Jani

Aug 252015
 
S&P500 daily

S&P500 daily

End of Day Update:

It was another dramatic day in the market as the S&P500 gave up a healthy 2% rebound to end the day solidly in the red. Volume was elevated, but well off of Monday’s historic levels.

The market opened sharply higher on the coat-tails of an impressive European relief rally. But our rebound never built momentum and traded sideways under 1,950 for the first half of the day. While it was nice to see the emotion fueled selling take a break, the lack of further progress revealed those with cash were not ready to buy the dip. Without demand to extend the rebound, we started sliding lower midday. The selling picked up speed as fear of regret compelled many to dump their stock at any price. This became a self-fulfilling prophecy that accelerated until we closed near Monday’s lows.

Those that thought they could hold the dip lost their nerve and bailed out this afternoon. While this close looks atrocious technically, it is actually laying the foundation for the inevitable rebound. Weak and fearful owners were selling shares to far more confident dip-buyers willing to hold this volatility. While people try to outsmart the market with fundamental and technical analysis, it trades on nothing more than supply and demand. Once we exhaust the supply of fearful sellers and replace them with confident owners, prices will stop falling regardless of what the headlines and gurus claim it should do.

The hottest topic in the financial press is if the Fed will raise interest rates in September. Many claim there is no way the Fed can raise rates when the stock market is struggling. My question to these people is what changed since the last Fed meeting? Has employment gone up? Has GDP gone down? Outside of the chronically weak energy market, have we seen deflation flare up? I cannot think of anything that materially changed in the U.S. economy since the Fed’s last meeting. The only thing that is different is the Chinese stock market’s bubble that burst, but is this Chinese gambler’s paradise really something our Fed should be making policy decisions on?

Which of the following two scenarios scares you more?

A) The Fed raised interest rates 0.25% today because they are confident the U.S. economy no longer needs artificial support.

B) The Fed chose to keep rates near 0% today because they believe the economy is too fragile to withstand a modest bump in rates at this time.

I don’t know about you but I would be far more fearful if the Fed doesn’t raise interest rates than if they do. And I suspect this will also be the market’s reaction. Expect prices to rally on a modest and sensible rate hike, and fall if the Fed thinks the economy is too weak to withstand a rate hike.

But Fed decision is weeks away and most of you want to know how to trade this market on Wednesday. The most bullish thing this market can do is sell off sharply Wednesday morning and then bounce into the green Wednesday afternoon. That would mark a capitulation bottom. A less compelling bottom would be continuing to consolidate between 1,850 and 1,950. While the consolidation would be volatile and choppy, this is the easier bounce to jump on board because the recovery will be far slower than the capitulation’s vee-bottom. And lastly and most bearish would be another relentless slide that closes on the lows of the day. That tells us there is still further downside and this might not stop until we hit bear market territory.

Jani

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 Posted by at 9:56 pm on August 25, 2015
Aug 242015
 
S&P500 Daily

S&P500 Daily

End of Day Update:

The S&P500 officially entered correction territory Monday as the index closed down more than 11% from recent highs. Trading volume surged to one of the highest levels in history. It’s hard to put today’s move in context since so few times have we seen such a volatile day where prices jumped multiple percentage points every hour.

Clearly this is one of the most emotionally charged markets this decade. The question before us is if these dramatic moves are warranted based on severely deteriorating fundamentals, or if this is simply an overreaction and the buying opportunity of the year.

The first thing we need to understand is what kind of selloff this is. Selloffs take one of two forms, the insidious grind lower that slips under the radar because few are alerted by slow moving declines. The other is the breathtaking plunge that makes front page headlines around the world. I don’t think anyone needs me to tell them which type we find ourselves in the middle of.

But here’s the thing, the selloffs we fear the most are typically the ones we don’t need to worry about. Sharp moves lower are often followed by sharp rebounds. Last October’s 10% Ebola plunge bounced back within two-weeks. Five-years ago we recovered from 2011’s 20% U.S. Debt downgrade within six-months. While everyone remembers 1987 for the largest single-day selloff in market history, few remember that we actually finished 1987 up 2%. The most similar selloff to our current situation was the 1998 Asian financial crisis that saw us tank over 20%. But you know what, we were making new highs within five-months.

The selloffs we really need to worry about are the slow grinds lower. While most people remember the financial crisis that consumed our markets in October 2008, the market actually topped a year earlier in October 2007. One of the largest selloffs in market history started in the Fall of 2007 when no one was paying attention. While this recent plunge shoved us down nearly 250-points across five trading sessions, in 2007 it took us four months to fall 250-points! The lesson from history is we should fear the selloffs that few pay attention to, not the one the world is fixated on. People are free to disagree with me because “this time is different”, but they’re arguing against history.

To clarify a little confusion that arose from last night’s post. In one breath I said that buy-and-hold investors should stick out this volatility, while in another breath I said I pulled my money out before Friday’s big plunge. Many people were confused by these conflicting statements, so let me clear things up. The difference is timeframe. I’m a reasonably active trader and move in and out of the market one or two times a month. My trading strategy is to take advantage of one, two, and three percentage moves in the index, take my profits and then move on to the next trade. Most savvy active traders would have gotten out of bullish positions last week when the market started moving against them. That is why it is my assumption that anyone still in the market has a longer holding period than I do. If someone makes a couple trades a month, I would suggest they get out of the way of any move lower. But if a person only makes a couple trades a year, holding through dips is part of their game plan. That’s why it is called buy-and-hold, not buy-and-hold-until-you-get-scared. While this move is dramatic, I don’t see a reason for long-term investors to dump their stock at a steep loss. Hold on and in six months or less we’ll be making new highs. As always, keep the comments and questions coming.

Jani

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 Posted by at 9:55 pm on August 24, 2015
Aug 232015
 
S&P500 weekly

S&P500 weekly

The Week Ahead:

Last week’s nearly 6% plunge in the S&P500 was the largest weekly decline since 2011. As painful as that was, what should we expect next week? The good news: these selloffs typically only last a few days. The bad news: emotion fueled selling can do an awful lot of damage in just a few days.

Unfortunately for many, the days of defensive selling are long gone. The only choice left for someone still in this market is to join the emotional selling, or stick to their original buy-and-hold plan. When stated that way, the right choice is obvious, but sticking to it when everyone around them is running around with their hair on fire is far harder to do.

Without a doubt the selling can and will likely continue next week (overnight futures are already down over 1%). The only question is if we should get out ahead of a much larger decline, or if this is simply another buyable dips on the way higher? Of course there is a third option: both of the above!

The only reason to abandon this market is if we think we are on the verge of another crippling economic contraction. Something that will freeze our capital markets, crush consumer and business spending, and trigger waves of layoffs and spiking unemployment. Most of last week’s fear revolved around slowing global growth. That means we have to figure out how this will impact our economy.

To be perfectly honest, the US economy is extraordinarily self-absorbed. Seventy percent of our GDP is service based and we run a gigantic trade deficit. Does that sound like an economy dependent on global growth? Lower energy and commodity prices, cheaper junk at Walmart; what does that mean for our economy? It means consumers will have more money left to spend on massages, vacations, and bathroom remodels. Should we be worried about our economy? Not really.

Obviously the China story will affect companies like AAPL and TSLA that have huge Chinese growth premiums built into their stock price. But these are the exception in the S&P500, not the rule. While the pessimists are concerned about plunging energy sector profits, we know American consumers are lousy savers and without a doubt the dollars saved on energy will find their way into other sectors of the economy. That’s bad for energy shareholders, but it is a net neutral for our economy since one loss is offset by another gain.

And lastly, every time the stock market had a “lost decade” over the last 100+ years, we pulled out of it with a ten to twenty year secular bull market. The roaring ’20s, nifty ’50s, and ’80s and ’90s tech boom were brilliant times to own stocks. And all three followed a depressing and demoralizing decade of owner ownership. If history repeats itself, this bull market isn’t even halfway done.

I will gladly concede that our economy isn’t very impressive, but where pessimists see weakness, I see opportunity. Protracted bear markets start when economic activity reaches unsustainably high levels. This overshoot results in the inevitable economic contraction and a devastating bear market. At this point in our economic recovery, most bulls and bears will agree our economy has a long way to go before it reaches anything close to overheated levels. That means we are safe from the next major economic contraction. While stock market selloffs happen inside major secular bull markets (1987 occurred in the middle of the greatest bull market in history), corrections in secular bull markets bounce quickly and are great buying opportunities. Keep that in mind when the crowd tries to tempt you into selling your stocks at a steep discount next week.

Jani

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 Posted by at 8:50 pm on August 23, 2015
Aug 212015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The worst day in four-years capped off the worst week in just as long. It was a brutal, relentless selloff that shoved us down 3% for the day and nearly 6% on the week. Volume exploded to the highest levels in nearly half a year. And if those stats didn’t fully capture the sense of urgency, the VIX saw the biggest weekly percentage gain on record.

While I’ve been writing about the pervasive bearishness seen among active investors that contribute to internet forums and answer investor surveys, today’s selloff broke beyond the financial pages and became front page news. People who don’t regularly follow the stock market heard about today’s plunge. That opens the door to an entirely new population of sellers. While it’s been a great ride from the 2009 lows, today’s weakness could give the average 401k investor flashbacks to 2008’s fear and regret. That creates the very real opportunity for this weakness to spiral out of control.

But before we get too carried away, we survived sharp selloffs in 2011 and 2014, so we know this storm will pass too. The 2011 selloff was nearly 20% and came on the heels of a S&P downgrade of United States debt. That drop did a lot of damage but we were making new highs within six-months. Last year’s nearly 10% Ebola scare rebounded to higher levels within weeks. Without a doubt this selloff’s recovery will fall somewhere inside this range. Armed with that knowledge, we can decide how to trade this.

If we will be back near the highs in less than six-months, would you still be tempted to dump your stocks at a steep discount today? If yes, then sell. If no, then resist the temptation to bail out and stick to your buy-and-hold plan. The worst way to trade the market is buy when it feels safe and sell when it is scary. Remember, risk is a function of heights, meaning this week’s 120-point selloff makes this the safest time to own stocks all year. Think about that for a moment.

But don’t expect the rest of the market to think about the situation this rationally. There is a good chance Monday will be another bloodbath as a portion of the 401k crowd tells their financial planners to “sell everything”. Mutual funds settle at the end of the day and a surge of people placing mutual fund sell orders could show up late Monday. But once those people are out, we’ll probably run out of sellers and be poised to bounce on tight supply. The best profit opportunities come from buying other people’s panic and the pickings are really good right now. Keep your head and you’ll come out on top.

Jani

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 Posted by at 8:58 pm on August 21, 2015
Aug 202015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The S&P500 crashed through support on its way to six-month lows. Again volume was surprising light for the biggest down-day in a year-and-a-half. While some are running around with their hair on fire, the lighter volume tells us most owners resisted the temptation to join the emotional selling.

There are two ways this can play out. The bullish scenario has confident owners standing strong and the resulting tight supply will put a floor under stocks. The bearish storyline plays out if confident owners lose their nerve in the face of further declines and join the emotional selling. That will lead to a surge in volume and end in more traditional capitulation bottom quite a bit lower from here.

As scary as today’s selloff felt, we need to remind ourselves that we are still within 5% of all-time highs. While most of the world has seen double-digit declines, our markets are holding up remarkably well. Either that means we need to catch up to everyone else, or more positively the US markets have become the safe haven for global investors desperately seeking shelter. Between the strong dollar and our resilient market, the US is easily the most attractive place for the world’s wealthy to move their money. This easily explains much of the strength we are seeing in the S&P500.

Over the medium-term I remain bullish on our market and still expect we will finish the year in the green. But how we get from here to there is a little less clear. Today’s weakness was a clear sell signal for shorter-term traders. While I’ve been bullish on this market, this morning’s awful price-action told us the bottom wasn’t in yet. We bounce decisively from oversold levels and retesting the lows today signaled there was more selling left. Friday could get even more ugly since nothing shatters confidence like screens filled with red.

Long-term buy-and-hold investors need to resist the temptation to bail out. This is one of those periodic market gyrations and when they sell years from now, this weakness will be long forgotten. Shorter-viewed traders need to be more cautious. It is probably getting a tad late to be adding new shorts, but those lucky enough to be short can let this play out a little longer. Just be prepared to lock-in profits because when this bounces, it will be fierce. Those with cash should resist the temptation to jump in too quickly and wait for a little more stability. As for the longs that feel stuck, there is nothing wrong with selling defensively, but don’t let a little volatility sour your attitude toward this market. Be ready to jump back in as soon as the selling exhausts itself, which is only days away. While days like this hurt, the trader in us should be excited because buying discounted shares from emotional sellers is the easiest and fastest way to make money in the market.

Jani

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 Posted by at 10:16 pm on August 20, 2015