios, all of it is totally and completely meaningless to an emotional market. This selloff will end when we run out of scared sellers. Nothing more, nothing less. Are we close, yes, we’re very close. The challenge is in a market that falls 4%, 5%, and 7% in a single day, an imminent bounce might come to our rescue, but prices could be at much lower when it finally happens.

This is a day-trader’s paradise. Everyone else should resist the urge to react to these gyrations. That means either sticking with your long-term positions and buying more of your favorite stocks, or watching this unfold from the safety of the sidelines and only jumping back in after the overnight gaps and intraday swings calm down. As the saying goes, it is better to be a little late than a lot early.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN

Mar 09

CMU: Trading plan for markets in turmoil

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P had one of the worst days since the 2008 Financial Crisis, plunging a staggering 7% from Friday’s close and violating recent lows in the process. While the Coronavirus remains front and center, frayed nerves were shattered when Saudi Ariba launched an aggressive oil price war against Russia, going full nuclear and triggering the biggest one-day oil price crash in nearly 30 years. Global markets were already teetering on edge and this news gave us the biggest kick in the pants imaginable.

How do we trade this? That’s a question everyone wants to know, so let’s get to it.

First, we need to bifurcate our approach into two major strategies because our primary objectives have a huge impact on how we approach this volatility. It all comes down to time-frame. Either we are steady long-term investors or we are nimble swing-traders. There is zero room in between these extremes. Pick one or the other and make a ton of money. Find yourself in the middle and other people will be getting rich at your expense.

Now, there is a smart way to straddle these two extremes, but it most definitely doesn’t come from blending timeframes. Instead, we allocate a portion of our market exposure to each approach. Have some dedicated long-term investments and another portion is exclusively for swing-trading. As long as each piece falls firmly within one of these clearly defined strategies, you will be fine. Anyone mixing the two quickly become a wealth doner (If you know anyone like this, please thank them for allowing us to have such a great month!)

Trading Plan

Long-term:
Let’s start with the long-term approach. This is the classic buy-it-and-forget-it. These people shouldn’t be following the market’s daily movements and if they do, it is only so they know when prices dip and they can add more. Anyone selling long-term investments during this crash is making a huge, huge mistake. Don’t be that guy. Buy-high and sell-low never works.

If your trade started as a long-term investment, keep it that way. Stop following the headlines and watching the market’s daily gyrations. If you really want to do something, pick your favorite investments and add more. Scale up your 401k contributions, don’t decrease them. In nine months when pundits are reflecting back on 2020, the Coronavirus will simply be a footnote and life will be back to normal. If you bought the dip, great. If you sold it, well, someone needed to donate their money so the rest of us can have a great year.

Short-term:
While a lot happened over the last few weeks, the short-term trading plan I’ve been sharing with subscribers hasn’t changed in three weeks. When something is working this well, why mess with it?

First, we are small investors and that means we can get in and out of the market with the greatest of ease. This is far-and-away our largest advantage over the big boys and if we don’t exploit this strength, we should convert everything over to long-term investments and forget about trading this chop.

Second, this is often a counter-trend trading technique, meaning we need to be extremely nimble, buy early, and exit losing trades fast. The only way to survive this stuff is by being earlier and faster than everyone else.

Third, start small and only add to winning trades.

Fourth, buy bounces early and short breakdowns just as quickly. Moving decisively allows us to place a nearby stop under the lows on a bounce or just above support on a short. The closer our stops, the less money we have at risk.

Fifth, be prepared for a lot of head fakes and false alarms. There will be inevitable rebounds that fizzle and violations that rebound. No big deal. As long as we start small, get in early, and have a nearby stop, the losses will be minor and inconsequential compared to the towering profits when we catch the next big move.

And Sixth, trade in such a size that when we are wrong, it stings, but it isn’t crippling. Being long into this morning’s open would have sucked, but if we bought near Friday’s lows and only held a small position over the weekend, it actually wasn’t that big of a deal.

Take all of those strategies together and our trading plan is to buy any and all bounces early, start small, keep a nearby stop, and close/short the violation of support. It doesn’t get any simpler than that. I’ve been buying every bounce for two weeks and I keep making money shorting the market. And I will continue buying every bounce until the market stops giving away money. If I make money buying the dip, great. If I make money shorting the violation, great. It makes no difference to me as long as I’m making money.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM