Sep 162015

End of Day Update:

It was another strong day for the S&P500 as we closed at the highest levels since the August correction began. As worried as people have been, we’re up four out of the last five days and that lone down day was only a modest eight point decline. Without a doubt buyers are growing increasingly confident. Is this sustainable, or the highs before we tumble back into the trading range?

It is hard to get away from the Fed’s rate hike since that is the only thing people are talking about. Will they hike or won’t they hike, that is the question on everyone’s mind. As a contrarian, I like to trade against the crowd, but opinion is divided on this issue. Without a consensus to trade against, it is hard to figure out what comes next.

Even if I knew ahead of time what the Fed was going to do, it wouldn’t do me any good because I cannot begin to guess how the market will respond. That’s because with such a divided opinion, it is hard to figure out who has been buying these last couple of weeks. Is this a short-squeeze? Or have we finally run out of fearful sellers and are rebounding on the resulting tight supply? Maybe those that are hopeful the Fed will keep rates artificially low are buying ahead of that expected announcement? Or are people are buying for no other reason than other people are buying? Without a popular opinion driving this move, it is hard to figure out what is behind it.

But all is not lost. While we might not know what the market is thinking right now, it will show us its hand following the Fed’s decision. There are four possible outcomes and four ways to trade it.

Rate hike followed by a rally:
This is a bullish signal because it tells us the market no longer cares about China or rate hikes. Everyone who fears these things sold weeks ago and when there is no one left to sell a headline, it stops mattering.

Rate hike followed by a selloff:
Over the medium-term this is a bullish outcome because the rate-hike debate and uncertainty is finally over. While the knee-jerk reaction was to sell the news, a 0.25% bump in short-term interest rates will not have a material impact on our economy. There will be plenty of value oriented buyers ready to jump in and snap up discount shares from fearful sellers. While we could slip to the lower end of the trading range, even undercutting the 1,860 lows, the Fed hiking rates tells us they believe in this economy and so should we.

No hike followed by a rally:
This is most likely a temporary relief rally that will fizzle. Delaying the rate hike by six or twelve weeks isn’t going to make much of a difference and isn’t something to get excited about. In fact, I would be concerned about the Fed not hiking rates because it tells us they think our economy and stock market are too fragile to handle such a nominal rate hike. If they’re worried, then we should be too.

No hike followed by a selloff:
A bloodbath following good news will be our signal to stay clear of this market. If the Fed doesn’t believe in this market, we could smash through the lows. The situation is further compounded because the cloud of rate hike uncertainty continues indefinitely. The market can handle bad news because it is quantifiable. This not knowing is what drives it crazy.

While it is hard to read the market ahead of time, the way it responds to the Fed’s decision will tell us a lot about what traders are thinking and how they are positioned. This will be interesting!


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 Posted by at 10:21 pm on September 16, 2015
Sep 152015
S&P500 Daily

S&P500 Daily

End of Day Update:

Tuesday’s 1.3% gain in the S&P500 was one of the best looking day’s we’ve had in a while. We closed at the highest levels in weeks as fear of a bigger selloff continues to dissipate. But there are a lot of flaws in this strength.

Volume was light as few people traded ahead of the Fed’s rate hike decision due later this week. This reduced volume leaves the market vulnerable to larger moves because smaller traders have greater influence. Another concern is Tuesday’s intraday trade was fairly one-direction, suggesting more of a short-squeeze than legitimately fought for and earned gains. This notion is s further reinforced by the lack of a fundamental or headline catalyst behind this move. It felt like a day where people were buying for no other reason than other people were buying. While a legitimate reason can emerge to justify this move, without something substantial to support us, this strength will likely fizzle. And lastly we are approaching the upper end of a recent trading range that we retreated from a couple of times previously. In range bound markets, relief often gives way to fretting. Until we breakout and hold those gains, we should be more inclined to take profits at these levels than continue chasing prices higher.

It is hard to avoid the rate hike chatter. Will they? Won’t they? If our economy is so fragile that its fate rests on the outcome of a 0.25% change in short-term interest rates, then we have far bigger things to worry about.

Personally I think the Fed should raise rates because that is consistent with all the things they’ve been telling us. Markets are far better at dealing with bad news than uncertainty. A 0.25% rate hike now or in six or twelve weeks isn’t going to make much of a difference to anything. But the market is paralyzed by now knowing what is going to happen. Postponing the rate hike will only extend this largely unproductive debate over when the first hike will be.

We saw the same anxiety and fear ahead of Taper, but once the Fed announced Taper and started reducing its bond purchases, the market embraced that certainty and predictability, paradoxically rallying throughout the entire taper process. I have little doubt the same will happen if the Fed lays out a responsible and methodical rate hike plan. That eliminates the uncertainty hanging over us and finally lets the market focus on our steadily improving economy.

In the near-term, I have absolutely no idea how the market will react to either a hike or delay. Give me the Fed statement early and I wouldn’t know how to trade it. Only after the fact will we be able to come up with the “official” explanation for why the market rallied on a hike/delay or plunged on the hike/delay.

While we cannot get ahead of the Fed announcement, the way the market trades afterward will go a long way to telling us its mood and where it wants to go next. Will it embrace the half-full story, or obsess over the half-empty? The ideal bullish setup will be a knee-jerk selloff on a rate hike, but then the selling quickly exhausts itself and we break through 2,000 resistance. That would be the capitulation bottom of the correction. This reversal could play out over hours or weeks, but it would be a strong sign the market will rally into year-end. The harder price action to get behind will be a pop if the Fed keeps rate at zero. That is far more likely to fail since what the Fed is really telling us is they don’t think our economy is strong enough to handle a 0.25% bump in interest rates. Surely not a ringing endorsement of our economy.


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 Posted by at 10:15 pm on September 15, 2015
Sep 082015
S&P500 daily

S&P500 daily

End of Day Update:

The S&P500 exploded higher today, one trading session after plunging lower last Friday. This followed two huge up-days, which was proceeded by a gigantic plunge, that was on the heels of an epic multi-day rally. And so on, and so forth, you get the idea. It’s been a volatile few weeks as we consolidate the recent selloff and build a base between 5% and 10% under recent highs. While these moves have been dramatic and emotional, the non-stop plunge has yet to resume, a good sign prices are stabilizing in the 1,900s.

This volatility has been driven by economic uncertainty in China and the Fed’s looming rate hike. But while it doesn’t feel like it, down nearly 10% makes this one of the safest times to own stock all year. Risk is a factor of heights and this is the lowest we’ve been in quite some time. Common sense tells us the lower we go, the closer we are to the eventual bottom. Rather than fear this market, we should embrace it. While there is still the potential for further downside, no matter how much lower we go, the downside will still be less than the fall experienced by those that bought a couple of months ago. Take advantage of this new-found safety due to lower prices, don’t run from it.

China continues to dominate traders’ thoughts and is the source of most of the market’s anxiety. I have little doubt the situation in China will continue to deteriorate over coming months, but it will matter less and less as the market grow accustomed to the situation and it becomes priced in. Very few US companies rely on the Chinese consumer as a major source for their corporate profits. That’s why a weak Chinese economy will have a limited impact on S&P500 earnings. In fact, since we are an import driven economy, we will actually see a net benefit as companies input costs fall due to weaker Asian currencies. The knee-jerk reaction was to fear a Chinese slowdown, but it won’t take long before traders realize the actual situation is nowhere near as bad as feared.

As for the near-term trade, we are forming a trading range between 1,900 and 2,000. One day’s euphoria gives way to the next day’s stampede for the exits. Closing near 1,970 leaves us near the upper quarter of this range, making us more vulnerable to another overnight hand grenade out of China. This a better level to be locking in profits than chasing the bounce. The safest way to trade this market remains to be either ride out the waves by sticking to a buy-and-hold plan, or stay on the sidelines until there is a little more price stability. The choppiness will likely last for another week or two as the Chinese situation gets priced in and we wait for clarity on our Fed’s rate hike intentions.


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 Posted by at 11:18 pm on September 8, 2015

How to Respond to a Crisis

 Intraday Analysis  Comments Off on How to Respond to a Crisis
Aug 312015

End of Day Update:

I’m changing things up a little tonight. Normally I write about the daily fluctuations in the stock market, but given the dramatic and emotional moves in recent days, a bigger picture analysis is warranted. This blog post is for all the nervous owners out there that are not sure how to respond to these uncertain times.

As I write this, overnight stock futures are plunging nearly two-percent because of continued Asian weakness. No doubt this will carryover to our shores Tuesday morning and compel many owners to sell their stocks at even greater discounts. Their rationale is to sell now before things get worse.

But as investors and traders, the first questions we should ask ourselves is if we want to buy stocks when they are cheap or expensive? The natural follow-up is if we want to sell when they are cheap or expensive? While the answers are obvious, this isn’t consistent with the way most people trade.

Many owners are desperately selling their stock right now because they want to get out before things get worse. “What if this is another 2008?” they are asking themselves. Surely we all want to avoid that type of disaster again. Not so fast, some of the best buys I made over the last 20-years were in 2008. Not as a trader, but as an investor.

I rarely write about the buy-and-hold portion of my portfolio because there really isn’t much to talk about. Every month I add to my long-term investments and then forget about them. Through thick and thin, they just sit there. Sometimes they go up in value, other times they go down. But every month I keep adding to them because I believe in the US economy and that our stock market is the best place to grow my money until I need it 20 or 40 years from now.

While we only recently climbed out of the “lost decade” where our market was flat from 2000 to 2013, those were actually fantastic years for the long-term investor who dollar-cost-averaged into the market over that entire period. When everyone was selling and reducing their 401k contributions because of the dotcom bubble and financial crisis, I kept buying more. Those buys in 2002, 2003, 2008, and 2009 have more than doubled. All my buys in 2004, 2005, 2010, and 2011 are up in the high double digits. While the stock market had a “lost decade”, my buy-and-hold account had a phenomenal decade because I continued buying when other people were selling.

Think about that tomorrow as you contemplate selling your stock or decreasing your 401k contributions because of this Asian uncertainty. Personally I’d love to see another 2008 because that would be another fantastic buying opportunity for the buy-and-hold portion of my portfolio.


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 Posted by at 10:19 pm on August 31, 2015
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.


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 Posted by at 9:56 pm on August 25, 2015