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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 added a towering 5.4% Thursday, making this one of the biggest up days in stock market history.
As much as I expected inflation to start moderating, I never expected the market to react in such an oversized way to what was a fairly modest change in inflation. But the trend is everything and Thursday morning’s inflation reading suggests our inflation fever is finally breaking.
Netting out Wednesday’s -2% post-election hangover, we’re “only” up 3.4% from Tuesday’s close, which is still a lot, but a tad more reasonable. And more importantly, Thursday’s gains put the rally to 4k back on track. (And at this rate, we could be there Friday morning!)
As much as bears tried to punish stocks for Republicans’ underperformance in the midterm elections, as I wrote Tuesday evening, this market isn’t concerned with politics.
The stock market really isn’t concerned with politics this time around because it knows the Fed is the one controlling the economy. By Wednesday afternoon, expect the election to be old news for the market and it will go back to what it was doing before, which is obsessing over inflation and rate hikes.
If the market’s attention is going back to what it was doing before the election took over the airwaves, that means October’s rebound is back on and 4k is within reach.
Well, it turns out my Wednesday afternoon forecast was a tad premature, but hopefully, most readers can forgive me for being off by a few hours.
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As expected, the only thing that matters to this market is inflation and rate hikes and Thursday morning’s lower-than-expected inflation reading means the Fed doesn’t need to move as aggressively with future rate hikes.
Sometimes it is better to be lucky than good and Thursday was one of those days. I was fairly certain Wednesday’s election-fueled selloff would fade quickly. What I didn’t expect was Thursday’s historic gains following a “less bad than expected” inflation report, but that’s the way this game goes sometimes. The important thing is recognizing the direction the wind was blowing because we can’t get lucky if we don’t know which side of the street to stand on.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The Republican’s widely anticipated “red wave” turned out to be little more than a “red ripple”.
As is often the case, the market’s reflex is to buy Republican victories and sell Democrat wins. And Wednesday was no different with the index tumbling 2% following the latest Republican letdown.
While this politically skewed view of the stock market is easily debunked by looking at historical performance under different administrations, that doesn’t stop partisan investors from sour grapes selling in the hours and days after an election.
Now, I will be honest, I had no issue with stocks slipping in a knee-jerk reflex to the Republican fumble, but I thought the market would find its footing and move past the election by Wednesday afternoon. A split government is a split government and Republicans don’t need large majorities or even both houses to stifle the Democrat’s legislative agenda. But obviously, the market saw it differently and the selling continued through the afternoon.
There are two possible explanations for this:
If the market’s latest rebound from the October lows was built on expectations of a “red wave”, that means there is a lot of air underneath us since this “red wave” failed to materialize. Partisans buying the rumor and then the rumor turning out to be wrong is a recipe for falling stock prices.
On the other hand, maybe Wednesday’s one-way selloff was little more than the herd following each other off the cliff. Few things shatter confidence like screens filled with red and Wednesday’s stumble could be nothing more than selling because other people are selling. Lucky for us, selling without a meaningful catalyst tends to exhaust itself fairly quickly.
At this point, either scenario is equally likely. Fortunately, the two possible explanations for Wednesday’s weakness will quickly diverge from each other. If there were high expectations of a red wave priced into the market, the selling will continue for days and even weeks, pushing us all the way back to the October lows near 3,500. But if Wednesday was nothing more than reflexive selling that got a little carried away, supply will dry up and prices will bounce as soon as Thursday.
Buy a bounce Thursday because it means we are headed to 4k and sell/short a further breakdown because it means 3,500 is just around the corner. It really is that easy.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday was another wild ride for the S&P 500 as the index bounced between 3,780 and 3,860 before finally settling in the middle of the range, posting a respectable 0.6% gain.
The talk of the day is obviously focused on the election. Republicans are widely expected to take the House while control of the Senate is up in the air and odds are good a runoff or recount could delay the outcome for this chamber for days if not weeks.
But if Republicans gain control of the House, that means a split government and control of the Senate isn’t necessary to grind things to a halt. And while people complain about a dysfunctional government, the stock market loves gridlock because it means no one is changing the rules in the middle of the game. As far as the market is concerned, bad rules that can be counted on and priced in are better than rules in flux where no one is sure how things will turn out.
The market could experience further reflexive knee jerks over the next handful of hours as it frets over “voting irregularities” and such, but as I wrote previously, the stock market really isn’t concerned with politics this time around because it knows the Fed is the one controlling the economy. By Wednesday afternoon, expect the election to be old news for the market and it will go back to what it was doing before, which is obsessing over inflation and rate hikes.
If the market’s attention is going back to what it was doing before the election took over the airwaves, that means October’s rebound is back on and 4k is within reach.
As always, use trailing stops to protect our profits, but at this point, October’s rebound remains holdable with stops above Friday’s lows. Until we fall below that level, the rebound is alive and well.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 continued Friday’s late bounce on Monday as it added another 1%.
Economic headlines remain mostly the same as everyone looks forward to Tuesday’s elections. But for as much coverage as the election is getting, we shouldn’t expect Tuesday’s result to move the markets in a meaningful and lasting way. Partisan politics aside, stocks have rallied and fallen under Republicans just like they have under Democrats. Remember, we trade the market, not politics, so leave that Red and Blue stuff out of this. This economy rests in the Fed’s hands and it doesn’t matter who is in charge of Congress.
If the election were not happening Tuesday, I would be buying Friday’s rebound. But since we have an election on Tuesday, I’m buying Friday’s rebound. See what I did there? I trade the market, not politics, and right now the market is telling me it is time to buy the bounce, so that’s exactly what I doing.
Now, don’t get me wrong, I’m not saying the election will have zero impact on the market. No doubt we will get a knee-jerk bounce Wednesday morning following a “Red Wave” and prices will slip a little if we get a “Blue Wave”, but after that initial reflex of partisan volatility, expect the election to be old news by lunchtime.
I’m buying and adding to Friday’s rebound with stops spread around Friday’s intraday lows. If prices fall under my stops, I’m out. If the rally continues, I’m adding more and lifting my stops. Let other people second-guess the headlines.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Friday was another wild session for the S&P 500 as the index popped +1.8% in early trade, crashed back to breakeven before lunchtime, and then surged +1.4% into the close.
The economy added another quarter million jobs in October and we haven’t fallen into a meaningful slowdown yet. That’s both good and bad depending on which side of the fence a person is standing on. A strong economy is good for corporate profits, but too strong means even more rate hikes are ahead of us. And that’s what traders spent all day arguing over.
Friday’s midday retreat was a concern because it suggested dip buyers were MIA. But but after that slump failed to trigger an even larger breakdown and the selling stalled near breakeven, buyers finally decided to show up a few hours later. As the saying goes, better late than never.
How we finish is always more important than how we start, so by that measure, Friday was a good session. The midday breakdown couldn’t build momentum and that tells us the ground under our feet is fairly solid. If this really was a house of cards, we would have crashed to fresh lows. The fact we are still standing tells us the market is a lot more resilient than the critics claim.
As I wrote Thursday evening, I expected this week’s Fed-fueled selloff to bounce relatively soon and that’s exactly what we got:
While we’ve seen a lot of big selloffs this year, each echo gets weaker than the one that came before it. Meaning odds are good this week’s selloff will bounce a lot sooner than many people expect. For someone that’s short this weakness, that means standing near the exits and being ready to lock in profits as soon as the selling capitulates, which could come as early as Friday afternoon.
Friday was a good day, but we need to keep this strength up next week because a retest of the lows means the bounce is dead. Friday’s bounce is buyable with stops near 3,700. Add more if the rebound continues next week and pull the plug if we slip back to our stops.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 shed another 1% Thursday, adding to Wednesday’s Fed-fueled 2.5% losses and leaving the index down 4.6% for the week. Ouch!
As bad as this feels, unfortunately, it appears there are still more losses left in this “pain trade”.
Thursday was one of those tipping points where the market was telling us what it wants to do next. And the uninspiring price action told us dip buyers are not ready to bail us out yet.
The index opened Thursday down 1%, rallied from those early lows, and even spent a portion of the session threatening to turn green. Finishing green would have been a very bullish reversal, but instead, a wave of selling knocked us back from those midday highs. As long-time readers of this blog know, how we finish matters most. Big institutions place their trade at the end of the day and rather than buying these discounts, big money was selling and running for cover.
As I wrote Wednesday evening, even though I came into the Fed decision with a long position, as soon as that midday rally broke down, there was no arguing with the market and it was time to pull the plug. And when trading a binary outcome, if we find ourselves on the wrong side, it only makes sense to change sides. So I shorted Wednesday’s breakdown and held that position through Thursday.
But just as important, as soon as I’m out, I’m always on the lookout for the next bounce. While we’ve seen a lot of big selloffs this year, each echo gets weaker than the one that came before it. Meaning odds are good this week’s selloff will bounce a lot sooner than many people expect. For someone that’s short this weakness, that means standing near the exits and being ready to lock in profits as soon as the selling capitulates, which could come as early as Friday afternoon.
I will continue holding this short as long as the market keeps falling, but I’m already lowering my trailing stops and it won’t take much convincing to get me to lock in these profits.
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