Aug 192015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The S&P500 took us on a wild ride Wednesday, covering nearly 100-points intraday. We’ve seen big moves recently, but today’s volatility takes the cake. As dramatic as the surges and crashes were, volume was barely average. That tells us most traders didn’t change their mind and stuck with the cash and stock positions they started the day with.

If anyone traded well today, it was surely more luck than skill. These violent swings convinced reactive traders to buy and sell at the exact worst moment. The only way to survive chop like this is to resist the urge to trade. That means sticking with the positions you have, or watching from the safety of cash. Reacting to a choppy market is the surest way to blow up a trading account.

This morning’s mindless selling pushed us under the 200dma. The best the financial press could come up with was blaming Chinese stocks, which paradoxically ended the day up 1.2%. Don’t bother trying to understand the logic on that one.

By lunchtime the market found a bottom and started rallying 30-point ahead of the Fed’s meeting minutes. But the euphoria was short-lived as we gave up a big chunk of the rebound by the close.

While we love to assign blame for every move, the simple truth is people were selling because other people were selling. The herd rushes in and the herd rushes out. These daily moves are nothing but head fakes that convince reactive traders to give away all their money, and so far they’ve worked exceptionally well.

I don’t see anything in Wednesday’s trade that suggests this is the start of something worse. The market chopped around all summer and this looks to be much of the same. We had multiple opportunities to breakdown this year and there isn’t anything here that makes these headlines more credible than the ones the market ignored previously.

Contrary to the crowd, I’m eagerly looking forward Fed’s rate hike in September. Without a doubt this will kick off the next rally leg when they announce a 0.25% hike followed by similar hikes every three-months. That gives us clarity and predictability as well as two more years of historically low interest rates. The Fed laid out a similar plan with Taper and paradoxically the end of Quantitative Easing lead to a 10% rally in equities. We will see the same thing here because it will finally let us stop worrying about when the first rate hike will happen.

Jani

If you enjoyed this article, sign up for free email alerts and receive notifications when new content is published.

 Posted by at 10:57 pm on August 19, 2015
Aug 182015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Tuesday the S&P500 slipped back under 2,100 support/resistance in an otherwise quiet and uneventful day. Trade resembled a typical, slow summer session, a welcome departure from last week’s dramatic swings.

The most noteworthy thing is how modest the loss was considering the Chinese stock market plunged 6% overnight. That easily could have triggered another emotional rout if this rebound was fragile or unsustainable. The fact our market yawned at those developments tells us anyone who fears China is already out of the market and current owners are not interested in selling that story again. Right or wrong, when no one sells a headline, it stops mattering. Prices move on supply and demand, not headlines or fundamentals. Successful traders take their cues from what matters and ignore what doesn’t.

We find ourselves within a couple percent of all-time highs for the umpteenth time this year as we extend the longest and tightest trading range in 65-years. There are two ways to interpret this range-bound market. The half-full analyst says if were going to breakdown, it would have happened already. The half-empty outlook counters with if we were ready to go higher, it would have happened by now. Both opinions are valid, but only one is right. The question is which one.

Depending on the way a technician looks at the data, it is just as easy to come up with a bullish interpretation of our situation as a bearish one. That means we need additional information to figure out what comes next. The tiebreaker is sentiment. The mood and outlook of the market tells us if this is stalling or pausing.

For various reasons that we can cover in another article, the market will move in the opposite direction of the market’s mood. If we are flat while everyone is excited about the future, that means we are running out of new buyers and stalling. On the other hand, if the sideways trade happens under dark clouds and widespread pessimism, then we are pausing and refreshing before the next leg higher. This is standard and widely accepted contrarian theory. To figure out what comes next, all we need to do is look at what the crowd thinks and take the opposite side.

Over the last few months headlines have been dominated by Grexit, strong dollar, plunging energy sector, Chinese stock market bubbles, rate hikes, lowered revenue and earnings forecasts, anemic domestic growth, stagnant wages, and a host of other ominous stories. Given this backdrop, it’s little wonder most sentiment measures are in the toilet. But as contrarians, all the negativity tells us this sideways trade is a refreshing bullish consolidation and it is clearing the way for the next leg higher.

Taking it one step further, these bearish headlines also assure us this is one of the safest times to own stocks. While most will disagree with me, if all the above bearish stories failed to break this market, it is hard to imagine something that will dent it. Limited downside and healthy upside create a very favorable risk/reward, making this a great time to own stocks. By the time it feels safe, it will be too late.

Jani

If you enjoyed this article, sign up for free email alerts and receive notifications when new content is published.

 Posted by at 9:40 pm on August 18, 2015
Aug 132015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

On Thursday the S&P500 ended down a modest 0.1% following Wednesday’s gigantic reversal. Thursday started weak, but we quickly found support at 2,080, effectively extinguishing the emotional trade that dominated Wednesday. If the market was vulnerable to a collapse, sellers would have piled on this morning’s weakness and the downward spiral of emotional selling would have resumed. Instead, supply dried up and we traded sideways the rest of the day.

It’s cliché to say “don’t fight the tape”, but fighting this market has practically become a national pastime. Sentiment remains in the toilet by almost every measure. Stocktwits $SPY sentiment had bears outnumbering bulls by 2-to-1. The historically bullish AAII sentiment survey also shows bears beating bulls by a healthy margin. Identical trends are evident in put/call ratios and short interest. And anecdotally it is hard to get away from the bearish hecklers in my blog’s comments and Twitter feed. Everyone loves hating on this “overvalued” market, yet here we stand less than three-percent from all-time highs. When the crowd and the market don’t agree, my money is always on the market.

Jani

If you enjoyed this article, sign up for free email alerts and receive notifications when new content is published.

 Posted by at 9:47 pm on August 13, 2015
Aug 122015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

This was a day traders won’t soon forget. Contagious overseas selling dragged the S&P500 down nearly 1.5% before lunchtime. By itself this was a striking move, but the day was only half over and the second act was even more impressive as we rebounded to close in the green! We’ve grown accustomed to daily moves that measure a quarter of percent in this dull and slow market. We haven’t even moved outside a 5% range all year-long, but somehow we managed to slide across 3% in one day! Amazing.

Unfortunately for many traders this wasn’t the good kind of amazing because it convinced them to trade reactively, a.k.a. sell-low and buy-high. And honestly I cannot fault anyone who was fooled by these dramatic moves. Sometimes the market gets the better of us and this was easily one of those days.

After this move made both bulls and bears look foolish, we are left wondering what comes next. Clearly the selling could have spiraled out of control because nothing shatters confidence like screens filled with red. But supply dried up near 2,050 support and we bounced. This rewarded those that held the dip and Pavlov would tell us they are even less likely to sell the next one. This was yet another example of a market that simply refuses to breakdown. While the obvious interpretation of today’s bullish reversal is, well bullish, nothing in the market is ever that clear-cut.

A breakout above all-time highs is extremely likely given this market’s refusal to breakdown, but emotion is sky-high and chances are this will be anything but a smooth ride. While confident owners are keeping supply tight, it will take a bit of time before recent sellers warm back up to this market. Whether is it lingering fear, or a refusal to admit making a mistake, many of these sellers will stay in cash until prices climb so high they stop fearing a correction and start fearing being left behind. Often we see prices snap back aggressively from extreme oversold levels, but it is hard to claim a 2.5% dip from all-time highs qualifies as extremely oversold. Today’s rebound tells us the path of least resistance is higher, but it will probably continue to be a bumpy ride.

Jani

If you enjoyed this article, sign up for free email alerts and receive notifications when new content is published.

 Posted by at 9:31 pm on August 12, 2015
Aug 112015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Tuesday was a tough day for the S&P500 as it gave back most of Monday’s gains. We fell back under the 50dma and 2,100 support, but managed to hold the 200dma. Volume was slightly above average, but relatively constrained given the size of the decline.

The Chinese government surprised everyone with an unprecedented yuan devaluation. This sent investors the world over scrambling for cover. While there is a direct impact from a weaker yuan and stronger dollar, that pales in comparison to the inflamed fears of a slowing Chinese economy.

The market can quantify and digest currency moves in a day or two. This is a negative for export dependent economies like Germany, but a weaker yuan actually helps net importers like the United States since it lower input costs for many of our companies. That’s why stocks like WMT were higher when everything else was down.

Reacting to the currency move alone, the response in US markets seemed overblown. But it wasn’t the currency move that spooked traders. They feared the reasons the Chinese government felt compelled to act so brashly. Between slowing Chinese growth, a crashing Chinese stock market, and now this, traders are starting to fear worse than expected weakness in the world’s second largest economy.

This situation leaves the market in a precarious position. Prices defied countless bearish headlines this year from Grexit to rate hikes, but those were largely recycled stories that we’ve lived with for years. China weakness on the other hand is something new and unexpected. Investors that weren’t bothered by a Grexit or 0.25% rate hike are rightfully concerned by these Chinese headlines. While there is a good chance this is just another blip on our way higher, this is the most serious situation we faced all year.

Things are too uncertain at the moment to predict which direction the market will go next, but I’m confident whatever happens, it will be dramatic. Maybe this is what finally breaks the camel’s back and triggers the long-awaited correction. However, if a crumbling Chinese economy cannot bring down this market, then nothing will and all we can do is hang on and enjoy the ride. The next couple of days will give us good insight into the market’s psyche. Either selling intensifies and we plunge to levels not seen in years. Or the emotional selling exhausts itself and we rebound to new highs like we have so many other times.

Jani

If you enjoyed this article, sign up for free email alerts and receive notifications when new content is published.

 Posted by at 10:31 pm on August 11, 2015