Markets give up early gains, again

By Jani Ziedins | Intraday Analysis

Oct 02

Markets gave up early gains again, but are still holding key technical levels.  Assume the market is still in a rally until there are more clear signs it is breaking down and losing support.  Resist the temptation to short this ‘obviously overpriced’ market.

S&P500 daily @ 3:17 EDT

MARKET BEHAVIOR

The indexes retreated from early highs for the second day in a row.  Traditionally this is seen as a weakness, but if we look at where we are, the markets are still well within the established up-trend.  They are above the 50dma and 200dma, both moving averages are trending higher, and the market is still above the lower trend-line established in June.  There are obvious signs of indecision, but the rally has not violated key levels yet, so pronouncements of this rally’s death are premature.

One thing to remember is market tops generally rollover and rarely start with violent plunges.  These rounded-tops, double-tops, and head-and-shoulder patterns give traders time to get out.  This idea is especially critical for anyone tempted to short this market.  There is a fair amount of churn before a rally kicks-the-bucket, so it is better to be a little late than a little early.  Even if this market is topping, I wouldn’t be surprised to see it make new highs before rolling over.

MARKET SENTIMENT

Shorts are leaning on the market, buyers are reluctant to buy, and we are seeing some holders start selling.  Captain Obvious would say the market will either move up or down, and he’s right.

Without support from new buyers, the market will drift lower under its own weight.  Much of the bad news regarding Europe, US, and Asia is already priced in, same for an Obama win.  This means none of these things will lead to a market crash, but a broad reluctance to buy because of these reasons could trigger an intermediate dip.

On the other side, shorts, nervous sellers, and reluctant buyers are building the excess fuel necessary for the next push higher.   We have employment this Friday and that could send the market sharply higher, continuing the pattern of modest corrections followed by huge surges.  To this point employment has been a win-win.  Strong numbers mean the economy is recovering; weak numbers encourage more easy money from the Fed.  There always has to be a bear case for the markets to go down, and with employment that might be simply hitting the numbers.  That’s too low to show meaningful economic growth, yet not bad enough to trigger another large wave of quantitative easing.

In Q1 and Q3 of this year, sentiment was overly bearish and the easy trade was owning stocks.  Q2 corrected because making money on the long side became too easy and the chasers overcrowded the trade.  While we are at similar price levels, I don’t feel that same boundless optimism present back in March.  Investors remain cautious and paranoid of the headline risk.  This reluctance is what provides an ample supply of new buyers ready to push the market higher, and why I think there is still some upside left before the market finally tops.

TRADING OPPORTUNITIES

The market is far less skewed between bulls and bears then it was just a couple of months ago.  The rally is in later stages of the game and the probabilities of a continued rally are not as strong.  The high probability trade continues to be on the long side because of the widespread caution, reluctance, and bearishness, but the advantage is shrinking to the point where bears finally have a legitimate shot at breaking the market.  If one did a qualitative survey of the headlines and sentiment in the financial press and traders around them, it still feels like there is more cautiousness than boundless optimism and that is why I’ll stick with the long trade up to the point where it becomes overcrowded and I’ll look to go the other way.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL found high volume support at its 50dma after a modest post iPhone5 selloff.  Seems the sales were in line with expectation and is why the stock has been selling off a tad after the excitement and hype has died off.  Next big catalysts are 3rd quarter earnings, mini-iPad, and strong holiday season.  Can this thing keep rallying like it was a small-cap, or will its size and wide ownership finally slow the stock down?  Given how hard it is to find an AAPL bear, the end could be closer than most think.  And of course the end doesn’t have to be a crash or even a selloff, it could just turn into a sideways trade.

Stay safe

 

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.