Apr 142014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks closed higher and recovered most of Friday’s losses, but it was a wild ride getting there.  After an opening gap higher, the market slipped to break even before staging a late-day rally back to the early highs.  Volume was well under average on the first day of this holiday-shortened week and the S&P500 remains under the widely followed 50dma.

MARKET SENTIMENT
Sometimes markets are overwhelmed by surges in supply and demand, other times they move because no one is buying or selling.  Today’s low-volume rally had selling take a break as we floated higher on tight supply.  This strength took pressure off nervous owners, but it didn’t do much to tempt reluctant dip-buyers that were burned by last week’s false bottom.  While there were few buyers, there were even fewer sellers and is why we ended the day higher.

With the S&P500 down over 4% and the NASDAQ 8%, many are claiming this is the 10% correction that is long overdue.  These people point to similar corrections in years past, but to me there isn’t much similarity because the examples they hold up were driven by some fundamental change that altered investor’s outlook on the future.  Euro Contagion and the downgrade of US debt were the two biggest selloffs of this 5-year old bull.  While the technical setup might be similar, we still lack the fundamental catalyst that changes confident investors outlook on the future.  Without those fear mongering headlines, this dip will likely be little more than the normal back-and-forth.

TRADING OPPORTUNITIES
Expected Outcome: Without a fundamental reason to sell off, we will remain range bound.
While I don’t see any reason for the market to implode here, there also isn’t much reason for it to race off to the moon either.  We trade sideways more often than directionally, so why are so many people taking sides, predicting a launch higher or collapse lower?  Why can’t we simply hang out in a 100-point trading range through summer?

Alternate Outcome:
Sometimes we don’t know why markets selloff until after the damage is done.  Maybe there are people far smarter and connected than we are and they are liquidating positions ahead of the imminent market collapse.

Trading Plan:
While it is fun to predict market collapses, smart money bets on a continuation of the previous trend.  That’s because a trend will continue countless times, but only reverses once.  It’s a numbers game.  While it is hard to get excited about the upside, the market is in a better position to bounce than continue lower.

Plan your trade; trade your plan

 Posted by at 10:42 pm on April 14, 2014
Apr 112014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks sliced through any semblance of support as the selloff continues.  We fell over 80-points from the all-time highs set last Friday.  This includes breaking the 50dma Thursday and continuing lower on Friday.

MARKET SENTIMENT
It is hard for the financial press to come up with a justification for this selloff other than “profit taking”.  There are no fundamental headlines dominating trading rooms and it largely seems like people are selling for no other reason than everyone else is selling.  The high-flyers are taking it the hardest, down 20 and 30%.  Some claim the death of these mo-mo stocks signals the end of this bull run, but here is the thing, markets typically top when the hottest stocks continue higher while everything else drops back.  During the dot-com boom, brick-and-mortar companies were shunned while everyone was piling into speculative internet stocks.  Today we have the opposite.  The momentum darlings are down double digits while the broad market only slipped a few percent.  Is this the end of the bull market?  Not if we use history as a guide.

Stocks fall for only two reasons, waves of selling or lack of demand.  A rush of sell orders is the stereotypical selloff and fairly intuitive.  This is when everyone hits the sell button at the same time and that surge of supply overwhelms demand, crushing prices.  The less intuitive reason prices fall is lack of demand.  This is when most traders still believe in the market, but prices come under pressure because prospective buyers wait patiently for more attractive prices.  

Surges of buying and selling often see volume leap 30 and 40% above average, but over this 80-point slide, the most elevated volume we’ve seen was 8% above average.  That hardly qualifies as a mass exodus.  The lack of huge selling volumes suggests most owners are confidently sitting through this weakness and these price declines are largely driven by lack of demand.  This is important because it gives us insight into where we are headed next.  

TRADING OPPORTUNITIES
Expected Outcome:
There are two kinds of selloffs, those driven by fearful headlines and those that seem to fall for no reason at all.  This week’s selloff  lacks a fundamental catalyst and these mysterious selloffs are primarily caused by supply and demand imbalances.  All of the big selloffs people remember and fear are triggered by a fundamental catalyst that sent shivers of fear through the market.  Contagion, Default, Taper, Sequester, etc.  Confident owners need a boogeyman to shatter their confidence and turn them into sacred sellers.  So far we don’t have a boogeyman and that likely means this selloff will be more shallow since fewer owners will impulsively sell the fear mongering.

Alternate Outcome:
Sometimes we don’t figure out why a market is selling off until after it already happened.  If this market continues collapsing, the financial press will invent a reason.  While today’s selloff stalled just above 1,810, we could see a fresh round of emotional and reactive selling if we breach 1,800 next week.

Trading Plan:
The best profit opportunities are born from the most uncomfortable situations.  Buying the dip Wednesday after holding support was the easy, and wrong, trade.  Buying now that we’ve crashed through support is far more difficult.  And that is what likely makes it the right trade.  Without a fundamental driver, expect this selloff to stall soon.  Shorts should look to take profits and bold dip-buyers can take a chance.

Plan your trade; trade your plan

 Posted by at 10:38 pm on April 11, 2014
Apr 082014
 
S&P500 Daily at 1:13 EDT

S&P500 Daily at 1:13 EDT

Intraday Update

MARKET BEHAVIOR
Stocks bounced off the 50dma in early trade and are holding near 1,850 as they search for direction.  So far today’s move is more like a pause than decisive rebound since we are only up a few points from Monday’s close.

MARKET SENTIMENT
For as much drama as two-days of selling caused, we are only 2.5% from all-time highs.  This can be taken one of two ways.  Either this dip is no big deal and we shouldn’t be obsessing about it, or this is the start of something that still has a long way to go.  Of course the truth most likely lies between these two extremes.

Today’s pause marks the end of two-days of emotion fueled selling.  Those with a weak hand were flushed out in the rush for the exits, but confident owners continued holding and that limited new supply.  As soon as the emotional finished selling, the market found a floor and this is taking pressure off any remaining anxious holders.  But the fate of this move is no longer in the hands of holders.  Instead buyers will be the ones to save us.  Traditionally this is a mix of value investors and dip buyers.  Today’s pause is tempting dip buyers, but it is hard to claim a 2.5% discount from all-time highs represents a great buy for the stingy value investor.  Sometimes dip buyers can do this on their own, but if we need the value investor’s help, we probably need to slip a little further before they come to the rescue.

TRADING OPPORTUNITIES
Expected Outcome:
If the marked doesn’t end this dip in a decisive v-bottom today, we will likely hold near for 1,850 over coming days.  This leaves us vulnerable to one last emotion filled selloff as those barely hanging on get flushed out.  That last dip will likely be the end of the selloff and clears the way for a continuation higher.  We saw a similar move in late January.

Alternate Outcome:
While big selloffs usually need a reason, sometimes we only come up with one after the fact.  While this is behaving like a vanilla pullback, it could devolve into bigger waves of emotional selling if dip buyers and value investors don’t have sufficient numbers to prop up the market.  Every dip is buyable until the one that isn’t.

Trading Plan:
There is not a lot to do here as we wait for the next trade.  We will likely see one last dip lower before bottoming.  This means shorts can continue holding and dip buyers can wait for a better entry.

Plan your trade; trade your plan

 Posted by at 11:15 am on April 8, 2014
Apr 072014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks sold off for a second day, slicing over 50-points from Friday’s intraday highs.  We are just above the 50dma, but under 1,850 support.  Volume was elevated, but only just above average, so this move doesn’t qualify as a stampede for the exits.

MARKET SENTIMENT
Easy come, easy go.  Friday we set record highs following a respectable employment, but its been all downhill since then.  While there are no major headlines to speak of, many high-fliers are crumbling and that is dampening the mood in the rest of the market.  We haven’t seen major waves of selling indicating most owners are largely holding through the dip.  This weakness is primarily coming from the absence of demand as anyone with money was reluctant to buy all-time highs as we ran out of momentum chasers.

Typically there are two types of large selloffs.  The first is the familiar headline driven panic selling.  This is typified by overwhelming fear the market is about to crumble because some structural flaw has just been uncovered.  That doesn’t seem to be the case here since the best most people can come up to explain this weakness is “profit-taking”.  The other type of extended decline is the “stealth” selloff.  This is the one that sneaks up on us by lulling traders into complacency.  These are the declines that no one notices because they are trivial by themselves, but over time they add up.  The last-two days of weakness is many things, but stealth is not one of them.

The emotion and pain of the recent plunge sent most with a weak stomach running for cover.  Most of these are the late to the party momentum chasers and breakout buyers.  They are the ones that first showed losing trades and are the most likely to impulsively pull the plug.  Now that many of these flaky owners have jumped ship, they were replaced by more confident buyers willing to own the uncertainty and this is the start of the bottoming process.  This selloff will finally end when the supply of sellers dries up after all who were inclined to sell already sold.  Given how transfixed the market has been by the last two days, we are probably getting close to this capitulation point.

TRADING OPPORTUNITIES
Expected Outcome: A little more weakness before finding a bottom under the 50dma.
Short-term traders are well aware of this weakness and many sold as we undercut their stop-losses.  This autopilot selling is provided much of the downside pressure, but now that many of these traders are out of the market, that overhang has been removed.  What hurt us today cannot hurt us tomorrow.  While we likely have some traders barely holding on and slipping under the 50dma will flush this last wave out, once these stragglers sell, expect the market to run short of supply and bounce.

Alternate Outcome:
Nothing shatters confidence like losing money.  No matter how confident we are, when everyone else is rushing for the exits, it forces us to wonder if they know something we don’t.  All of us have our breaking point before we succumb to the emotional pressure and join the herd.  If the market doesn’t find a bottom shortly after breaking the 50dma, the selling will likely continue as previously confident holders start selling first and asking questions later.

Trading Plan:
The market will likely find support near the 50dma in coming days, but if it doesn’t bounce in a v-shaped rebound, it needs one last plunge lower before returning to 1,900.  Long-term traders should ignore this volatility, but short-term traders can look for an interesting entry point when the crowd is convinced we are on the verge of a dramatic plunge lower.

Plan your trade; trade your plan

 Posted by at 10:34 pm on April 7, 2014
Apr 042014
 
S&P500 daily at 1:23 EDT

S&P500 daily at 1:23 EDT

Intraday Update

MARKET BEHAVIOR
We slipped over 25-points from record highs as buyers failed to embrace these new levels.   The market opened strong following a decent employment report, but we waterfalled lower as the market undercut recent technical levels at 1,890 and 1,880.

MARKET SENTIMENT
This reaction was not driven by fearful headlines and is primarily the result of traders trying to game each other.  We often see volatility surrounding the monthly employment data, but it is typically short-lived and over the last few years it hasn’t had a lasting impact on trading.  Good report or bad, the market continued its relentless march higher from the 2009 lows.  It seems unlikely today’s decent employment report that fell in line with expectations will derail this rally.

We have seen periodic selloffs during this 5-year-old bull market, but each was following some spooky headline that threatened the solvency of the global financial system, giving traders flashbacks of 2008.  We’ve seen more modest weakness recently due to political gridlock or the impending Taper, but so far we don’t have any of that headline fear mongering going on today.  That means this is not the “crash” bears have been waiting for and this move is simply a rebalancing of supply and demand.

TRADING OPPORTUNITIES
Expected Outcome:
The market is in the middle of an emotion driven selloff.  We are undercutting recent support levels as autopilot stop-losses are kicking are adding fuel to the fire, but so far there is little headline fear to shatter the confidence of bulls that have been conditioned to buy every dip.  Once the selling frenzy slows, expect the market to find a floor as supply dries up.

Alternate Outcome:
There are bullish and bearish headlines every single day.  If the market wants to sell off, it will be easy to find a justification.  Nothing shatters confidence like screens filled with red.

Trading Plan:
Long-term investors should ignore these daily moves, but shorter-term traders should be treading lightly here.  Bears shouldn’t expect the market collapse without a dramatic headline and bulls need to be careful about buying the dip so close to the upper end of the recent trading range.  Sometimes the best trade is no trade.

Plan your trade; trade your plan

 Posted by at 11:24 am on April 4, 2014