Monthly Archives: August 2012

Bulls are firmly in control

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:02 EDT

MARKET SENTIMENT

Headline day in the markets ended up not being very big.  Bernanke’s comments from Jackson Hole were simply parroting previous statements.  No new stimulus, but ready and willing to act if needed.  Markets opened higher, plunged at no announcement of QE3, and then like ever previous fed commentary sell-off in the last couple months, the market bounced back as quickly as it sold-off.

While the news was fairly hum-drum and the price action didn’t move us out of the previous 1400-1410 trading range, the price-action is highly noteworthy.  By many measures, not announcing QE3 today was a big disappointment for some of the most bullish traders.  This was the perfect time for the bears to take the knees out from under this market and send us into the tail-spin they are convinced we are on the verge of.  They had that fast and hard sell-off this morning to kick off an avalanche of selling, but why didn’t we plunge?  The market ran out of sellers and buyers jumped on board at the 1400 level, pushing us right back up to 1410.  So much for the theory that the market is fragile and ready to breakdown.

To me this shows the bears are exceptionally weak and overextended.  Here was the perfect set up for them and instead of raking in huge profits, they got their face ripped off in a short-squeeze.  And to be honest, the pain isn’t over for them.  Next week the rally should continue past last week’s intraday high as the last of the bears are flushed out.

While short-squeezes are powerful, they are also fleeting.  Without real buying following the short-squeeze, the market will drift lower due to a lack of support by other investors.  But the thing I am sensing from CNBC, online discussion forums, and local investor meetups is pros and amateurs alike are sitting on a lot of cash because they are afraid of this market.  These traders are modestly positive on the markets, but reluctant to buy because they fear the headlines.  As a contrarian, this shows me there is a HUGE war chest of cash ready to chase this market higher if it hits news highs.   Fear of a pullback will be replaced by fear of being left behind.

MARKET BEHAVIOR

The market continues trading in the 1400-1410 range, but volatility has picked up a bit with intra-day ranges hitting 1% over 6 of the last 12 trading days.  While 1% is still fairly modest as compared to the last several years, it does show a livelier debate brewing between bulls and bears at this key psychological 1400 level.  Looking at the price action, it the bulls have responded to everything the bears can throw at them.  The news continues to be negative and we are lacking a positive catalyst worthy of driving the market to multi-year highs, but the market is forward-looking and it sees something most don’t.

There is a saying that the market is better at predicting the news than the news is at predicting the market.  And this is the market we find ourselves in.  The market is leading bullish news out of Europe and US Economy.  By the time the news finally hits the wires, the market already made its move and it will be too late for cautious stragglers to profit off of the news.  And that could actually be the top of this rally as the market heads lower in a sell-the-news correction.

TRADING OPPORTUNITIES

Today’s upside reversal from disappointing lack of action from the Fed is highly bullish.  It shows bears are weak and bulls are strong.  Stick with the market and don’t let the heights scare you.  We’re going to breakout of this small 1400-14100 consolidation one way or the other and so far the best indication is for an upside breakout.  In the markets, the best trade is most often the hardest trade.  I could be wrong and we could see the market sell-off, but that is what sell rules are for.  Buy when other people are fearful and sell when others are greedy. The market might not be fearful they way it would at a market bottom, but there is a large amount of reluctance setting up the same trading opportunity.

FB daily @ 3:02 EDT

INDIVIDUAL STOCKS

Most everything is having a good day as the broad market is lifting all stocks.  TFM is following on to yesterday’s 50dma support.  This is a hugely volatile move over the last few days, so take that into account if anyone is adventurous enough to grab this bull by the horns.  FB continues making new lows, down 5% today.  So much for the next great thing.  In the markets, most often if you are excited to buy something, it isn’t going to work out as expected because the simple truth is most traders think alike.  If you are excited, then everyone else is excited, meaning there are few new buyers left to push prices higher.  The hard trade is usually the right trade and the easy trade is usually the wrong trade.

Stay safe

Bears try again

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:07 EDT

MARKET SENTIMENT

Markets gaped lower at the open.  Is this the sell-off everyone is expecting?  Sure feels like it.  We’re near 52-week highs, the headlines are ominous, and everyone is reluctant to own this market.  To be honest, I completely appreciate the bear case here and am tempted to side with them, but the one thing that holds me back is the abundance of bearish sentiment in the markets.  Fundamental and technical traders are underweight this market because of all the above reasons, and they are good reasons, but when we start analyzing sentiment and supply and demand, the picture starts looking different.

All things being equal, the sentiment skew is set up for a move higher because most often the crowd is wrong.  The crowd already made their trades and are simply along for the ride because only new buying and selling moves market prices.  If the bears are already underweight, out of, or short this market, they have done their best to move the markets and seeing as how we are stuck near 52-week highs, they didn’t move it very far.  But the noteworthy thing is all these bears are available and able buyers if the market forces them to change their minds.  This potential upside fuel is quite bullish because these supply and demand dynamics results in the crowd most often being wrong.

The above works under normal circumstances, but there are rare occasions where stocks can keep falling even after everyone is already bearish and that is when there is a complete lack of buyers.  Stocks are always traded from one person to another, meaning someone always owns stocks.  From these owners there is always an available supply of potential sellers.  But on the flip-side no one ever has to buy stocks.  A good example of this is housing in Detroit.  Someone owns the real estate up there, but even when some houses are listed for less than $1,000, they still can’t be sold.  Even if you gave it away free it could sit on the market simply because no one wants it at any price.  Same thing can happen with stocks.  But this is the extreme case of panicked trading where value investors would rather sit on their hands than buy something at attractive prices.  We saw this phenomena in 1987, 2008 and most recently in 2010’s flash crash.  The thing to remember is these are very rare, emotionally charged environments where buyers are paralyzed by fear, and in most instances they make for great buying opportunities once the dust settles.

I don’t expect this extreme case to play out and based on conventional market sentiment and contrarian views, I’m cautiously sticking with my bullish views.  Given market dynamics of supply and demand, I expect an upside resolution to this consolidation even if we see some near term volatility first.  Remember, supply and demand always trumps opinion.

MARKET BEHAVIOR

Markets dipped under 1400 again and actually undercut Friday’s low of 1398.  But while the dip is noteworthy, we continue trading within 2% of a 52-week high, so hard to say the market is struggling and breaking down.  This is still a bull rally until the bears can prove otherwise, and minor tests of resistance levels don’t cut it.  Of note, the 50dma is ramping up and closing the gap between itself and our current levels.  Many market participants view the 50dma as a buying opportunity and it often provides support for bull markets.  The closer the 50dam comes to the current market, the less downside there is before reaching this safety net.  It wouldn’t be unheard of for a bull market to dip down to the 50dma, but isn’t necessary as markets can often levitate above the 50dma for months at a time without a check-back.

TRADING OPPORTUNITIES

Volume continues coming in far under average.  Neither the bears nor the bulls are leaning into this market in a meaningful way and it is a stand-off between the two waiting to see which side will blink first.  No doubt we could breakout of this trading range in either direction and our trading plan needs to take this binary outcome into account.  I think the probability of an upside resolution is slightly greater than a breakdown, but in the markets nothing is certain.  Stay open-minded to what the market is telling you even if you don’t want to hear what it has to say.

TFM daily @ 3:07 EDT

INDIVIDUAL STOCKS

TFM is adding to yesterday’s losses, but pausing at the 50dma.  With such volatility, there are really only two possible outcomes, crash on through the 50 or bounce off it.  Just like with the indexes, many big money managers don’t like chasing high-flying stocks and will instead wait for a pullback to the 50dma.  When a stock finds good support at the 50dma, it often means institutional investors are accumulating shares at this level and a rebound is likely.  A high volume bounce off the 50dma would be a buying opportunity, but obviously a plunge under should be avoided.  While it is no fun for anyone who holds TFM in their portfolio, reversals like this are a part of trading and why we maintain defensive sell rules.  Stick to your rules and you’ll survive to fight another day.  And lets not forget, sell rules are not just for selling, but can also help keep you from getting shaken out in a pullback.

Stay safe

Watching paint dry

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:25 EDT

MARKET SENTIMENT

Another boring day in the markets as the S&P500 continues hovering around 1410.  This is like watching paint dry.  No doubt people are looking to Bernanke’s statements from Jackson Hole, but in all honesty this is nothing more than the market’s latest obsession.  Bernanke will say something, the market will go crazy for an hour, and then it will be forgotten as the market start obsessing about the next make-or-break data point.  Where does it end?  More importantly, does it really matter?  Is the market and financial press too obsessed with looking at its feet to see where it is going?

Most of the time I discount news because it doesn’t matter much.  Markets don’t trade on news, they move on traders’ expectations of the future.  News affects this perception to a degree, but it doesn’t move the markets, only traders do that.  The problem with news is it is always seen through participants’ preconceived biases and this distorts any story into what the market wants to see.  This is why the market can pop on horrible news and crash on great news.  If we really want to identify where the market is headed, we need to focus on other traders, not the noise.

By most measures it is hard to argue there has been much positive news in the financial press, yet the market continues rallying.  This screaming divergence means something powerful is going on under the covers and most people don’t see it.  Sometimes traders can be in denial and stubbornly holding on to positions thinking they can out-wait the storm.  This is what happened in late 2008 as the market imploded long after the cracks in the financial system were exposed to the world.  But the attitude back then was “everything is fine” and “these repressed valuations represent great buying opportunities.”  Is that where we find ourselves right now?  Are traders salivating at these attractive valuations and most traders are optimistic about the future?  I sure don’t see that surveying CNBC or StockTwits.  Seems most everyone is cautious and reluctant.

What if this divergence is due to an under-invested market?  Traders are afraid of this market because of all the perceived risks.  They fear another meltdown and it is nearly impossible to find anyone who thinks stocks are a bargain at these four-year highs.  But if the market is truly in such bad shape why has it pushed up this high?  Most experts justify the rally by saying it is overbought by novices chasing the market.  But I can tell you from first hand experience with local investor groups in my area that retail investors are not buying this market, they are just as afraid of it as everyone else.  If it is not the novices moving the markets, what is pushing us higher?

I think it is lack of supply.  This is why we have low volume and rising prices.  All the sellers have already sold and everyone else is holding on.  Lack of sellers is pushing us higher and chances are this trend will continue as fear of a crash is slowly replaced by fear of being left behind.

MARKET BEHAVIOR

Frustratingly tight trade continues.  Support has moved up to 1410 for the time being.  We could see volatility surrounding Bernanke’s comments, but over the last couple months the market has initially sold off after Fed’s comments disappointed markets, but the same day the markets turned right back around and recovered those losses.  It will be interesting to see if this trend of sell-off and then rally continues this time.  If the post-comment weakness persists, it could indicate a new trend for the market, but another rebound will be a green light to stay long, or get longer.

TFM daily @ 3:22 EDT

TRADING OPPORTUNITIES

Continue holding high quality stocks breaking out of sound bases.  Most everything is working and pullbacks are minor to non-existent.

INDIVIDUAL STOCKS

FRAN and GOOG are having good days and exhibiting follow on strength to earlier breakouts.  UNFI is breaking out on volume.  On the downside, TFM surged higher and them came crashing down on huge volume.  It is still well above its July buy-point and 50dma  and doesn’t need to be sold today, but any owner should put this one on a short leash after today’s volatile moves.  And when in doubt, remember it is better to be out of the market wishing you were in, than in the market wishing you were out.

Stay safe

Only idiots believe in the gold standard

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:02 EDT

MARKET SENTIMENT

Another dull day in the markets.  Indexes are again trading in a tight range, this time around the 1410-ish level.  The markets are creeping slowly higher in a stealth rally, defying all the problems generating headlines in the financial press.  Going against the market is a dangerous game and shorts are feeling the pain of the market’s stubbornness as it continues to chase them out for a loss.

I don’t expect we’ll see a material pullback until most of the bears have given up because it is their skepticism that is putting the floor under the markets.  Of course a shockingly bad headline could rattle the markets, but if the only thing we get are the bearish headlines we’ve recycled for the last six months, the markets should continue its slow, steady climb.

KORS daily @ 3:05 EDT

TRADING OPPORTUNITY

Stay long the names that are working.  While the indexes are trading sideways, the calm environment is allowing breakouts to work.  Stick with these leaders until you have a respectable 20% profit or the broad market starts getting more volatile.  But don’t get greedy and take your worthwhile profits off the table once they hit your targets.  Markets typically move in 20-25% steps before pulling back.  Take the elevator up, but avoid riding it back down.

During corrections it is often easier and more predictable to short indexes, but in uptrends the best gains will be found in individual stocks.  As always, the market is constantly changing and the best traders change their strategies along with the market.

INDIVIDUAL STOCKS

I updated the watch list with some of the stocks I’ve been mentioning over the last couple weeks.  These are not buy recommendations, but simply leading stocks showing interesting price action and worth consideration.

OTHER IDEAS

All this talk about returning to the gold standard is just asinine.  Anyone promoting this idea is exposing just how little they understand economics and global current events.  Europe is on the verge of imploding because it lacks meaningful flexibility in its currency.  They are back in a recession and possibly headed for a depression because of all the austerity measures forced on them due to a rigid currency.  Unemployment is above 20% in certain areas and they are cutting spending and programs at the worst possible time. Other examples include Argentina blowing up because of their peg to the USD.

Sure fiscal responsibility sounds great in theory, but like any theory it needs to be tested and this is where the gold standard and austerity falls flat on its face.  Similarly Communism is a wonderful idea in theory, but it failed miserably in practice.  Debt is scalable and analogies can be made between personal, corporate, and government debt.  For the government to pay for everything in cash would be like telling young couples that mortgages are bad and they should save up money to buy a house in cash even if it takes 20 or 30 years to save up.  Have you ever heard financial gurus recommending renting for 30 years so you can save and avoid having a mortgage?  Of course not because it is a stupid idea.  Or how dumb it is for recent college graduate to get a car loan so she can commute across town to a high paying job versus working for minimum wage at the corner grocery store?  Or how about advising young people to work for ten or fifteen years in low-wage jobs so they can save up and not take any student loans?  These are some of the worst financial advice a person can receive, yet this is exactly what all these ‘smart’ people are recommending for the US government.

Of course there is both good and bad debt.  Above I listed beneficial debt that pays huge dividends far above the interest payments.  But there is bad debt too, such as racking up credit card bills to finance for a vacation, a big screen TV, a fancy dinner, or pair of $300 basketball shoes.  A typical guideline is use cash for things that have a near-term benefits and use debt to finance things that provide benefits over multiple years.  Translating this to government, social services and public employee salaries should be paid in cash, but public work projects and supporting R&D should use debt so those benefits can be moved forward and start benefiting the community right away.

No doubt many people who have their head stuck in the sand will argue against this, but all they have to do is look around the world to see the these different policies in practice and the economies resulting from these decisions.  We’ve been off the gold standard since the 70s and racked up a staggering debt, but the world has never witnessed as much prosperity as the US has over the last 40 years.  This debt financed an innovation explosion like the human race has never seen before and it kicked off an economic boom that advanced the standard of living and life expectancy for everyone around the world.

There is a point at which additional debt can create drag for the system, but we are not at that point yet, mostly because of the flexibility we have with our currency.  Had we been on the gold standard as gold went from $80 to $1,800, it would have crushed our economy and made us one of the least competitive countries in the global economy.  I’d even go so far as to say it would be stupid for the government not to lock in long-term debt at these absurdly low 1.5% rates.  That is practically free money and if invested properly in our economy could provide returns many times greater than the interest payments.  If I could get loans at 1.5%, I’d buy as much rental real estate as I could get my hands on and let the money flow in.  Uncle Sam can do the same thing by investing in our country and increases in productivity and economic growth will more than pay for this trivial interest rate.  Of course having the government spend the money wisely is a different issue all together.  But even if only half of the money was invested wisely it would only accelerate the prosperity we’ve seen over the last forty years.

Stay safe

AAPL wins, everyone loses

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:05 EDT

MARKET SENTIMENT

Markets are up modestly in early trade, but that demonstrates good follow-on support for Friday’s 1400 bounce.  Constructive and sustainable gains are made by grinding higher slowly and include an occasional pullback here and there.

Bears remain cynical of this market and are arguing with Friday’s reversals.  The dip to 1400 was an excellent time to take profits on a counter-trend trade, but many bears were greedy and held on, expecting a larger slide.  And now all their profits are evaporating and turning into losses.  The market doesn’t care how thoughtful an argument is, it will run over us just the same.

Over shorter time-frames the market operates on supply and demand regardless of what the news, fundamentals, or technicals indicate the market should do.  The market goes up when shares are scarce and down when they are plentiful.   The low-volume trade we are witnessing shows few shares are available and this is contributing to the tight supply, and thus creep higher.  The bears have already sold their shares or gone short, but all their selling was unable to flood the market with supply.  The market gladly swallowed those shares and is asking for more.  No matter what the fundamentals have been, the market is headed higher and as traders we have to respect that.

MARKET BEHAVIOR

The market continues to show upside resilience with low volatility.  Sustainable rallies go up in smaller steps with low volatility and everything continues to point to a move higher.  Typically volatility will creep in prior to a reversal as the battle between bulls and bears heats up, but we are not seeing signs of that.  Most rallies end by rolling over with a more rounded and choppy top, not in a spike, so bulls have time on their side and no need to be standing by the door with a trigger-finger just yet.  If we stall again at 1425 and return to 1400, then we will need to reevaluate our bullish thesis.

TRADING OPPORTUNITIES

Stay on the long side.  Lots of breakouts to choose from, but don’t chase anything more than 5% extended from a proper buy point.  Last week’s pullback brought some stocks back into buy ranges.  If you missed those, there will be other opportunities in coming weeks from 50dma pullbacks and bounces.

INDIVIDUAL STOCKS

AAPL is higher on its successful litigation with Samsung on Friday.  But what might be a short-term victory will be a long-term loss for Apple, the industry, and consumers.  The patent system is badly broken and not able to handle the technological age we are living in.  For example, one of the patented items Apple was suing Samsung over was how when you get to the last photo on a list, the last pictures initially moves but then snaps back indicating the end of the list.  How in the world is something like that patentable?  Is it really Unique, Useful, and Non-Obvious?  Does it deserves 20 year protection in order for Apple to recover the investment spent developing it?  Is that really an invention or simply a design element?  Give me a break.

But here is the thing, this closed attitude in technology is bad for everyone because stifles innovation.  Apple won this battle, but it will lose the war when other companies start locking down every trivial ‘invention’ and that will prevent anyone from building a usable device without infringing on dozens of patents.  Apple is the current innovation leader, but so was Palm, Nokia, Motorola, and RIM.  Apple is building this culture of patent litigation and it is hurting everyone in the process.  If this stands, it could eventually spell the end of Apple’s reign as it gets out innovated by someone with other trivial “inventions” that locks Apple out of the next round of phone designs.  Congress or the Supreme Court really needs to get involved and strike down this silly business methods patent garbage.  And while their at it, eliminate patent squatting too.  Patents were intended to foster innovation by rewarding inventors, not stifle innovation by preventing everyone from doing anything.

In practice most of these mega companies simply cross license each others patents, but what this game of giants does is it locks out the small innovator without deep pockets who cannot afford to play patent roulette.  The big guys will sue any upstart out of business because every new device will infringe on dozens of existing bogus patents.  When the little guy loses, we all lose.

Stay safe

Another rough day for the bears

By Jani Ziedins | Intraday Analysis

S&P500 weekly @ 3:20 EDT

MARKET SENTIMENT

Markets are bouncing off 1400 today after briefly falling under this key psychological level in early trade.  The rally is sending bears running for cover and no doubt a large chunk of this move is a short squeeze.  The bigger question remains if there will be more buying from other market participants to continue this rebound higher.

Supply and demand moves markets plain and simple.  Some traders obsess over the news and others focus on technical levels, but what really matters is how all these various traders are positioning themselves.  Everyone comes to the markets with biases and it is impossible to interpret anything without looking through those tainted lenses.  If a person is bearish, they grab on to the bearish side of any story.  If a person is bullish, the get excited about the smallest positive nuggets.  Truth is if news and technicals actually mattered, they would be far more reliable than they are.  Good news would always make the go up and bad news would make the market go down.  If technical were reliable, then every breakout would work.  But it only takes a little experience in the markets to realize nothing works the way it gurus say it should.

This is why I try to see past the news and technical levels because following those signals sends off waaaay too many false signals for my tastes.  Instead, I focus on what other market participants are thinking and how they are positioned.  Have we run up and everyone is giddy?  Then chances are everyone is already invested and no matter how good the news or technicals are, the market is going to run out of available buyers and prices will head lower on weak demand.  On the other side, if everyone is expecting horrible news, then they have already traded this opinion and supply is about to tighten because all the selling has already happened.

This is a simplified explanation of the pricing dynamics behind contrarian investing.  But while most people think of themselves as contrarian, logic tells us the majority can’t be contrarian because then the contrarian view would be the majority?!?!  The trap most people fall into is thinking contrarian investing means going against a stock that made a large move.  This is why people get in trouble shorting a stock that is “too high” or buying a stock that is “too cheap”, only to get taken to the cleaners as it keeps going.  Contrarian has nothing to do with price and everything to do with the crowd.  Figure out the popular opinion and then trade against it.  Let supply and demand work for you and against the crowd.

There are a lot of people who are confused by this market.  The headlines are horrible, the world is falling apart, and yet the market is at four-year highs.  But if the market did what it was supposed to, we’d all be rich right now.  Don’t let yourself fall into the trap of thinking about what the market should do, but instead focus on what all the other people think the market should do and use that insight to plan your trades.  In the current market there are too many bears and the market is rallying because of that imbalance.  Don’t get mad at the markets, don’t accuse it of being unfair, reality is the market doesn’t care what you think.

MARKET BEHAVIOR

Stocks are rebounding after a sell-off this week. But any experienced trader knows red weeks are a healthy part of a bull rally and should be expected and embraced.  The trend remains higher and while this week’s price action was a little wider than the last few weeks, volatility is fairly benign by historical standards.

TRADING OPPORTUNITIES

Shorts had a good counter-trend trade in place if they got in near the 52-week high on Tuesday, but a counter-trend trader needs to be very nimble and take profits quickly.  Anyone who jumped on the short trade late or got greedy and didn’t cash in is having a bad day.  The market doesn’t care how sound your logic and reasoning is, it is far larger than any of us and it will run over us if we get in the way.  Trade the market, not opinion.

Timing is everything in the markets.  In fact, your view on the markets doesn’t matter as long as you have good timing.  Paradoxically enough, both a bear and a bull can be right at the exact same time.  Think about how crazy that sounds for a moment.  But its true, direction doesn’t matter as long as you pick the right time frame.  A bear could have made good money on this counter-trend trade if he knew when to pull the trigger and cash in.  And a bull could make money with a longer view if he sat through the dip.

Of course the other edge of this sword is both can also be wrong at the same time if they have poor timing and this is the trap reactive traders fall into.  Those with good timing are proactive, act confidently, and make the hard trade.  This lets them get in early and get out early.  But reactive traders are always a step behind the curve.  They wait until a trade feels safe before buying and then they hold until the market moves against them and they are forced to sell for a loss.  Bears make money, bulls make money, but pigs and sheep get slaughtered.

WPI weekly @ 3:19 EDT

INDIVIDUAL TRADES

AAPL is holding strong near its highs in spite of most investors’ fear of heights.  When most people think something is too high, hold tight because it is headed higher.  But be on the watch out for when too many people start talking about AAPL breaking $1k, or you start day dreaming about what car you want to buy with all your profits.  When that happens, sentiment is too positive and it is time make your exit before demand dries up and the price pulls back.

HAIN is adding to yesterday’s breakout.  What seems to be too-high usually only goes higher.  But remember chasing is a dangerous sport as you put yourself at risk of getting run over.  Yesterday buy was risky, but today’s buying seems safer.  Remember the hard buy is usually the right buy.  The easy buy is what will put a hole in your account.

WPI is breaking out today from a three-weeks-tight or alternately a cup with high handle.  Medical industry has been hot lately between Obamacare and big money’s attraction to recession proof industries.  It might be worth a look.

The hardest part about the current market is there is so much merchandise screaming to be bought.  Part is luck picking the breakout that will make a huge move, but the part that isn’t luck is being in the market.  You have to play the game before you can get lucky.

Stay safe

Weakness continues: opportunity or warning?

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:24 EDT

MARKET SENTIMENT

Markets opened lower, as they’ve done three of the last four days.  In the previous two weak opens, we pulled out of the dive and closed close to even.  Will the third time be the charm?

Market participants continue their pessimism over all the negatives in front of us, yet the market continues holding near its high.  Bears are shouting from every high place this market is over valued and they are short.  Big money managers are expressing concern.  The media is hyping up all the bad news.  Heck, even I can’t figure out why the market is holding up at these highs given everyone’s concerns.  But we profit from price moves, not people’s opinion, so that is what we must focus on.  The market wants to go up and we must respect that.

We’ve had a recent bout of weakness, but everyone must recognize the market can’t go straight up and make it easy for everyone to rake in money.  The market is notorious for making us think we are wrong before eventually proving us right.  The challenge becomes knowing when to stick to our guns and when to admit defeat.  The recent price action is shaking out a lot of weak bulls and encouraging anxious bears to take the plunge on the short side.  This weakness is expected and healthy price action for a bull rally, but the fear is this same price action could also be the market rolling over and the perceived support is nothing more than naive bulls jumping in and buying the dip.

The question we have to ask is which side are the naive traders on, the long side or the short side?  Naive traders always follow the crowd.  They are the me-too traders who always show up late to the party and are stuck holding the bag.  All their money flows directly into the pockets of savvy traders.  The key to finding the naive trader is figuring out which side the crowd is on.

If the majority of this market was excited about this breakout and talking about how much higher it would go, then I would be selling this market.  In March, I ruffled a lot of feathers when I told people the market was setting up for a pullback.  See my March 13th post for my analysis of the market back then.  Everyone was bullish and expecting big bull market gains.  That is why I got nervous and sold out of the market close to the peak.  Fast forward to today and at those exact same price levels, raging bulls are few and far between.  Most everyone is cautious and reluctant to buy this market, as demonstrated by the ultra-low volume.  Same price level, 180 degree different attitude toward the markets.  In March the sentiment was set up for a sell-off, today the sentiment is set up for a continuation.

But as I was getting to earlier, the market can’t go straight up, so this whipsaw move we are seeing is designed to shake out the weak hands and temp bears to put their heads in the guillotine.  What will determine how far this minor dip lasts is how quickly it can shake out all the weak bulls and tempt the ambitious bears.  We have to clear the deck of this dead weight before we can continue higher.  Maybe we do that holding above 1400, or maybe we need to drop under 1400 to trigger a final wave of automatic selling that will only happen when everyone becomes convinced the market is breaking down.

Being a bull in these markets is a lonely proposition, but the more of an outcast I am, the more likely it is I’m on the right side of this trade.

MARKET BEHAVIOR

Market continues to trade tight and in low volume.  Opening down half a percent in early trade is a big move for this market, but still peanuts from where we came from.  The increased range will give day traders a little more to work with, but still a far cry of this summer’s multiple percent per day moves.  But for the bull case, this is encouraging because historically rallies tend to be low volatility and low volume as most investors are comfortable holding and are not bailing en mass at every headline that crosses the news wire.

TRADING OPPORTUNITIES

The market is showing it wants to retest 1400.  Trading within in a few S&P points of 1400 it seems inevitable given market makers’ financial incentives to push us into a region that will trigger a wave of trading.  But even a dip under 1400 won’t break the rally.  No doubt the ultra-short term traders can profit from these counter-trend dips, but any longer time frame needs to respect the uptrend we have in place.  Too often the easy trade is the wrong trade, and if this market feels too extended and prone to pullback, that is exactly what makes it a good buy.  We are biologically wired by evolution to feel more comfortable in crowds.  In trading we feel more comfortable trading with the crowd, yet supply and demand and other pricing dynamics make following the crowd a losing proposition.  Our instincts are wired to survive in the wild, not succeed on Wall Street.  The time will come when we need to fear the market, but that will be when it feels safe.

CRUS daily @ 2:24 EDT

INDIVIDUAL STOCKS

AAPL in the red today, but only giving up a fraction of yesterday’s gains.  The uncertainty in today’s markets is driving big money managers into the perceived safety of mega-cap, blue chip stocks.  Following that same theme, HD is showing strength and is holding up better than the market in this mini-correction.  Speculative growth names like FRAN and KORS are also doing well with surging relative strength lines.  For breakouts, HAIN is surging 18% today and SNPS gaped 5%.  CRUS is impressively adding to its late July breakout in high volume today, but remember CRUS is extended from a valid buy point.  In spite of the headlines, there is a lot of good stocks showing strong relative strength to choose from.

There is a lot of encouraging price action in leading stocks, defying the bearish sentiment seen in the rest of the markets.  We continue to be in a confirmed uptrend and often the best buying opportunities are the scariest.  By the time it feels safe, all the best profit opportunities will be gone.

Stay safe

AAPL pops, but indexes struggle

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:35 EDT

MARKET SENTIMENT

The indexes opened slightly lower in early trade after yesterday’s reversal.  While yesterday’s loss was modest at -0.3%, the intraday range was the widest we’ve seen in weeks as the S&P500 sold off from a fresh 4-year high.  What does this tell us?  Simply that the market doesn’t go up in a straight line.  Most of August was an easy hold for bulls as the market drifted higher with low volatility.  But the market doesn’t like to be easy, so it has to throw in a few hiccups here and there just to keep everyone on their toes.

I’m suspicious of this bearish reversal because obvious shorts rarely work, and hard to hold longs often do.  Much like a rodeo bull, the market is bucking off longs with weak conviction.  Yesterday was an eye-opener as the reversal rained on the bull’s new-high parade and gave bears something to sink their teeth into.  No doubt a lot of the surge to a new high was bears covering shorts and bulls buying the breakout, but once all that automatic buying ended, no one was left to step in and support the market.  For such a noteworthy move, volume was noticeably absent.  Yesterday had the highest volume in over a week, but still well under average.  This means there was not a whole lot of buying on the pop, nor mass selling on the slide lower.

There are four investor moods that move markets, enthusiasm by bulls, enthusiasm by bears, apathy by bulls, and apathy by bears.  The low volume yesterday is more indicative of apathy by both bulls on the rally and apathy by bears on the sell-off.  This is simply continuing the summer’s low volume trend.  As I’ve shared before, my interpretation is big money is reluctant to commit new capital near recent highs and bears are exhausted from trying to drive it down.

Like anything in the markets, this could break either way as 50% of the money is on each side of the trade.  If buyers give up on this market first, bears will win and it will slide lower due to the absence of new money.  But if bears continue losing money, they will start changing their stripes and come over to the bull side.  Their buying will provide the initial lift for the market and it will be followed by chasing from formerly reluctant money managers who fear being left behind by a rising market.

I expect bears threw everything they had at yesterday’s sell-off and if that was the best they could do, the bull case remains solidly in tact.  The one wildcard is how many weak longs are still holding and prone to being spooked out of the market.  But once the market chases all of them off, we’ll be ready to resume the rally.  Sell early, or hold through the pullback, but try to avoid selling emotionally in the middle of a pullback because most often your breaking point will be the exact low of the correction, before the market resumes higher.

MARKET BEHAVIOR

The market broke from its low volatility rally yesterday, but that is no surprise.  We shot up in a short squeeze and then sold off due to a vacuum of follow on buying.  But one day does not make a trend.  Yesterday’s intraday range was 1.1%, which was exciting by recent standards, but hardly noteworthy when compared to price swings earlier this summer.  The low volatility trend continues for the time being.

TRADING OPPORTUNITIES

The market threw us a curve ball yesterday to make sure we are paying attention.  Anyone not expecting it was shaken out and this cleared the deck for a continued move higher.  No doubt we could see more red, retesting the 1400 consolidation, but I expect we’ll find support there and resume the low volatility climb higher.

No matter what anyone remembers from the good old days, there was never an easy time to invest in the market.  We remember where something started and where it finished, but seem to forget all the white knuckle zigs and zags in between.  Holding is never easy and we shouldn’t expect that here either.  The key to surviving these gyrations is to buy right and not chase.  The further away from the breakout you buy, the greater chance you have of getting shaken out in a normal and healthy pullback.

Now that is the bull case, since no one has a crystal ball and the market can throw off the best traders, lets build a plan B so we know what to look for if our original thesis starts breaking down.  We should see support at the recent 1400 consolidation.  Decisively breaking through this on volume demonstrates a high level of vulnerability to the recent rally.  At this point we should be unwinding our longs and looking for opportunities to short.  Don’t get overly aggressive at the first hints of a breakdown because often the market likes to throw in a head fake before resuming its previous trend.  And even if we do fall under 1400, the bull market is not dead, a pullback to the 50dma would not be an unreasonable thing for a bull rally to do.  But there is no reason to hold through that pullback.

S&P500 daily @ 2:36 EDT

INDIVIDUAL STOCKS

Everyone’s favorite stock AAPL is showing resilience after yesterday’s sell-off.  The thing about these favorite stocks is they go longer and further than anyone thinks possible.  AAPL cannot go up forever, but there is still gas in the tank.  I continue to be skeptical of AAPL’s long-term prospects as the most valuable company in the world because I see them dropping the ball to Android the same way they lost the PC battle to MSFT 20 years ago.  AAPL is a great and innovative company, but they don’t do well in the low-cost producer commodity markets.  How much more innovation can they push into phones and tablets?  The clones are on their heels and by some measures even out performing AAPL’s hardware. There will always be a place for AAPL’s marquee and premium products, but that isn’t enough to keep it the biggest company in the world. But that is then and this is now.  I’m a trader, not an investor, and clearly the momentum is behind AAPL and the stock has room to run with all the support for it.  But trade this stock, don’t fall in love with it.  As William O’Neil often says, “all stocks are bad…..unless they go up.”

HD is holding up nicely since its breakout out.  This stock has multiple tailwinds behind it, good earnings, housing recovery, and big money’s attraction to blue chip names in this economic environment.  What’s not to like?  This isn’t a 10x growth opportunity, but it could work for a nice trade if someone is scared of owning high-beta stocks like MLNX, KORS, or FRAN.

OTHER COMMENTARY

All the fear over the impending fiscal cliff is just noise.  Anyone who has followed politics knows even the most trivial decisions are pushed to the edge.  Brinkmanship is the name of the game in politics.  If you don’t push decisions to the deadline, you are doing something wrong.  This is negotiations 101, agree too early and you gave up too much.  Congress is nothing but one giant negotiation between the two parties and both sides will hold out until the last possible moment, trying to get a better deal for their constituents.  This is the way the game has always been played and to expect anything different now would be naive.  Quoting Churchill, “Democracy is the worst form of government except for all the others that have been tried.”  All this hype over the Fiscal Cliff is just trying to sell newspapers.

Stay safe

Market fades from 52-week high

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:12 EDT

MARKET SENTIMENT

Markets launched out of the gate this morning and the S&P500 made a new 52-week high in early trade.  Given our proximity to this key technical level, it is not surprising high frequency traders and market makers pushed the markets through this key level to trigger all the automatic stops from bears and the buying from breakout traders.  But as soon as the frenzy peaked, the market started a one way slide giving back all those gains.

There continues to be a large level of skepticism among market participants who are anticipating a correction because they feel these levels are unsustainable.  But these people are stubbornly trading opinion, not the markets.  The key thing for bears to remember is a trend is far more likely to continue than reverse.  Trends continue countless times, but only reverse once.  And lets not overlook the fact anything “obvious” in the markets is most often a head fake.  Bears are piling in to this obvious short today and that could very well lead to a short squeeze in the coming days.

Further, we need to think about what is going through the mind of big money managers who are under-weight this market as they watched their benchmarks race off without them over the last few months.  How much longer can they wait for the pullback before they are forced to start chasing?  Can they wait for a 5% pullback or will they start jumping in at -3%, -2%, or -1%.  Up to this point they bought anything that turned red, let alone dropped a full percent.  Will these desperate fund managers put a floor under today’s sell off?

The world is always a scary place, so we always need to take all the things the bears are shouting about with a grain of salt.  Anything that is widely known and expected is already priced in the market.  The things we need to fear are the ones no one is talking about.  With all they hype over Europe, employment, China, US economy, etc we can safely discount those risks because they are already accounted for.  Any bear who is shouting about these things is focused on yesterday’s news.  As savvy investors, we need to be on the lookout for tomorrow’s news.

MARKET BEHAVIOR

The markets are making new highs and continuing the bull trade higher.  No doubt today is a noteworthy reversal, but we can’t go up every day, so red days will happen here and there, but so far the trend remains intact.  Every time over the last couple months the market tried to sell-off, buyers steeped in to and supported prices.  The low volume rally is more indicative of weakness by bears than weakness in bulls.  Bears are throwing everything they have at this “over valued” and “over bought” market, yet they fail to budge the needle.  Sometimes a low volume rally is something to be skeptical of and other times it is should be embraced.  The price action so far clearly shows this low-volume rally should be embraced.

No doubt we could see a down day, or even a week-long sell-off, but money managers behind the eight-ball and lagging their benchmarks will be forced to buy every dip as they to try to catch up.  While today’s slide looks ugly and has bears beating their chest, we are still close to flat for the day.  We will see if this chasing performance by big money keeps this pullbacks fairly modest too.

TRADING OPPORTUNITIES

Many stocks are extended as they hit new highs and are a good ways above their pivot points.  Avoid chasing stocks more than 5% extended from their proper buy points.  Stocks often rally two steps forward, one back.  If you buy on that second step forward, you risk getting shaken out on the step back.  If a stock is extended, add it to your watch list and wait for a follow on buy point, either a pullback into buying range or a 50dma bounce.  Days like today help bring extended stocks back into buy range.  And never forget, profit opportunities are like city buses, miss one and another one will come by minutes later.   It is better to miss the bus than get hit by the bus.

URBN daily @ 2:13 EDT

INDIVIDUAL STOCKS

AAPL is selling off after its big headline day yesterday.  But that is expected and nothing to worry about yet.  The traders who get in trouble are the ones who try to analyze every single random move a stock makes.  A lot of buying happened yesterday and no doubt it is healthy for some selling to happen today.  Just another example of why you want to get in early and shouldn’t chase.  AAPL will peak, but today is not that day.

URBN is breaking out on earnings.  A lot of people think the stock is expensive, as shown by 11% shares held short, but the thing about expensive stocks is they tend to get more expensive.  No doubt a lot of today’s pop is a short squeeze, but sampling the views on StockTwits $URBN, there is still a lot of skepticism left in this name.  A good way to trade this breakout would be to watch it instead of rushing in.  Tomorrow you could buy it if it goes above today’s intraday high, or if it pulls back into the gap, a potential buy point is when it reclaims today’s intraday low.  This is a volatile name, so if you chose to trade it, make sure to employ prudent risk management between position size and stop-losses.

Stay safe

Apple is taking off

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:19 EDT

MARKET SENTIMENT

Indexes opened lower, but in bull markets stocks often open weak and finish strong.  That has been a common theme over the last month and we’ll see if it continues today.  The sell-off only declined half a percent in early trade, which is fairly trivial when compared to the volatility we lived through over the last few years.  If -0.5% is a bad day, I can live with that.  Not to say we can’t have larger sell-offs ahead of us, but it seems this market doesn’t want to sell-off more than that.  We trade the market we are given and this is the market we have.

There are a lot of comments floating around that the low ultra low VIX is indicating a lack of fear and over confidence by bulls, something often seen before a correction.  And while the VIX is extremely low, I don’t see the requisite overconfidence in the majority of market participants.  In fact, I think most are expecting a pullback and not fully committed to this rally, indicating the opposite of overconfidence.

$VIX daily @ 2:21 EDT

Remember, the VIX is a derivative of a derivative and each time you make an indicator from another indicator, key information is lost.  Math nerds know every time you take a derivative, you lose the constant and that is why when you try to reverse engineer the original equation (integrate), you have to add back in an unknown constant.  The only thing a low VIX actually tells us is option premiums are cheap.  The unknown is why options are cheap and we cannot determine that by looking at the VIX.  Options could be cheap because of overconfidence, but they could also be cheap because of low historic volatility.  Looking back at how the market’s character has changed from wide and loose to ultra-tight where intra-day ranges are under one percent, it is little wonder option premiums have come in a lot.  And lets not forget, bull rallies are accompanied by low volatility.  A low VIX doesn’t have to mean a reversal is imminent, it could be telling us that this bull rally still has gas in the tank.

No doubt the volatility will return and we will have a correction, but in the markets timing is everything.  Bears will be right……..eventually, but the overabundance of bears needs to work itself off before we will have the correction everyone is waiting for.  For the time being, I expect the market will head higher and the VIX will go lower much to the dismay of all the bears.

MARKET PERSONALITY

The tight trade and bullish trend continues.  Don’t let yourself be stuck trading this summer’s patterns because we have clearly moved beyond that pattern.  The market is trading tight with an upward bias and it will probably continue this way for a bit longer.  Only after the majority of bears and reluctant longs have bought into this rally will it be ready to top.  Remember the way to make money in the markets is to recognize trends early and then prepare to change gears once the trend has become obvious to everyone.

TRADING OPPORTUNITIES

Continue holding your longs.  The market is marching higher and pullbacks in individual names are trivial to non-existent.  It’s been a while since it has been this easy to hold stocks.  But lets not get greedy.  Set profit targets of 20-25% for most stocks and start looking for the exit when you find yourself daydreaming about what you are going to buy with all your stock market profits.

AAPL daily @ 2:20 EDT

INDIVIDUAL STOCKS

AAPL is the big story of the day, making fresh all-time highs.  The chart looks scary and is triggering a fear of heights in many traders, even hardcore AAPL bulls.  While the gut might be screaming too high, most often the gut is wrong in the markets.  Our brains are wired to protects us from lions and tigers, not stock crashes.  In fact the markets often move exactly opposite of our instinctive impulses.  Who hasn’t bought exactly when they should have sold?  Who can say they never been shaken out and watched the stock shoot higher without them?  Or worked up the confidence to buy only to top tick the move and see the stock come rushing down as if the market knew you were buying and was making it personal?

The truth is the market is agnostic and it could care less about any of us and is not intentionally out to hurt us.  It moves are entirely based on the emotions of the crowd.  The crowd is made up of individuals that react to feelings of fear, greed, hope, and despair.  We are all wired the same and most often react the same.  This is great attribute when trying to form a bond with other members of the tribe because our chances of survival are far greater when part of a group as opposed to being an outcast trying to defend yourself from all the scary predators in the wild. But these same herd instincts are going to get you killed in the financial markets.

Supply and demand dynamics work in such a way that the crowd is most often wrong.  This creates an inverse self-fulfilling prophecy because when crowd believes in something, most of the buying has already occurred and there is little buying left to keep pushing prices higher.  This is why crashes start when everyone is the most excited about a stock.

But when looking at the current AAPL trade, there is a healthy dose of skepticism in the market.  To see this, check out the various posts on StockTwits under AAPL’s feed.  There seems to be a lot of reluctance to buy this breakout, meaning there is still a lot of money available to bid up the price.  What we need to watch for is when the crowd becomes overconfident AAPL will continue higher, only then should you develop a fear of heights.  The best I can tell we are not there yet and there is still upside left in this name.

Of course it is obvious AAPL has come a long way and is widely held, so the best way to trade AAPL trade might be to ride this momentum higher and then cut out after a respectable 20% gain from the breakout.  At least that is the way I would play the name.  We could see a buy the rumor, sell the news into the iPhone 5 announcement in a few weeks, especially if the new phone doesn’t have some radical must have feature that stimulates a lot of upgrades.

Stay safe

Jump in, the water is fine.

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:48 EDT

MARKET SENTIMENT

Yesterday broke out to the upside with the biggest daily gain in a couple of weeks.  The recent tight trade and bearish sentiment setup for a nice upside move, but today’s price action returns to the flat, tight trade.  But this is actually supportive of yesterday’s gains because big money is not profit taking and cynical bears don’t have the strength to weight down yesterday’s rally.  We are a fraction off of multi-year highs and market makers pay their alimony and kids private school tuition by pushing markets through key technical levels and triggering a flurry of buying and stop-loss activity.  At this point, a new 52-week high and short squeeze is a given, although we could trade flat or slightly lower first.

Technicians need to be careful in markets like this because often overbought/oversold indicators or resistance/support levels can be misleading when the market is breaking out.  I don’t buy into indicators because it isn’t the indicators that have the money I’m after.  People have money and that’s why I am always watching other traders for clues about their attitudes, positions, and emotions.  Even the VIX at these low levels can be deceiving for traders who mistakenly grasp for some signal to tell them how to trade.  The key to being successful in this game is recognizing who your opponent is and then keying off of his moves, not some lagging, second or third derivative indicator of what he is doing.

Market participants continue to be cynical and skeptical of this rally and these high market levels.  And chances are the rally will continue until we have demoralized and humiliated all these stubborn bears.  At that point the bulls will be cocky and taunt their fallen adversaries, but their joy will be short-lived because that is when the market will reverse and take the knees out from under the arrogant bulls.  That’s just the way this game works.

MARKET BEHAVIOR

Yesterday was the biggest move in a couple of weeks, but it was still relatively modest as compared to daily moves we saw over the summer.  The tight, low volatility trade will continue and we could see another week of tight trade before the next leg higher.  This is the new personality of the market and what we should expect for a while.

The low volatility comes from the lack of buying and selling from big money.  Big money isn’t profit taking at these levels, but it is also reluctant commit new capital.  And that’s why we continue tight, sideways trade.  But with each inch higher, we put more pressure on money managers under-weight this market as they fall further behind their benchmarks.  Slowly the pressure will mount and these managers will be forced to chase the markets.  For market behavior what this chasing means is desperate managers will start buying any and every dip, putting a solid floor under the markets, preventing the market from pulling back much at all.  But at the same time, they will be waiting for pullbacks to buy, so there will also be muted upside moves.  This will lead to a quiet and smooth rally, inching higher, at least for the time being.  The character will change a bit as the managers waiting in vain for a bigger pullback get more desperate and have to bite the bullet and start plowing larger chunks of money into the markets fearing they will fall even further behind.

HD daily @ 1:49 EDT

TRADING OPPORTUNITIES

Same strategy as in the last 10 posts, find good stocks, buy them, and hold for a nice gain.  We don’t need to be as trigger happy when taking profits as we were over the summer.  Give your winners room to run and hold out for larger gains.

INDIVIDUAL STOCKS

FRAN and TDG are breaking out today.  KORS, GOOG, and HD are adding nicely to their earlier breakouts.  It seems like most everything is working and these are the environments that traders dream of.  Don’t let your fear of heights get in the way of making money.  The best buys are the hardest ones to make.  Jump in, the water is fine.

Creeping higher

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:37 EDT

MARKET SENTIMENT

Everyone is expecting either a pullback or a full on correction from these levels.  But the thing about contrarian trading is it is going against the crowd, not the price.  Too often people confuse contrarian trading as trading against a move that has “gone too far”.  The truth is contrarian trading has nothing to do with price and everything to do with the crowd.  If too many people think the market has “gone too far”, then there is still fuel in the tank and the contrarian trade is to stick with the trend.  And I think that is exactly where we are now.  Follow the gurus or discussion boards and you’ll hear tripple-top, pullback, shorting opportunity and all that kind of chatter.  It is hard to find a bull opinion amongst all the bearish noise, but that is why the market continues to creep higher.

Contrarian trade is simply supply and demand at work.  People trade their convictions.  If they are bearish, they have already established bearish positions.  People holding positions can no longer influence the market and are only along for the ride because only new trades move prices.  So if everyone is bearish and has already established their positions, that means there is no new selling left to drive prices lower and inevitably they start going higher.  The move higher will then accelerate as the bears are forced to unwind their short positions in a short squeeze.  And the market will continue even higher as bears capitulate and convert to bulls, forced to chase the market higher.

Even if the market does trade lower, all the already established bearish positions means there is not much gas left in the tank to sustain a move lower.  In fact, the bears will even support the market as they start taking profits by buying back their shorts.  This bearish profit taking will slow down any move lower.

There continues to be lots of talk about the low volume, but that is just big money’s reluctance to commit to this market, another bearish attitude.  As the market creeps higher, the pressure to keep up with their benchmarks will force big money to chase the market higher.  And because they are behind their benchmarks, they will have to trade aggressively to catch the market that left them behind.   This aggressive trading by big money could cause high beta stocks to surge, something to keep an eye on.

MARKET BEHAVIOR

Clearly the new personality is blander than bland.  About the only traders who can make money in this market are sellers of option premium.  Even day traders are frustrated by the super tight trade.  Obviously the swing trade is dead, but that doesn’t stop people from continuing to trade what worked this summer.  We are creatures of habit by nature and that is something we as traders need to overcome.  If something worked well for us before, we continue to go back to it even if it is no longer working.  To be successful, we need to recognize and trade the new personality, not get stuck trading what is no longer working.

TRADING OPPORTUNITIES

Based on market psychology, the best trade continues to be on the long side.  Volatility is so low that day trading and swing trading the indexes is futile.  The best trade is to buy the indexes or good quality large cap stocks and holding for an extended period of time.  But while large caps have dominated small caps recently, there is a good chance small caps will start to catch up, especially if money managers under-performing their benchmarks are forced to take on extra risk to make up ground.

We could see some ugly headlines, but the market seems to be ignoring them and further, the Europeans seem to be really quiet lately.  Maybe they are all on vacation and that explains the lack of news, but it really seems like all the different groups are getting on the same page and recognizing what needs to be done.  Compromise in politics is difficult, but I think the Europeans are finally balancing both austerity and growth concerns and needs of all the parties involved.

PETM daily @ 12:37 EDT

INDIVIDUAL STOCKS

PETM popped today and made a new high.  You could call it a flat base or a 50dma bounce.  Either is a valid entry point. HD is continuing to run.  KORS fell back to the gap, but has since reversed higher.  So far leading stocks are doing well.

It is funny to see AIG and TYC making the cut as high quality stocks by IBD’s metrics and showing up in the Stocks on the Move screen today.  I’m not sure I would call either high quality, but as WON says “All stocks are bad unless they go up.”  By that metric TYC with its 84 RS and AIG with its 92RS make the cut as good stocks.  Not that I am recommending either, but they are doing quite well and qualify as turnaround stories, a valid CAN SLIM trait.

Day eight

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:20 EDT

MARKET SENTIMENT

I could copy and paste any post over the last two weeks and put it here and every word would still apply to today’s market.  For the 8th straight day we’ve hovered around 1400 in tight trade.  Without a doubt this is a new personality for the markets coming after this summer’s volatility.  There is a large contingent of buyers willing to step in any time we drift closer to 1400 because we bounce back any time the market drifts lower.  The big question is if we will breakout to the upside before these 1400 buyers run out of money.

MARKET BEHAVIOR

The big thing everyone keeps talking about is the light volume, but is this a real concern?  Stalling or churn is bearish and happens when there is little price gain on heavy volume.  This is called churn because you have a large number of investors selling as indicated by the high volume and it is assumed smart money is selling to dumb money.  But the low volume we are seeing disqualifies the current trade from being traditional stalling or churn.  No doubt the drawn out trade over the last two weeks could accomplish the same thing if all the buying and selling at these levels is added up.

TRADING OPPORTUNITIES

Plan A:  The market continues to defy gravity, holding solid above 1400 in spite of all the bears and swing traders calling for, and positioning themselves for a pullback.  It is encouraging to see the market hold up against all the bear’s selling.  A solid break above this trading range will force bears to cover and send fear of falling behind into those sitting on cash.  At that point they will start chasing the market.   In my mind, all the cynics have coiled the spring to the upside pretty tight and it could lead to a strong move.  Not a huge one day gain, but a sustained one way rally that offers very few dips for laggards to catch up.

Plan B:  While the market is holding up well, the low volume and flat prices show investors are reluctant to commit new capital to this market.  If we don’t see the breakout and rally in Plan A, we could see the market drift lower.  But using the spring analogy, the downside spring is already unsprung, meaning most of the sellers have already sold in anticipation of the expected correction.  The bears have already used up most of their ammunition and there is little left in the tank to push the market down.  In fact, buying from bears’ profit taking will actually provide a good level of support if we do start declining and that buying will make it a far more gentile sell off.  Using the spring analogy, clearly the advantage and risk/reward is to the upside.

HD daily @ 1:20 EDT

INDIVIDUAL STOCKS

HD and KORS are showing good support after yesterday’s breakout.  HD is riding the big-cap and housing recovery boom.  KORS is the next hot thing in women’s fashion.  Both of these could have room to run.  Being a big-cap and established name, HD has a lot less room to run upside potential than a recent IPO like KORS.  An aggressive investor might up his position size on a name like HD to maintain a similar risk/reward profile as compared to smaller growth stocks.

Stay safe

Indexes break above trading range

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:49 EDT

MARKET SENTIMENT

Markets poked their head above the recent consolidation.  No doubt this is getting the attention of those expecting a pullback and are either out of the market or short.  Fear of being left behind is a very real thing, especially for a fund manager whose performance is already lagging the indexes this year.  The market is ruthless that way and it is shaping up to be a very bad year for many money managers as they completely mistimed these major market moves.

The interesting thing from looking at a chart is noting how far we are above the moving averages and near 52-week highs.  This leads many technicians to assume the market is extended and likely to correct.  Then you add in the fundamentalists who are reading all the bearish headlines and predicting doom-and-gloom.  Heck, just a few weeks ago I fell into that trap too.  But the mistake I made was thinking about what the market should do, not what it was doing.  In the markets it is OK to be wrong, but it is fatal to stay wrong.  The market wasn’t doing what I expected, so that forced me to reevaluate my position.  This critical introspection allowed me to realize I got sucked into the wrong position and I was able to correct it in a timely manner.  Recognizing your mistakes early is the key to minimizing losses and profiting from the new trend.

MARKET BEHAVIOR

We are making new highs relative to the consolidation and pushing up against 52-week highs.  This slow and steady climb is not something we’ve seen out of the markets since the first quarter and is a departure from the summer chop.  The market never goes straight up, so we should expect some dips here and there, but so far the trend is clearly higher until further notice.  The volatility has also dropped off dramatically, making it easier for position traders to hold on for larger gains.

TRADING OPPORTUNITIES

Just when everyone was becoming most frustrated with the market is when it finally turns around and becomes a great time to invest.  The key to successful contrarian investing is knowing when to go with the trend and when to go against it.  Right now the contrarian trade is with the market because everyone else is so cynical.  In a few weeks or months when everyone comes around to this rally is when we need to be looking for the exits.  A critical nuance in contrarian trading is recognizing you are going against the crowd, not the trend.  This is a important distinction missed by a lot of people who think of them selves as contrarians when they short something that has gone up too much.   The successful contrarian trades against the other market participants, not against price moves.  Always remember that.

KORS daily @ 12:51 EDT

INDIVIDUAL STOCKS

KORS is making a huge move today, up 14% on strong earnings.  It would be a stretch to label the recent consolidation as a valid base pattern.  It could be a 50dma bounce, although the typical 50dma bounce happens when the 50dma is sloping higher and the stock is experiencing a temporary correction.  But nothing in the markets follows the textbook, so as traders we need to decide what flaws and defects we can live with.

HD, GOOG, and AAPL are also having good days and worth a look.

Stay safe

Another day of sideways trade

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Markets are stuck again at the 1400 level and struggling to make a move either direction.  This is making for boring blogging because there is nothing new and insightful to report.  We continue to show support at these levels simply because the previous pattern was to sell-off after a run up and we have instead been holding steady.

Institutional buyers are not buying, but they are not selling either.  They are comfortable with their current potions and are not looking to take profits as they would if they expected the markets to head lower from here.  But they are also reluctant to commit new capital to these markets.  Cautiously optimistic is how you might interpret this price action.

The lack of a sell-off as we dipped under 1400 this morning also shows bears are unable to mount a meaningful assault on this rally.  But the thing about the market is it will fall under its own weight if there is not follow on buying soon.  People only buy something when they think it will go up, but they can sell for any number of reasons other than thinking the stock will go down.  A pension fund will sell assets to finance its monthly obligations to retirees or a fund will re-balance part of its portfolio that has had a good quarter to get back into balance with its stated ratios.  This asymmetrical motivations between buying and selling is why stocks will tend to drift lower when nothing else is going on. The challenge for this market is finding a reason to rally after staying flat for the last week.  If we can’t find a reason to breakout, we should expect the market to drift lower for these reasons.

S&P500 daily @ 2:38 EDT

MARKET BEHAVIOR

The last time we saw 6 days of tight, sideways trade was at the end of April, which coincidentally (or not) was also at the 1400 level.  The ominous thing about this comparison is this price action indicated a stall before falling 100 points.  Will we see the same thing here, or will the third assault on 1400 be the charm?

TRADING OPPORTUNITIES

It seems the market has gotten numb to all the negative headlines the bears are shouting about, China slowdown, US recession, Euro collapse, etc.  But since everyone, even non-traders has heard these headlines, they are already fully priced in the market.  We can safely ignore everything in the media; what we need to fear and trade is the news no one is talking about yet.  Maybe that is trading a US and global recover from the long side.  Or trading the global markets will implode 2008-style from the short side.

The lack of bulls makes the contrarian in me favor the upside, but this is nothing more than a game of probabilities because there can never be certainty about the future.  There is always a risk of being wrong and losing money, but the goal is not to always be right, but to make more money than we lose by being disciplined in the way we trade.  Combining unique market insight with savvy money management is the best way to come out ahead over the long-run.

A 5th straight day of tight trade around 1400

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:40 EDT

MARKET SENTIMENT

The S&P500 continues to flirt with the 1400 level for the 5th day.  We are not selling off, but we are not surging either.  It seems we have a staring contest between the bulls and bears to see who blinks first.  But the lack of a sell-off from these elevated levels is far more encouraging than the lack of follow on breakout buying is concerning.   It is far easier for the market to fall than it is to climb.  So holding a key level is in fact bullish, especially in the face of all this skepticism.

MARKET BEHAVIOR

This tight sideways trade is not something we’ve seen out of the indexes in quite some time.  We’ve had very small intraday ranges and even tighter closes.  Chances are this is building to something and we’ll probably see a 1%+ move out of this when we get a headline that excites traders either up or down.  An upside move will put pressure on the bears to change their minds or at the very least cover the shorts they’ve laid down the last several days.

TRADING OPPORTUNITIES

With the market hardly budging the last week, there is not much new to add.  This stability supports the bull case and gives us the green light to buy CAN SLIM stocks.

There is always risk in the markets no matter how well things set up, so we need be mindful of our risk and stick with our stop-loss plans just in case the markets get caught off guard by an unexpected headline.

All of the above analysis is getting fairly redundant because we haven’t seen anything new from the markets in the last several days, but that quiet trade continues to support and reinforce the previous bullish analysis.  Maybe next week we’ll see the upside breakout and the surge from short covering and chasing.

Stay safe and have a good weekend

New leaders emerge, old leaders fade

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:24 EDT

MARKET SENTIMENT

Stocks are holding around the 1400 level and volume continues to be below average.  But while many will say low volume shows a lack of buying by institutional investors, the thing to remember is buying and selling is symmetrical, ie for every buyer you must have a seller.  Using that logic, we can flip the previous statement on its head and say that the low volume also indicates not many institutions are interested in selling at these levels either.  The lack of selling at these high levels means holders of stocks are not cashing in.  The low volume also shows bears and swing trades have exhausted themselves because they have nothing left to sell and are unable to lean on the market.  So while many are leery of the light volume, I think it is very bullish.

MARKET BEHAVIOR

This tight trade after a rally is uncharacteristic of previous pullbacks that corrected rather abruptly once they ran out of buyers.  The 1400 price level is holding up well even when buying is slowing down, as indicated by low volume.  Again another change in character from this summer’s pattern.  All this indicates to me we are leaving the volatile swing trading and moving on to something else, so trading strategies that worked over the summer won’t work going into the fall.

TRADING OPPORTUNITIES

The market is holding up nicely and everything is indicating it is safe to buy high quality CAN SLIM stocks breaking out of proper bases.  There are several breakouts in today’s Stocks on the Move section of Investors.com.  Many of these are smaller and unfamiliar names.  Always do your background research before blindly buying a breakout just because it has a high composite rating from IBD.

MNST daily @ 2:26 EDT

INDIVIDUAL STOCKS

While we are seeing a lot of new names pop up in IBD’s screens, we are also seeing some of the old favorites stumble.  PCLN yesterday, MNST today, LULU this summer.  These old leaders are showing cracks and for many former leaders, these cracks will turn fatal.  We need to be looking out for the next leaders, not chasing the old ones.  Remember WON’s quote, “All stocks are bad unless they go up.”  Don’t let a cheap price or an attractive pullback tempt you into jumping in an old and tired leader.  IBD’s research show the average leaders correct 73% after their run is over, meaning there is a lot more room on the downside no matter how cheap they seem.  A few of these leaders will recover, but wait for the company to form a new base and have a valid breakout before buying.  As I said yesterday, a pullback because of a downgrade can bounce back pretty quickly, but slowing fundamentals is far more terminal for a high P/E stock.

Stay safe

Stock testing 1400

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The S&P500 briefly dipped under the 1400 level as doubters and swing traders challenged yesterday’s breakout.  Given all the cynicism and how little the bears were able dent the rally demonstrates bulls are firmly in control at this point.  Even though bears make up the majority, they have exhausted all their resources fighting this rally and are helpless to stop it.  Little by little the bears will give up, admit defeat, and change sides.  Their buying will add to the rally and the higher it goes, the more pressure there will be on the remaining bears to change sides.

No doubt there could be an unexpected headline that turns the market on its head, but with everything we know and what is expected and feared out of employment, economy, China, and Europe, the trend is clearly higher no matter how dire the world seems to the fundamentalists.  We trade the market we are given and this one is inclined to go higher.  And we should trade it from the long side until everyone has become bullish, at which point we cash in and go short.

MARKET BEHAVIOR

Today’s price action supports yesterday’s breakout.  No doubt we could see a pullback into the trading range, but it seems like the market has broken from the summers trading range and we should not see a retracement back to the lower trend line.  If we do head back to the lower trend line, that would indicate this breakout has failed and we should anticipate breaking through the lower trend line and continuing materially lower.

The interesting thing to watch for is the new personality the market adopts going into the fall.  With the bullishness seen in the charts, we could see a nice rally as all the bears end up chasing the market and are forced to buy every dip.  Their buying of the dips will keep any pullback modest and make it easy to hold stocks.

TRADING OPPORTUNITIES

Plan A:  Buy this breakout and there are lots of high quality stocks to choose from.  But be careful and don’t chase a stock that is already extended from a proper buy point.  There will be some volatility as we try to hold this breakout and try for a new 52-week high.  Skeptics and swing traders will shoot against the breakout and they could have some temporary success holding down the markets.  Given growth stocks will react two to three times as much as the indexes, buying an extended stock could lead to a shakeout if the market pulls back.  Most winning stocks won’t correct more than 5% from its proper buy-point, but if you buy the stock more than 5% from the proper buy poiont you can easily get shaken out on a very normal and healthy test of the breakout.  Remember half of all breakouts test the buy point and we need to buy right so we can sit through that.

Plan B:  A modest dip under 1400 is expected, but if the bears are really as weak as they seem, the market will reverse higher rather quickly.  But if the slide continues deeper, we need to reevaluate our position because the bears are stronger than expected and it also shows bulls lack conviction to hold.  Breaking the mid-point of the trading range will be a key benchmark to watch for.

INDIVIDUAL STOCKS

PCLN is getting crushed today.  It is one thing to have a high-flier pullback due to a downgrade or skepticism.  Professional opinions are no more reliable than amateur ones when it comes to near-term price moves and often the more bearish the pros are, the more upside potential .  But when a company starts reporting real slowdowns in business, that is something an investor cannot ignore.  Opinion is opinion, but fact is fact.  Maybe this is just a single bad quarter for PCLN and they’ll bounce back next quarter, but it could also signal a fundamental shift in growth trends and that can absolutely crush a high P/E stock whose valuation is based entirely on huge growth expectations.  PCLN has had a huge run, but most of these stocks come back down to earth eventually and maybe this could be PCLN’s turn.

PCLN could sell off for a few days, but most of these sell offs don’t go straight down.  They’ll sell off hard, but then rebound and look like they are recovering.  It could even retake the 50dma, but if the stock really is broken, that would be a great opportunity time to place a short.

Or this could just be temporary growing pains and PCLN is forming another base that will eventually breakout to new highs in a few months.  But don’t buy until you get a legitimate breakout.  Bottom fishing and hoping for a recovery is not a high probability trading strategy.  If growth really is slowing, that could cut the P/E and thus the price in half, meaning there could be a lot more room on the downside.

Stay safe

Cleared 1400

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:38 EDT

MARKET SENTIMENT

After some reluctance yesterday, the market finally reclaimed the 1400 level.  There is more psychological significance to this round number than anything else, but since the market is all about what other traders think, it is just as important as any other technical level.  Back in the spring the rally stalled out after hitting the 1400 level in March and late April.  But the market often works in forward steps and retracements; ie two steps forward, one step back.  If that is the case here, then we have the opportunity to hold and then move past 1400.

The low volume continues to show a lack of support by major players, but if these big money guys are wrong, their performance will suffer and they will have to chase the market this Fall.  This desperation to catch the market will lead to big money buying regardless of price or fundamentals.  Remember, the market tries to humiliate the greatest number of traders at any given time.  With the abundance of bearishness and skepticism, it is little wonder why the market is rallying.

The reason the market moves opposite of the crowd is because the crowd has already made their move, either buying or selling, and are now simply along for the ride.  All the bears are out of the market, or short, and if all their selling couldn’t push the market lower, then there is good support and it will rally once the bears have completed all their selling.  And that is what we are seeing here.  The bears and swing traders have leaned on this market with all their strength to no avail.  So even though bears out number bulls, the bears are exhausted and have little left continue the fight.

MARKET BEHAVIOR

Today’s rally above 1400 is pushing us through the upper end of the summer trading channel.  This is showing another break of pattern.  There have been a number of hints at a changing character, meaning we need to keep our eyes peeled for what comes next.  The best way to profit in the market is to identify and trade new trends early while they still work.  It is too early to identify a new pattern because we are in the middle of the transition, but we can use sentiment and history to guess at what is ahead.

Summer is typically listless and we get more directional moves in the Fall as all the senior traders come back from vacation and get serious about meeting year-end performance benchmarks.  And lets not forget Fall is a popular time for major market sell-offs.  At this point we could go either way, but we should expect some movement out of this trading channel.   This should be good news for most breakout traders who have been getting jerked around by this summers volatility.

TRADING OPPORTUNITIES

The best opportunities continue being on the long side as many leading stocks are breaking out or finishing their bases.  We are still late in a bull market so don’t be expecting everything to double and triple.  Most of the time take your 20% gain and move on except in the most rare of circumstances where a stock is showing exceptional strength.  If we see a rally, it will probably peter out late in the year after the election and Euro stabilization are priced in.  Remember, bulls make money, bears make money, and pigs get slaughtered.  We’re in this to make money, so always be prepared to take your worthwhile profits.

Stay safe

Market holds up

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The stock market held Friday’s big gains, all-be-it in lower volume.  Lower volume will scare off a lot of investors because they think it shows lack of commitment by institutional buyers.  But if people remember, we saw the same thing last fall and that lead to the phenomenal “light volume” rally.  Like anything else in the stock market, the volume rule is only right about 1/2 the time.

The reason any stock market rule is only right 1/2 the time is because if it were more reliable than that, some savvy hedge fund manager would make an absolute killing arbitraging it.  He would buy high-volume breakouts and short just as many low-volume ones.  This means he is long just as much as he is short, so his net market exposure is zero.  The market goes down he loses on his longs, but makes it back on his shorts.  Same applies if the market goes up.  In theory if his broad market exposure is zero, then his risk is zero.  But where he makes his money is the performance difference between the high-volume breakouts and low-volume breakouts.  If high volume breakouts really did perform better than low volume breakouts, then he would make lots of money with this strategy with very low risk.  Now maybe it is just me, but trading breakouts with zero risk sounds too good to be true, and that’s because it is.  Now don’t get me wrong, there are legitimate arbitrage opportunities in the market that have very little risk, but they are few and far between, and trading volume is not one of them.

That was a very long way of saying low-volume can be a warning sign some times and other times it can be encouraging.  In today’s environment I actually find this low volume encouraging because indicates bearishness by big money.  Their reluctance to buy at these levels is setting up a situation where money managers will yet again find themselves behind the curve if this market continues to rise.  And just like last year, they will get panicked and start chasing the market higher if it doesn’t pullback like they are anticipating.  Their pain becomes your gain.

S&P500 daily @ end of day

MARKET BEHAVIOR

Our most recent pullback did not come back to the lower channel line before rebounding, showing the bears losing even more control than they had in the previous failed attempts to push the market lower.  The series of higher-lows and now the quicker reversal show the bulls clearly have the upper hand.  Chances are this is indicating a move to a new character for the markets.  I expect we’ll probably get away from this choppiness and that will make it easier to hold stocks without getting shaken out.  We probably won’t see a powerful rally like we saw in Q1, but a gentle run up into the election will be nice.

The interesting thing to note is market is up over 10% for the year, not something you’d expect if you were simply reading headlines and sampling investor sentiment.  As long as investors remain reluctant to buy this market, we’ll continue to have plenty of fuel to push this market higher.

TRADING OPPORTUNITIES

Plan A:  It should get easier to hold stocks for larger gains.  Over the last few months the best trade was cashing in any gains as soon as you made them because they were likely to disappear within a few days.  But this choppiness should be easing and holds of multiple weeks should be possible and profitable.

Many of the former leaders are struggling, so look for leadership in new names.  Maybe those old names will come back a little further along in the rally, or maybe it is time for new leadership.  Let the price action be your guide and buy what is hot, not what was hot.

Plan B:  The market continues to be vulnerable to a major complication out of Europe since we are within 2% of a 52-week high.  But don’t confuse major complication with the typical bickering and threats of doom-and-gloom that the market has grown immune to.  Major complication would be something like a PIIGS nation actually refusing to service its debt.  If something happens that is dramatically worse than what the market is expecting, that could crater prices in a hurry and we should be prepared to cut bait quickly.  In a situation like that don’t be tempted to play that “lets see if stocks come back tomorrow” game.

Stay safe