Jan 29

How to interpret and trade the market’s mixed signals

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Tuesday, the S&P 500 slipped fractionally, but more importantly, it continues holding this month’s 2,600 breakout.

Over the weekend, Trump and Congress agreed to a temporary budget that allowed government workers to return to work and collect back pay. That was a critical development for Federal workers who missed two paychecks, but the political situation is far from resolved and the market actually declined Monday.

As I wrote last week, the 10% rally from the December lows priced in a lot of optimism the problems triggering last month’s swoon would be resolved. Unfortunately, that also meant any compromise was already largely priced in and stocks actually fell Monday because our politicians only offered a temporary solution.

The other significant development is the U.S. government’s criminal probe into Huawei, one of China’s most important companies. No doubt this escalates trade war tensions between these two economic superpowers.

Both of these events could be interpreted as bearish, and that’s the way the market took it, with declines on Monday and Tuesday, but the silver lining is the losses were relatively restrained. Taken together, the last two days of selling didn’t even trim 1% of value and we are still above the psychologically significant 2,600 level. Based on how volatile the previous three months has been, this week’s dip was barely a tremor.

I like how well the market is holding 2,600 support. Prices tumble from overbought and unsustainable levels quickly. This is our third week above this level and shows real demand for stocks at these prices. If equities were fragile and vulnerable to a tumble, there have been more than enough triggers to send us crashing back to the lows. Instead, the market shrugs the negativity off and continues holding recent gains. This is a dramatic improvement from late last year where even the smallest hint of a problem hiccup would send traders scrambling for the exits.

While the market’s mood has done a 180, its not that investors changed their mind, but that we changed investors. Fearful owners sold their stocks at a steep discount to confident dip buyers willing to hold these risks. After enough turnover takes place, we run out of fearful sellers and confident dip buyers disregard flare-ups of recycled headlines. That’s how we go from 250-point free falls to 300-point rebounds.

The problem with 300-point rebounds is those rate of gains is clearly not sustainable for any length of time. And this two-week consolidation above 2,600 support is proof of that. The market needs a breather and there are two ways this plays out; the dramatic stepback, or a mind numbing sideways grind. One scares weak traders out, the other bores them out.

To this point the market has resisted invitations to pullback. Big money seems more interested in buying these discounts than selling the fear and that is keeping a floor under prices. But at the same time, big money hates chasing prices higher and we can see their reluctance show up in the stalled rebound. In many ways, their reluctance to buy after a big move higher is a self fulfilling prophecy that creates the very dip they are worried about. But given how well the market is trading, most likely any near-term dip will be a buying opportunity.

While there is no reason to abandon our favorite long-term investments, there is also no reason to chase prices higher. Either we dip under 2,600 over the next few days or weeks, or we trade sideways for a while. Neither setup creates a good short-term buy. Instead, we should be patient and wait for a better entry.

If the market fails to rally on good news and finishes at the lows for a few days in a row, that is a bearish signal and an inviting short entry. If prices fall under 2,600 support, but quickly find a bottom, then that is our signal to buy the dip. And if we keep grinding sideways, then we just sit and watch. We only want to hold the risk of owning stocks when we are getting paid for it. If stocks are drifting sideways, we’re not getting paid and should be watching safely from the sidelines. We only want to buy when the risk/reward is stacked in our favor and that is not the case at these levels.


Apple reported its first declining revenue and earnings in more than a decade. But everyone knew this was coming and is why the stock was down nearly 40% from the highs. But the thing about the risks is they were already incorporated into the price. And like most things in the market, it probably even over did it.

If after-hours trade is any indication, AAPL will pop nicely tomorrow as reality turns out less bad than feared. If these gains stick Wednesday, it would put AAPL at the highest levels in over a month and easily erase the early January tumble when Apple lowered its guidance. At this point, it looks that dreadful day when the crowd was rushing for the exits was actually one of the best entry points in over a year.

This is what I told subscribers the day after AAPL lowered guidance and the stock plunged to fresh lows:

“I suspect we have already heard the worst from AAPL and things will only improve from here. Hopefully, Tim Cook was smart enough to lower expectations so far yesterday that it will create an easy beat when they report earnings at the end of the month. With the worst of the bad news already out there, most likely things will start getting better from here. Even AAPL bears should be expecting a near-term bounce from these oversold levels.”

Since then, AAPL is up 15% from those lows.

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

Jan 24

Why this rebound demands restraint

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Thursday, the S&P 500 bounced between modest gains and losses. The gov’t shutdown is dominating headlines and there is no end in sight, but the market doesn’t care and continues holding last week’s 2,600 breakout.

It’s been a wild ride from the Christmas lows, but so far the market is still acting well. Prices tumble from unsustainable levels quickly and holding 2,600 for more than a week is a good sign. Especially in the face of bearish headlines. If prices were grossly overbought, we would have tumbled by now.

That said, the last few weeks priced in a lot of good news in anticipation of breakthroughs with China and the shutdown. The problem with hope is it leaves us vulnerable to disappointment if things don’t go according to plan. While the market is acting well and trading like it wants to keep going higher, as long as we continue hovering near 2,600 support, we always run the risk of violating it. I remain cautiously optimistic, but I reserve the right to change my mind if conditions change.

But just because the market is acting well doesn’t mean this is a good time to add new money. Only a fool chases prices higher after a 10% move in a few short weeks. As I often write, markets move in waves. Understanding that principle in October, November, and December allowed us to profit nicely from sharp bounces on our way lower. And now that the market is recovering, we must acknowledge any rebound will include big drawdowns on our way higher. To expect anything different would going against the very nature of the market.

I don’t see any imminent warning signs of an impending collapse, but that still doesn’t mean this is a good time to be holding a short-term trade. No matter what happens next, the market will do something. Maybe it goes higher, or maybe it goes lower. One side will be right and the other side will be wrong. But just because the market will move doesn’t mean there is a good trade for us.

I buy when the odds are skewed in my favor. When the risks are small and the rewards large. Most of the time this happens when the market dips. Fearful sellers offer stocks at steep discounts. The more the indexes fall, the less risk there is because a big chunk of the downside has already been realized. And the lower we go, the greater the reward we collect when prices rebound.

But right now we have the opposite. The 10% rebound from the Christmas lows consumed a huge chunk of the upside. And now that prices are far more expensive, there is a lot more risk underneath us. Stocks are acting like they want to keep going higher over the near-term, but the limited upside remaining and heightened downside underneath means the risk/reward is now skewed against us.

Stocks are acting well and like they want to keep going higher over the near-term, but I’d rather be taking profits at these levels than adding new money. That said, this outlook only applies to my short-term trading account where my holding period is a few days or weeks. For our favorite buy-and-hold investments (think retirement accounts), there is no reason to sell and in fact, smart savers increased their contributions during this market volatility.

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

Jan 22

What to make of Tuesday’s dip and how to profit from it

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 slipped Tuesday, ending a string of four consecutive gains and posting the biggest loss in nearly three weeks.

It’s been a great run since the Christmas lows, with the index surging 10%. But as we know, markets don’t move in straight lines and a down day was inevitable. The question is if this is just one of those step backs before continuing higher, or if today’s weakness marks the end of the rebound.

Stocks have been surging despite December’s negative headlines sticking around. Nothing has been resolved in Trump’s trade war with China. Global growth continues to slow. The Fed is still planning further rate hikes. And the federal government has been shut down for a month with no end in sight.

Hardly seems like rally material, but that is exactly what happened. While the news has most definitely been bearish, it hasn’t been as bad as the crowd feared when they were scrambling for the exits at the end of last year.

Markets are prone to excess and that means oversized moves in both directions. Last summer we went a little too high. Then we fell too far in the fall. And now there is a good chance January’s rebound went a too far and it is time for a well-deserved rest. Even a pullback would be a normal and healthy way to process these gains.

Where we go from here largely depends on what happens next. Last week we reclaimed the widely followed 2,600 support level that propped the market up through October and November. While any near-term weakness will most likely dip under 2,600, how the market responds to such a violation will tell us what mood traders are in.

In December, fearful owners rushed to sell every hint of weakness. But the thing is, eventually we run out of fearful sellers. That’s because every person desperate to bailout ends up selling to a confident dip buyer who is willing to hold the risks. Out with the weak and in with the strong is how these things get turned around.

While bearish headlines are largely the same, and in some respects have even gotten worse, the market stopped caring. And not only has it stopped caring, it is acting as if everything has been getting better. But that is the way the market works. Buy the rumor sell the news. While we don’t have a resolution to any of the problems facing us, the market is assuming a solution is coming and anyone waiting for the confirmation will be too late.

But that assumes things turn out less bad than feared. There is an alternative outcome where the situation turns out worse than feared. And that is what it will take to send this market to fresh lows. But until that happens, expect every dip to bounce.

Having surged 300-points since Christmas, it is clearly too late to be chasing the rebound. Instead, we should be shifting to a defensive mindset and preparing for a consolidation. Savvy short-term traders have been taking profits into this strength. The most aggressive and nimble can try their hand at shorting this weakness. For the less bold, a dip under 2,600 support will likely find a bottom near 2,500 and that would be a great dip buying opportunity. If this market is healthy market, we shouldn’t get anywhere near the lows and retesting 2,400 would be a very bearish sign. Trade accordingly.

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