Sep 26

Why this market is not as risky as most people believe

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 skidded on Monday for the fifth session in a row and the eighth time out of the last ten.

Needless to say, it’s been a rough couple of weeks as the index shed nearly 500 points and is now challenging the summer lows.

Economic headlines remain mostly the same and nothing shocking or even unexpected happened over the last two weeks. Instead, sentiment simply swung from half-full to half-empty as investors looked down and developed a fear of heights. There is nothing more complicated about it than that. Owners lost their nerve and sold because they got scared.

But now that the market is retesting the 2022 lows, the most important thing to remember is that risk is actually at the lowest levels of the year. It sure doesn’t feel that way as waves of panic selling hit the market, but risk is a function of height and these are the lowest prices all year.

Undoubtedly prices can fall further, but this latest 500-point retreat can no longer hurt us because it already happened and we don’t need to be afraid of it.

We always give the edge to momentum and the trend, which is clearly lower. But at some point we are going to run out of sellers and the market is going to bounce because it always does.

We could tumble in one last dramatic violation of support before this latest round of selling capitulates. But bounce off of the lows or violate them, either way, the end will be here soon. If not Tuesday or Wednesday, then later this week or early next week.

I’m currently short the market, but I’m paranoid and standing next to the exits When this finally bounces, it will be hard and fast and I don’t want to give back all of these nice profits.

And more than just short profits, when this bounces, I want to switch direction and grab ahold of the next rally. Remember, the biggest and fastest rallies occur during bear markets. (Start small, get in early, keep a nearby stop, and only add to a trade that’s working.)

Stocks look horrible and they feel even worse, but that tells us this wave of selling is getting close to exhausting itself and the bounce is just around the corner.

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Sep 21

I was wrong and it wasn’t so bad

By Jani Ziedins | Free CMU

Free After-Hours Analysis: 

Whelp, that didn’t work. Tuesday evening I wrote a post titled, “Why I’m holding stocks ahead of the Fed’s rate-hike.” And 24 hours later, everyone knows that was the exact wrong move to make. But that’s the way trading goes sometimes.

If a person’s trading plan requires them to be right 100% of the time, they’re not going to last very long. The hard truth is successful trading means being wrong…a lot. If a person can’t handle that, they better find something else to do because trading isn’t for them.

In fact, the number one difference between successful traders and unsuccessful traders is how they handle being wrong. (Everyone has good ideas, it’s how they handle their bad ideas that drags most people down.)

Successful traders take their losses quickly and move on. Unsuccessful traders argue with the market and stick with their losers. As overly simple as this sounds, that really is all that separates good traders from everyone else.

Take my wrong trade on Wednesday. As I wrote Tuesday evening, I came into the Fed announcement holding stocks. But lucky for me, this was a new position and I always start trades with partial positions until they prove themselves. If I’m going to be wrong, it is a lot easier being wrong on a third or half position. And when I’m right, I keep adding partial positions until I’m fully invested.

And more than starting small, it is just as important to get in early. I picked up those positions Tuesday afternoon. By the time the Fed selloff started Wednesday afternoon, I was already sitting on a decent profit cushion, giving me a reasonable amount of protection. Sure, the index crashed 1% after the Fed’s announcement, but starting from +0.7% mitigates a big chunk of that sting.

And most importantly, when my trading thesis blew up moments after 2pm, I had no choice but to admit defeat and pull the plug. There was no giving it a few more minutes. If something is going to work, it is going to work. When the market took off in the wrong direction, it meant I was wrong and the only thing to do is get out and minimize the damage.

Sure, the market bounced hard an hour later, but I resisted the temptation to chase because the market wasn’t acting the way I expected, so it meant I was missing something. Rather than try to desperately salvage a bad trade, I simply let it go. And that proved to be a good decision because that bounce fizzled and there was a lot more selling left to do.

I was wrong on Wednesday. But more importantly, I lived to tell the story and I’m not going to let one trade discourage me. Like a city bus, the next trading opportunity will be along any minute.

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Sep 20

Why I’m holding stocks ahead of the Fed’s rate-hike

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped 1.1% Tuesday after it failed to hold Monday’s nice gains.

While it would have been more fun to watch stocks rally for a second day in a row, testing and bouncing off of recent lows isn’t a bad consolidation prize.

The first bounce in any attempted rebound rarely succeeds and Monday’s fizzled bounce fits that description. But encouragingly, even though the index undercut Monday’s lows on Tuesday, the selling stalled almost immediately. That tells us there isn’t a lot of extra supply sitting underneath the market. Instead, most owners seem content holding through a minor violation of recent lows. And when owners don’t reflexively sell, supply dries up and prices bounce, which is what we saw Tuesday afternoon.

Even though the index finished more than 1% in the negative, Tuesday was actually fairly constructive. As anyone that’s been doing this for a while can tell you, the first thing a downtrend needs to get turned around is to stop going down. And at least for the last couple of sessions, this market stopped going down.

No one knows for sure what the market will do Wednesday after the Fed announces the next rate hike and lays out its expectations for the next few months, but seeing prices 550 points under recent highs means a big portion of the near-term downside has already been realized.

As scary as buying feels right now, the market has been acting decently the last two sessions and these reduced prices mean the risks of buying here are equally reduced.

Now, I’ll be honest, I’m not excited to be buying this near-term stability, but that’s the way all of my best trades feel in the beginning. (It’s the easy trades that typically cause the biggest problems.)

As much as I think stocks will rally after the Fed’s statement turns out “less bad than feared”, if the waves of selling return, I’m more than happy to admit I’m wrong, pull the plug, and even go short again if the selling accelerates.

Long but standing next to the exits is the way I’m approaching Wednesday.

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Sep 19

Why smart money was buying Monday’s bounce

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 bounced Monday, adding a respectable 0.7% and ending a two-day losing streak. That said, Monday’s gains still leave the index near multi-month lows and August’s relief rally is ancient history.

All eyes are squarely on the Fed and Wednesday’s interest rate decision. But more important than what they do this week, investors are mostly interested in hearing the Fed’s plans for future hikes. Will it be a return of the dovish commentary that kicked off the summer rally? Or will Powell stick with his assertive tone that triggered this fall swoon?

My money is on Powell standing his ground. But there is a big difference when he says these things at 4,300 and when he says the same thing at 3,900. One price incorporated a lot of optimism and left us vulnerable to disappointment. The other is bracing for a stern talking too and it won’t catch many people off guard.

If prices were still at 4,300, I would be concerned about what the Fed says on Wednesday. But 400 points lower, there is already a lot of disappointment reflected in these levels and we could actually see stocks rebound on “less bad than feared” if Powell sticks to what he said in Jackson Hole last month.

Markets are always swinging between “too low” and “too high”. The August rally obviously got a little too carried away. But now that we are closer to the summer lows than the highs, there is a lot less risk in buying these levels.

I never buy dips, but I will be the first in line when prices bounce. And Monday’s bounce off of the opening lows was a great opportunity to get in because it allowed us to manage our risks by placing a very sensible stop nearby. If the bounce keeps going Tuesday, great, we add more and move up our stops. If the selling returns, no big deal, we pull the plug on our partial position at Monday’s intraday lows and start looking for the next bounce.

While it feels foolish to buy ahead of the Fed’s next rate hike, the best trades always start this way. By the time it feels good, it will be too late.

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Sep 15

It’s gonna get worse, but more important, when it will get better

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Thursday was another rough session for S&P 500 as the index shed an additional 1.3%.

So much for the post-Labor Day rebound. But this wasn’t a surprise for readers of this free blog. As I wrote Wednesday evening:

Bouncing 0.3% on the heels of -4.3% bloodbath is downright pathetic. Stocks rebound from oversold levels hard and fast. And since Wednesday’s bounce was neither hard nor fast, that tells us the market is not oversold yet…at this point, the wind is blowing in the other direction and momentum is clearly lower. Don’t relax because it is about to get worse.

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And as expected, the S&P 500 tested and violated 3,900 support Thursday. Unfortunately, dropping a handful of points under support doesn’t count as capitulation, meaning things need to get even worse before they can get better.

Now don’t get me wrong, I’m an optimist at heart and I’m looking for the next bounce, but we need a little more near-term pain before we break through to the other side. Maybe stocks fall hard Friday morning and that signals capitulation. Or maybe the selling doesn’t exhaust itself until Monday or later next week. But at this point, we still need to drive real fear through stock owners’ hearts before this will bottom and bounce. Until then, look out below.

Tuesday’s crash was shortable. We could continue holding the short through Wednesday’s pathetic bounce. And Thursday’s minor violation of 3,900 was only the warmup act, telling us to stick with the short trade into Friday.

What’s coming on Friday? More pain.

But the important thing to remember about short trades is they always end in a hard and fast bounce, so don’t get greedy. Just when this trade looks like it is unstoppable is when we need to pull the ripcord and lock in those short profits because holding a few hours too long will wipe out a big portion of our profits.

And when we bounce, be ready to grab that next wave higher because those first few hours will be very profitable. Maybe the bounce arrives Friday. Maybe it comes Monday or later next week. But it will be here very soon and we need to be ready to jump aboard as soon as the selling climaxes in a spectacular and obvious way.

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