Oct 292014
 

End of Day Analysis:

Another volatile, but ultimately uneventful session. While the spread between the day’s high and low exceeded 20-points, we ended down less than three.

The headline event was the Fed’s policy statement and ending of QE. This was widely expected, but they also removed language about considerable slack in the labor market. To many this implies a sooner increase in interest rates and was enough to send the market into a quick, 10-point selloff. But rather than cascade lower, supply dried up near 1,970 and the market bounced, nearly recovering all the day’s losses by the close.

The dip tested 1,970 support and the 50dma, but we held both. This is encouraging and gives credibility to the young rebound. If the market was teetering on the edge of another emotional plunge, this weakness more than enough of an excuse to set it off. But instead of rushing for the exits, most owners were indifferent and that apathy tightened supply, leading to the late bounce.

While holding 1,970 is encouraging, we need to keep a close eye on these levels in coming days. If we slip under 1,950 by Friday, things could get ugly in a hurry. But close the week above 1,970 and the market is moving past the fear and uncertainty that gripped us in the first half of October.

Jani

 Posted by at 10:08 pm on October 29, 2014
Oct 202014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Stocks continued last weeks rebound and closed just shy of the 200dma. Quite a reversal of fortune from the breathtaking plunge to 1,820 only days ago. Today’s strength is especially encouraging since it came on the heels of another European selloff. This shows many in the US are coming to terms with global weakness and they feel it is already baked into current US equity prices.

Getting to the technicals, 1,900 and the 200dma are significant resistance levels and seeing the market struggle with them in coming days will be no surprise. But ultimately they should only be speed bumps on our way to the 50dma. How the market trades when we return to 1,950 will be far more insightful in determining what comes next.

The big concern is if 1,950 forms the right shoulder in a much larger head-and-shoulders topping pattern. Failing near 1,950 and then undercutting the 1,820 lows means we have a lot further to fall and this could be the 20%+ correction many have been waiting for. But don’t worry too much about this since it is the worst case scenario. Most likely recent volatility flushed out any would be sellers and anyone who held through the plunge showed they are married to their positions. While this is a reckless attitude for traders to take, if we know they won’t sell, then we also know supply will be tight and that supports prices in the near-term.

A down-day or two is nothing to get excited about as long as the selling is rational and orderly. Some people who were paralyzed by fear during the dip to 1,820 will naturally sell the bounce they were praying for. But once these regretful owners finish selling, look for a surge of buying to follow a break above 1,900.

Jani

 Posted by at 10:25 pm on October 20, 2014
Oct 142014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Today’s modest up-day halted a three-day, 100-point rout. The question everyone is asking is if this signaled the end of selling, or is just another temporary reprieve on our way lower. Volume was off the chart, even exceeding the pace of the last few days of free-fall. While we are only 7% from all-time highs, it sure feels a lot worse than that.

The disappointing thing about today’s price-action is we were 20-points higher before another late-day collapse pushed us back near break-even. But maybe this isn’t a bad thing. The last few strong bounces turned out of be sucker’s rallies. A more measured response to the selling could be a welcome alternative to this month’s wild volatility.

The tone we set on Wednesday will go a long way to letting us know what happens next. Another free-fall day and who knows where this thing will stop. But a sideways day could indicate buying is finally catching up with selling. There always comes a point in every correction where prices become so attractive, deep-pocketed value investors can no longer resist the urge to snap up discounted shares from desperate sellers.

But that is the rational response and recently the market’s been anything but. In the wild, our ancestors were well served by adopting emotional cues from others in the clan. When everyone else was running, they started running too because those that stuck around to see what all the fuss was about quickly became lunch. And the same thing happens in the market. Few sellers over the last few days could clearly articulate why they were selling, which means they were selling primarily because everyone else was selling.

The VIX is at the highest level in over 2-years. Every other time we approached this level, that signaled an imminent bottom and is likely the case here too. But imminent can mean different things. Obviously that includes a bounce tomorrow. But 48-hours from now also qualifies as imminent, even if it means falling another 75-points.

The thing most investors need to keep in perspective is those with a longer-term outlook, this weakness is a blessing. While it always feels good to watch our accounts swell in value, there are only two prices that matter; what we paid and what we got when we sold. We want prices to be lower when we buy. Anyone who continued to invest in their 401k during the 2008 meltdown has seen those contributions more than double in value. They would be poorer today if we didn’t have that market crash. Markets go up and markets go down. The most successful are the ones who don’t let it get to them.

Jani

 Posted by at 10:28 pm on October 14, 2014
Oct 092014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Again the market bumped it’s head on the 50dma, giving back all of Wednesday’s gains and then some on exceptionally heavy volume. This is the most volatile trade since 2011 and it is doing a fantastic job of shaking off the summer’s complacency. We are a hair above recent lows at 1,925 and within easy striking distance of 1,900 and the 200dma. Given how volatile we are trading, we could easily tag these levels within the first hour of trade on Friday.

While every dip over the last several years presented a great buying opportunity, the lack of a tangible headline driver and huge volatility make this time feel different from the Taper Tantrum, Fiscal Cliff, Greece, and other recent selloffs. But this back-and-forth also feels different from previous runaway selloffs like the 2011 S&P Downgrade correction that collapsed over consecutive days. Given the lack of recent precedent, it is harder to anticipate what comes next.

While the financial press and talking heads blame the generic catch-all “global slowdown” for this selloff, weakness in Europe and a slowing Asia are nothing new. So why is it all of a sudden are recycled headlines causing owners to sell en mass?

First we need to segregate traders by timeframe to identify who is prone to sell this weakness. Since we are less than 5% from all-time highs and virtually every buy-and-hold investor is sitting on huge profits, few of them are hitting the panic button and we shouldn’t expect the average 401k investor to panic. Next come the medium-termed investors who still think the economy is on the rebound and expects prices to be higher over the next couple years. These guys are not likely to sell and are probably looking at this weakness as an opportunity to buy stocks at a discount. The final group is the shorter time-framed swing-traders who try to time each gyration. These are the guys buying and selling each 50-point move. And while they are exceptionally active, they are also the smallest segment of the money in market.

Long- and medium-term investors are unlikely to change their three- and five-year economic outlook based on these ambiguous headlines, so we should expect them to continue holding. Shorter-term investors are reacting to these moves and given recent volatility, the market has already tripped up a large number of them, reducing the number of them left to sell.

While a dip under 1,900 and the 200dma seems highly likely at this point, both bulls and bears should expect a bounce shortly after. The bull is looking for a decisive rebound to new-highs while the bear is expecting the right-shoulder of a head-and-shoulder pattern. Trading is never easy and the answer will only be obvious in hindsight.

Jani

 Posted by at 9:41 pm on October 9, 2014
Oct 082014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Stocks surged to one of the largest gains of the year following accommodative language from the Fed. But it wasn’t all smooth sailing when early trade saw us slip to 1,925, ever so slightly undercutting last week’s lows. If this holds, that counts as a double-bottom, one of the most common bottoming patterns.

While journalists and talking heads credit today’s strength to the Fed, the news was actually quite bearish. The Fed is concerned about weak global growth and how a strong dollar will adversely affect the domestic recovery. But the half-full crowd cheered because that delays the inevitable rate hikes and who doesn’t like cheap money?

But regardless of the headlines, there were only so many people left to sell following the last several weeks of gut-wrenching volatility. Once the pessimists sell, they no longer have a vote in what the market does next. Those that held through the weakness and those that bought it exhibited confidence and their conviction kept supply tight and propped up prices. While the dip was unnerving, it is very Chicken-Little like to let a 4% pullback make us think about jumping out of windows. But that is the nature of markets; dips only work when they convince everyone the world is imploding.

Thursday is an important day for both technicals and sentiment. While today’s rebound was impressive, it still left us shy of the 50dma, something that acted as resistance over the last week. Stall again and there is little doubt we are headed back to 1,900. But if we break through, look for a continuation to all-time highs in coming weeks as bears scramble over each other to buy back their short positions. At the same time, don’t expect fireworks since moves tend to be fairly symmetrical. A 75-point dip typically only leads to a 75-point breakout, but that would push us close to 2,100 by year-end.

The bigger concern is if the rebound stalls and the selloff spirals out of control, shattering the nerves of previously confident owners, turning them into fearful sellers. There is no doubt we have a date with a larger correction, the only question is if happens this fall, or waits until next year. But, rather than guess, we will let the market show us.

Jani

 Posted by at 10:02 pm on October 8, 2014