Aug 15

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

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.