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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 tumbled 1% Wednesday morning after a monthly inflation report came in unexpectedly high at 3.5%. This elevated result pretty much eliminates the possibility of a near-term Fed rate cut, and investors were disappointed.
As bad as that start sounds, the selling never really got carried, and we spent most of the session trading sideways, closing pretty much where we opened. And not just that, the index held recent lows and we remain at levels that were record highs just a few weeks ago. When put that way, reality isn’t nearly as bad as Wednesday’s -1% headline number makes it sound.
In trading, it’s not how the day starts but how it finishes that matters most. And by that measure, Wednesday was a decent day. We took our big lump at the open, but after that, nothing much happened because most owners chose to keep holding their favorite stocks despite the inflation headlines. Without a follow-on dash for the exits, stocks held the early lows, and the day didn’t get any worse. By that measure, Wednesday’s close was constructive, with very little panicked selling or urgent profit-taking.
That doesn’t mean the selling can’t continue Thursday, but every hour that passes without a waterfall selloff decreases the odds of a waterfall selloff.
As for how I traded Wednesday’s dip, readers will remember that Tuesday night, I had a partial position with stops at my entry points. Tuesday’s midday dip knocked me out of my position for breakeven and I arrived Wednesday morning in cash. Given how we opened, that wasn’t a bad place to be.
But rather than jump on the bear bandwagon and short the opening weakness Wednesday morning, I waited to see if the selling would stall, which it did. As I’ve written previously, this is a strong market, not a weak one. That means giving the rally the benefit of the doubt until proven otherwise. And I didn’t see anything Wednesday morning that changed that. In fact, the early resilience further confirmed this outlook and I spent most of the day looking for a dip buying opportunity.
I wanted to buy a nice bounce into the close, but instead, the market muddled into the close. While that was still a decent result, it wasn’t enough to convince me to put my money at risk. I stayed in cash and will reevaluate Thursday morning, where I will buy decisive strength, short a waterfall selloff that undercuts recent lows, or most likely, sit on my hands as the market continues trading sideways.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Monday was a constructive session for the S&P 500 as it held the vast majority of Friday’s rebound, and last Thursday’s fearful selling quickly faded from memory.
As expected, last week’s aborted selloff didn’t turn into anything meaningful and was simply a continuation of the recent choppy consolidation. Luckily, the lack of a bigger selloff didn’t surprise regular readers of this blog. As I wrote Wednesday evening, hours prior to Thursday’s panicked selling:
[M]ost owners are comfortable at these prices and are not rushing for the exits. If prices were overbought and vulnerable to a collapse, it would have happened by now. Yet, every time the market slips into the red, supply dries up, and prices bounce. That’s not how a weak market behaves.Without a doubt, this market is not in a hurry to go anywhere, but anyone betting on a collapse is going to be disappointed. There have been countless excuses and opportunities for stocks to tumble, yet every time, stock owners shrug and keep holding. This situation can’t last forever, but it will take something new and unexpected to convince these confident owners to sell. As we’ve seen over the last couple of sessions, undercutting 5,200 isn’t going to do it.
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Trends continue countless times, but they only change direction once. Anyone who believed something changed last week was betting on a far less likely outcome than those of us waiting for the far more probable bounce.
If I had a crystal ball, I could have squeezed some nice profits out of these recent swings by timing my purchases and sales at the precise tops and bottoms, but no one can predict the market’s exact movements, and only fools try. But just because we can’t see the future doesn’t mean we can’t make savvy trades when these opportunities present themselves, as I wrote on Friday:
[W]hen the sellers failed to show up and prices bounced [on Friday], that was our signal to buy.
[W]e can already lift our stops to our entry points, turning this into another low-risk, high-reward trade. If prices retreat next week, we get out at breakeven, no harm, no foult. If the rebound continues, let those profits roll in.
This is a bullish market, and that makes Monday’s sideways session bullish. If this market was fragile and vulnerable to a collapse, Thursday’s massive bearish intraday reversal was more than enough to send stocks tumbling much further. Instead, supply dried up and prices bounced, as they have during every other episode of weakness since the October lows.
Something is going to change at some point, but last week was not it. I still have the positions I bought Friday with stops near my entry points. While there are no risk-free trades in the market, this is about as low as it gets.
Maybe something will change later this week, but I wouldn’t bet on it.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 rallied 1.1% on Friday after the monthly employment revealed another strong showing in April. So much for Thursday’s huge selloff.
In case anyone missed the memo, this is a back-and-forth market. That means frequent and dramatic reversals, as greedy bears learned the hard way on Friday. Unfortunately for them, Thursday’s big dip was a continuation of this back-and-forth pattern, not the start of something new.
Luckily for readers, I said as much Thursday night following that day’s big bloodbath:
[T]here wasn’t any meat to Thursday’s selling, so I question the sustainability of this move lower. We need headlines that will shatter bulls’ confidence and turn them into fearful bears for this rally to break. I didn’t see anything on Thursday that will convince bulls to start selling their favorite stocks. Until proven otherwise, I will be looking for the next buyable bounce; it will probably be here sooner than most people will be ready for.
We didn’t have to wait more than a few hours for the next buyable bounce. Hopefully, you didn’t miss it.
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As for how savvy traders approached Friday’s session, when the sellers failed to show up and prices bounced, that was our signal to buy. As I wrote Thursday evening, this moment was going to arrive far sooner than most people were expecting, which is why savvy traders arrived Friday morning prepared for the unexpected.
For those who bought Friday’s bounce, we can already lift our stops to our entry points, turning this into another low-risk, high-reward trade. If prices retreat next week, we get out at breakeven, no harm, no foult. If the rebound continues, let those profits roll in.
But most importantly, don’t get seduced by the same overconfidence that stung bears on Friday. No matter whose side you are on, this is a back-and-forth market, and that means collecting profits early and often. If you hold too long, those profits will turn into losses.
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