May 272015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The S&P500 rebounded decisively from Tuesday’s selloff. We opened higher and never looked back, easily reclaiming 2,120 support. Volume was slightly below average and less than yesterday’s downday, but still respectable given this is a holiday shortened week.

Today’s price-action poses a serious threat to the Bearish thesis. Yesterday’s selloff was the crack Bears needed to finally kickoff the long-awaited correction. Nothing shatters confidence like screens filled with red, and we had that in spades Tuesday. But as it turned out, the selling was quite limited as we quickly ran out of owners willing to dump their stocks for a discount. This tightening supply put a floor under the market and the selloff ended as quickly as it started.

If this market was as extended and overbought as many claim, the smallest stumble would trigger cascading wave after wave of selling as panicked sellers rushed for the exits. That’s what happens when markets are unsustainably high, hence describing them as unsustainable. But the perplexing thing is rather than plunge lower, we keep rebounding to the highs. Looking only at the market’s behavior, it is fairly easy to make a compelling argument that this want to go higher, not lower.

The problem many traders have is they spend too much time thinking about what the market should do instead of looking at what it is doing. If the market doesn’t care about rate hikes, employment, inflation, Greece, and all the other jazz, then neither should we. Something will eventually take this rally down, but it will be totally unexpected and not what everyone has been talking about for months.

Jani

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 Posted by at 10:05 pm on May 27, 2015
May 212015
 

End of Day Update:

Opening weakness in the S&P500 quickly rebounded and turned into a decent gain for the index. Overnight worries about Chinese manufacturing and European weakness faded as soon as we opened. While it was nice to finish in the green, we struggled with 2,130 again as we find ourselves stuck in a very narrow range between 2,120 support and 2,130 resistance.

Headlines have given this market has every excuse to sell off, yet we keep making new highs. Too often the novice contrarian confuses price with sentiment. They assume high prices automatically equate to overly bullish sentiment and is why they want to bet against the trend. But the truth is price and sentiment are completely independent. Just as surprising, the contrarian trade is most often sticking with the trend while every else is convinced it’s gone too far and is about to correct. That is how we find ourself at record high prices while the AAII’s bullish sentiment remains 14% under historic averages and near five-year lows. It seems the crowd developed a fear of heights.

The most compelling signal the market can give us is not doing what everyone thinks it should. When we’re supposed to crash on Greece, weak GDP, rate hikes, and all the others, but we rally instead, that tells us to grab on and enjoy the ride. Don’t fear these headlines, instead fear the day when all the news is good and the market stops going higher

Jani

 Posted by at 11:14 pm on May 21, 2015
May 202015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The S&P500 ended modestly lower in a day that saw it trade primarily between 2,125 and 2,130. There was an early dip to 2,122 that quickly bounced and a brief jump to 2,135 following the release of the Fed minutes. But neither divergence stuck and we finished inside the day’s range.

The market moved higher following Fed minutes that pointed to a delayed rate hike, but we quickly returned to this morning’s levels once everyone realized we already knew that. For all the build up, the minutes were forgotten barely two hours later.

But this retreat from the highs is giving bears something to crow about. It is surprising how vocal they are on a day that saw us set fresh highs. They complain about bullish optimism, but getting excited over a 0.4% dip is definitely stretching for something to gloat over.

This was the market’s fifth consecutive close above the widely followed 2,120 resistance level that stretches back to February. What was resistance becomes support and that appears to be the case here. Previous attempts at breaking 2,120 saw us retreat days later, so holding these levels for a week is encouraging. It’s not as great as seeing the market surge to new highs, but it shows we are not being overrun by a wave of profit taking since the current crop of owners appear far more content holding on for higher prices. Their conviction keeps supply tight and makes it easier for us to keep going higher.

While this breakout feels different, we need to see it continue making progress. If we close materially under 2,120, that shows the lack of demand is even more powerful than owner’s confidence. Since confidence is so fragile in the face of falling prices, we need to be wary if we cannot hold support. The other risk is if we cannot escape 2,120 and continue trading sideways. The longer we over above support, the more likely it is we will slip under and trigger a wave technical and stop-loss selling.

Jani

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 Posted by at 4:12 pm on May 20, 2015
May 152015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The S&P500 finished the week on a positive note. While Friday’s gain was less than 0.1%, it was enough to set another record close. We’re only up 0.3% for the week, but it was impressive because it includes recovering from Tuesday’s test of the 50dma.

A couple of months ago we had a right to be concerned when the market failed to extend a breakout to record highs, and these thoughts were justified as we watched prices retreat from the highs in following sessions. But like everything in this game, sometimes a certain behavior means one thing, while under different circumstances it tells us the exact opposite. This time around, pausing at 2,120 actually feels productive. We saw early distribution, but it was fairly muted and we recovered into the green by the close. Obviously demand remains weak near widely recognized resistance, but we climbed this high because most owners are confidently holding for higher prices. And at least to this point, tight supply trumps weak demand.

The interesting opportunity for bulls comes as we close in on the tipping point where reactive buying will boost demand for stocks. When the widely expected correction instead turns into a breakout, it forces pessimists to decide between buying in or being left behind. And that’s how melt-ups start.

Seeing the market pause, or even pull back modestly here is constructive. What we don’t want is a retest the 50dma so soon after bouncing off of it. Keep holding for higher prices as long as we stay above 2,100. On the other side, be wary of a sharp move higher next week since that signals buying capitulation and leads to exhaustion.

Jani

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 Posted by at 5:19 pm on May 15, 2015
May 142015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

It was a record close for the S&P500 as we broke through the ever elusive 2,120. There was no real news driving this move, but it seems a lack of negative headlines is all we needed to push higher.

It is a powerful sign when the price-action diverges from what people think should happen. Many claimed this repeated stalling at 2,100 foretold of the rally’s imminent demise. The nuance they failed to account for is the difference between stalling and pausing.

Stalling is when the market stops rising on good news. Prices cannot continue higher when everyone who could be convinced to buy, already bought. Is that the case here? Are we topping on good news out of Asia, Europe, and the US? Are ragingly bullish headlines giving the last of the reluctant buyers the excuses they need to finally jump in? Hardly.

We find ourselves in the exact opposite situation with an endless stream of negative headlines. Looming European financial crisis, lowered earnings estimates, disappointing economic reports, crashing energy sector, we’ve seen it all. And yet here we are, at all-time highs. If this is what the market does with bad news, what is going to happen something good finally slips out?

The mistake many wannabe contrarian traders make is confusing price level with sentiment. Just because we are at record highs doesn’t mean the market is overflowing with bullishness. People scoff when I mention how bearish this market is. They cannot fathom how the crowd could be bearish when we are making record highs and they use this flawed logic to bet against the rally. Unfortunately, so many people hold this “contrarian” view that they are no longer in the minority. Doubting this strength has become the cool thing to do. The latest AAII sentiment survey backs this up, showing bullishness at a tepid 27% as compared to the long-term average of 39%. That is a stark contradiction to the widely popular assessment of how overly bullish this market is.

A resistance level can only hold a determined market back so long. We’ve been trying to break through 2,120 for four months now and if we were going to tumble lower, it would have happened by now. The smart money is sticking with this strength, at least for a little longer. We will reassess once we see the speed, size, and quality of the breakout.

Jani

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 Posted by at 5:02 pm on May 14, 2015