May 09

How much risk are you holding?

By Jani Ziedins | Free CMU , Weekly Analysis

Free End of Week Analysis and Lookahead: 

The S&P 500 added 3.5% this week and produced its first weekly gain in three weeks. That said, the previous two weekly losses were fairly modest at -1.3% and -0.2%. This continues to be the most epic rebound of all rebounds and the index is towering 30% above March’s lows.

In previous posts I covered the reasons this market is ignoring the horrific economic carnage surrounding us. But for those that missed it, it mostly comes down to the market’s forward-looking nature pricing stocks for where we are headed, not where we are today. The stock market expects the economic situation to be much improved in six months and that is how it is valuing stocks today.

But now that stocks are significantly above the selloff’s bottom, is there still a reason to be buying stocks at these levels? As is usually the case, the answer is both Yes and No.

First, let’s start with the Yes. Momentum is definitely higher and this market is refusing all invitations to breakdown. We just completed the seventh week of this rebound and if it was unsustainable and vulnerable to a crash, it would have happened by now. Compare this to the typical market crashes that are breathtakingly quick and force traders to sell first and ask questions later. The market most definitely doesn’t give us the luxury of multiple months to thoughtfully consider the full situation and allow us to sell in a calm and orderly fashion before the crash.

But just because this market is trading well and will most likely continue trading well doesn’t mean it is a good buy. Successful trading has less to do with the outcome of any individual trade and is more about managing our risks. Let’s say chances are good we can make $20 over the next few weeks. That seems like a no brainer, right? Well, what if that opportunity to make $20 also came with the risk we could lose $80. Does it still seem like a good deal? Probably not.

This market is dramatically higher and most likely it will keep going higher. But just because it goes higher doesn’t mean we should be chasing it here. The big run from the March lows ate up a big portion of the upside and means there is less profit potential left for us to squeeze out of the market over the near-term. And more than just limited upside, if there are any bumps in the road, there is an awful lot of air underneath us right now.

Given how skewed against us the risk/reward currently is, this is definitely a better place to be locking-in profits than adding new money. Just because the market goes up next week and the week after doesn’t mean buying stocks at these prices was the smart trade.

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

May 07

TSLA: Hitting its head on resistance or refusing to go down?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

TSLA has been struggling with $800 resistance the last two weeks. The most promising day occurred last week when the stock smashed through resistance following a strong earnings report, yet more ominously, it tumbled 10% from those early highs and finished the day solidly in the red.

I won’t bother with a fundamental analysis of Tesla. Number one, there are plenty of other articles written about how under or overvalued TSLA is (take your pick). But more importantly, number two, I don’t care. I trade the stock, not the company. If it wants to go higher over the near-term, I’m more than happy to hop on and enjoy the ride. If it wants to go lower, I can do that too. By the time the stock eventually settles into its “true” value, I’ll be long gone and it doesn’t matter to me.

Back to the stock, there are two ways to interpret this price action just under $800. What a person sees largely depends on their preexisting bias. Bears see a stock hitting its head on resistance and on the verge of tumbling back to $600 support. On the other side, bulls see a stock that refuses to go down. And the best part about a stock that refuses to go down? It eventually goes up.

Last week I would have sided with the bears. Smashing through resistance following a strong earnings report only to be overwhelmed by a tidal wave of profit-taking is never a good sign. And then the next day Elon slammed the stock even further by calling it overvalued. Yet rather than unleash waves of follow-on selling, supply dried up and prices bounce back to $800 and have been stuck there ever since.

For the time being, this is a strong sign and breaking through resistance in a sustainable way seems inevitable. That means the most likely next move is higher and if we get through $800, then all-time highs near $1,000 is the next stop. But that’s a big “IF”. If prices remain stuck under $800 into next week, this starts looking a lot more like stalling and the real problem turns out to be a lack of demand.

Which is it? Who cares? As nimble independent investors, we don’t need to commit ourselves to these positions ahead of time. Wait for the $800 breakout, buy it, and keep a stop under this level. If prices race higher, hang on and enjoy the ride. If the retreat again, bail out and go short. While I don’t know for certain which way this stock will go next, I do know it will move fast once it makes up its mind. Whether that is up or down, I don’t care as long as my trading plan keeps me on the right side.

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

May 06

The bearish developments that could be taking place under our nose

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 is perfectly content hanging out between 2,700 and 2,900, a range it’s been stuck inside since early April. As shocking and unprecedented as the headlines have been, it is definitely strange to watch stocks slip into a relatively tight trading range.

Uncertain markets are typically volatile. And without a doubt, this market had its share of volatility in February and March. And by some measures, it is still incredibly volatile with 2% and 3% moves occurring multiple times a week. The difference is now most of these big swings are offset by equally large swings in the opposite direction. One day up, the next day down.

One way to interpret this sideways grind following a strong runup is distribution. Smart money is getting out and dumb money is getting in. And to a certain extent, it is hard to not see that point of view when looking at this stubbornly resilient market. This is the worst economy since the Great Depression, yet the S&P 500 is only down 15%. The Nasdaq even less. Something definitely doesn’t compute.

The next big move hinges on what comes next. Do infection rates continue to moderate? Will the virus largely disappear once warmer summer temperatures arrive? Will a stir-crazy public start going back to their normal routine even without a vaccine? That’s the scenario this optimistic market is pricing in. And so far that is the way things are progressing.

But success in the market doesn’t come from predicting what comes next. It comes from understanding the risk/reward and exploiting skewed opportunities to our advantage. If the market is expecting good things, then most of those good things are already priced in and there is not a lot of upside left for recent buyers. On the other hand, these optimistic projections put a lot of air underneath us if there is even the slightest hiccup along the way. Limited upside and unlimited downside, that’s definitely not a risk/reward skew I want to own, let alone be buying.

I like the way this market is trading and it deserves our utmost respect. Only a fool is stubbornly shorting this strength. But the bear is no more foolish than bull buying stocks with reckless abandon at these levels. Both sides are making the same mistake and allowing their bias to cloud their judgment. While these ideologues are arguing why their side is better than the other, opportunists are grinding out a few bucks from this rally and that dip. Smart money doesn’t care who wins. All they care about is following the market’s lead.

While I don’t trust this market, I know better than to fight it. I’m fully prepared to short this strength, but I won’t pull the trigger until I see those cracks forming. And if those cracks never show up, then I’m just as content grabbing this rebound and riding it all the way back to the highs. It makes no difference to me** as long as I’m making money. (**For the country and front-line workers, I definitely hope this is a sharp v-bottom recovery taking the economy back to the highs a quickly as possible.)

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

May 05

CMU: How to trade a market that doesn’t make any sense

By Jani Ziedins | Free CMU

Cracked.Market University: 

There are not enough superlatives to describe this economic environment and the subsequent stock market. Unprecedented. Unexpected. Unicorn. Most un-words apply because they all fit when talking about something we’ve never seen before.

So how do we trade something without precedent? Unfortunately, a lot of people kept approaching this market the same way they always have. It doesn’t matter if you use fundamental analysis or technical analysis, this market has broken all of the rules. So why are people still stubbornly applying the old rules?

Now don’t get me wrong, I’m not saying to throw out all of the old rules because everything has changed forever. That is absolutely not the case. Soon enough things will return to normal. Maybe it will happen later this summer. Maybe this fall or even next year. But this too shall pass.

The challenge is what to do in the meantime. If your holding timeframe extends beyond this current environment, ignore the noise and stick with has always worked. Find the best companies. Wait for them to sell at a discount. Buy as much as you can. And allow the profits to come to you in 5+ years. That works great for slow-money investors like Warren Buffett and it will work this time toon.

But what about the rest of us traders with a shorter time frame? Well, quite simply, if something isn’t working, STOP DOING IT!!! If your understanding of the market cannot deal with this unprecedented rebound from the March lows, there is nothing wrong with the market. The problem is your system. The same goes for your technical analysis. If it cannot deal with something moving this far, this fast, you need to find a different way of looking at the market.

At best, our rules only apply about half the time. The challenge is knowing which half of the time. That is the art of trading. The other half of the time, we need to be smart enough to change our approach. Unfortunately, there is a an almost imperceptible difference between being patient and being stubborn, but the outcomes couldn’t be more contrasting.

As far as I’m concerned, conventional rules don’t apply to this market. Rather than figure out where this market is going using rules that don’t work, simply follow its lead. The greatest asset we have as independent investors is the nimbleness of our size. We don’t need to commit to positions days or weeks ahead of time. Instead, wait to grab on after the trade is already moving. And if we get in on the wrong side, no big deal, bailout, and flip directions.

Up to this point, many of my more conventional assumptions about this market have been flat-out wrong. But by having a flexible trading plan that can accommodate this unprecedented market, my trades have been on the right side of this market most of the time.

Eventually, our more conventional rules will become useful again. In the meantime, be fully prepared to follow a market that “doesn’t make any sense”. The market isn’t broken, your approach is wrong.

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

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