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.
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.
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.
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.
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.