Monthly Archives: November 2012

PM: Fiscal Cliff worries behind us?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Stocks were flat on the last trading day of the month.  The 50dma is providing overhead resistance and breaking through this level should be met with skepticism.  We’ve come a long way and it wouldn’t be surprising to see the market pullback some.

MARKET BEHAVIOR

Stocks entered a holding pattern on the last day of the month.  We ended virtually unchanged on higher volume as portfolio managers adjusted their positions for month-end.  The last 10-minutes provided some excitement as the market surged higher, trying to breakout, only to give back most of those gains in the final 5-minutes.  Portfolio managers and index funds make their trades in the final minutes of the day and their jockeying made for those last-minute fireworks.

MARKET SENTIMENT

Technically we are still under the 50dma and it is providing overhead resistance.  The 50dma is a widely followed technical indicator and breaking through could trigger a wave of short-covering and breakout buying since many traders follow the same technical trading philosophy.  But given how far we’ve come, I would be suspicious of any breakout rally and recommend waiting  a couple of days to confirm it is the real thing.

Sentiment wise it seems like a lot of the fear of the Fiscal Cliff has evaporated.  A couple of weeks ago the market was selling off as politicians extended olive branches to each other, and now we are rallying as they use press conferences to throw barbs at each other.  A bit odd if you ask me, but that is standard operating procedure for the markets.

The market often looks ahead six months or more and could have already discounted the Fiscal Cliff .  Or the market could be sucking in the last of the momentum buyers before the rally fizzles and reverses lower.  While most of the market might cognitively acknowledge the Fiscal Cliff will eventually be resolved, the fear of the unknown can overpower rational thought and herd instinct compounds these impulses.  As humans we fear risk about 2.5 times more than a similar reward and this is why the stock market sells first and asks questions later.

TRADING OPPORTUNITIES

Are we on the verge of something like we saw in the summer of 2010 and again this summer?  I don’t think so because those two cases started from a level of high complacency after big rallies.  We have sold off since September and sentiment is already fairly low.  The market could get spooked by a bad headline out of Washington, but it should find a floor fairly quickly.  We could easily break the 200dma again and even challenge the recent 1343 low.  But don’t count on going lower than that.

Another scenario is pessimism is already elevated and the Fiscal Cliff worries over the last couple weeks scared off all the emotional traders, meaning there are very few sellers left to spook out of the market.  In that case we could continue rallying into the end of the year.

The easy trade is if market plunges on Monday.  The harder read is if we pop above the 50dma.  That could be the last gasp of this rally, or it could be a continuation move and  the rally resumes.  Short-squeezes are very short-lived phenomena and within a couple of days we’ll know if a break above the 50dma is going to stick.  If it can’t hold, expect a selloff through the 200dma.  If the breakout sticks, the market doesn’t want to sell off and the smart trade is buying and holding on.

INDIVIDUAL STOCKS

Surprisingly AAPL was left out of the broad markets recovery today and it finished off 0.7%.  Under normal circumstances this would be a red flag, but we might give AAPL the benefit of the doubt today simply because it is the most widely held stock and month-end window-dressing could be part of today’s weakness.  AAPL has rallied a good ways from the November 16th low and broad market weakness could push the stock down again.  Hold off buying AAPL for the time being because you might get a better opportunity over the next couple weeks.

How did I do?

SCORECARD

Looking back at recent calls from CrackedMarket:

November 26th, 2012  “The trend is lower and the trend is more likely to continue than reverse, so we should plan for further weakness.  But at the same time, bears are getting pretty aggressive and we might see a short-squeeze thrown in before heading lower just to keep things entertaining.  The market doesn’t like to be predictable and a short-squeeze before plunging lower would zing both sides and humiliate everyone equally.

At this point I am looking for a plunge lower on gigantic volume to signal this correction is bottoming.  I would be reluctant to buy a rebound from this level without a huge selloff.  Lacking that, the rally won’t have the ammunition and sentiment necessary to sustain a move higher.  The market rises on fear and we need to scare everyone to get this rally going.  The only exception I would consider is if the market traded strong for four or more days.  I could get on board with that kind of strength, but that rally wouldn’t have the same upside potential as a market that had a decisive shakeout.”

Stay safe

AM: Looking for direction

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:36 EST

Markets trading sideways today as the market is looking for direction.  The recent rally used up a lot of the bull’s ammunition and we should be on the lookout for reinvigorated bears to take back some of those gains.

MARKET BEHAVIOR

Stocks are trading modestly lower this morning.  There is not any big new and the market is digesting recent gains.

MARKET SENTIMENT

We’ve come a long way from the panic driven selloff to 1350 where everyone expected the world to implode between Obama’s reelection and the impending Fiscal Plunge.  In a couple weeks we went from the world ending to everything is going to work itself out just fine.  Funny how bipolar the markets can be.  While most people are frustrated with this behavior, the savvy trader exploits these emotions for quick profits.

Right now the market is approaching complacency, anticipating the two parties will work this deal out.  It is also assuming a plunge off the Fiscal Cliff might not be such a scary thing because the ‘Cliff’ really is a gentle bunny-hill that takes a full year to fall down.  The thinking is that even if we fall off the cliff, there will be plenty of time to continue negotiations and retroactively unwind the any tax and spending implications.

And while that analysis is spot on, it assumes the market will be perfectly rational when the financial press starts screaming we are about to fall off the cliff.  What we have here isn’t a serious structural problem, but a one of irrational fear.  And that is exactly what I am hoping for.  It is impossible to consistently make money off of a rational and efficient market, we need emotional market cracks to exploit and the a breakdown in talks between Democrats and Republicans will do that.

Last week the two parties were open to compromise, but that was an unspecified compromise.  Now that both sides are getting into actual numbers, they are realizing just how far apart they really are and neither side is willing to compromise enough to meet the other side.  It will happen eventually, I have no doubt about that, but each side is going to follow the negotiation handbook first and that includes making unreasonable demands and walking away.  We are on the verge of this unreasonable demands and walking away part and that will no doubt spook the market, letting the air out of this optimistic rally.

TRADING OPPORTUNITIES

It is a given these negotiations will blow up at some point, the question is when.  Will it be this weekend?  Will it be closer to the deadline?  Or are both sides so sensitive and considerate of the stock market that they will work together and push through a deal without all the bickering.  Ha, ya right!

There is some sizable downside risk in the near-term for the trader, but for the investor this will just  be a blip it should be easy to hold through.

The experienced and savvy trader can look for a good shorting entry point.  There is risk of one more short squeeze if we push through the 50dma on more conciliatory talks out of Washington.  On the other side there is the profit potential of a 30+ point slide lower as talks breakdown. At this point it is up to the individual trader to decide how much risk they are willing to accept and if they want to get in early or take the safer route and get in a little late.

For the investor, get your wish-list out and wait for the inevitable breakdown and let prices fall to more attractive levels.

INDIVIDUAL STOCKS

Everyone’s favorite AAPL is feeling the broad market’s weakness but at a rate 3.5x the market, down 0.7% to the markets 0.2%.  AAPL is surprisingly volatile for the most valuable company in the world.  Given the high-beta trade of AAPL, it no longer makes for a safe-haven in turbulent markets and wary investors should look for other places to hide their cash.  But beta cuts both ways and AAPL will be an attractive buy when the market bounces back.

How did I do?

SCORECARD

Looking back at past ideas and commentary from CrackedMarket:

November 1st, 2012  “Last week I mentioned the best way to humiliate everyone would be to trigger a short-squeeze before turning lower and falling under 1400.  We are halfway there with today’s short-squeeze.”

Stay safe

PM: Buy or sell the breakout?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets notched a new high for the rally as we approached the 50dma.  Bears are becoming an endangered species as the bulls continue running them off.  But one of the more powerful paradoxes in the markets is the smaller a group gets, the stronger they become.  Expect the remaining bears to make themselves herd in coming days.

MARKET BEHAVIOR

The market finally cleared 1410 and rose to the 50dma before settling back to 1415.  Volume was average and the masses were not rushing to buy this breakout.

Boehner caused a dip in early trade during a press conference when he said the sides were not close to a deal.    Stocks have come a long way in a couple of weeks as optimism of an imminent deal boiled over, but is this time for the pendulum of sentiment to swing back the other way?

MARKET SENTIMENT

Stocks have been rallying nonstop regardless of the news.  Bad news might cause stocks to sell off momentarily, but within an hour they rally back.  That’s what happened with Reed’s comments a couple of days ago and Boehner’s comments today.  This is a Teflon market as it shakes off anything and everything.  Does that make it a safe time to buy, or is the perceived safety making it even more dangerous?

Bears have gotten chased out for the umpteenth time and are starting to get discouraged.  Markets will often feign a reversal a couple of times before actually going through with it.  Given the recent whipsaws, we are getting close to that real reversal.  Many of the buyers have bought and most of the shorts have been squeezed out.  Without a new catalyst, we will run out of buyers shortly.  There might be enough gas in the tank for one push higher through the 50dma, but don’t expect our politicians to pretend to get along for much longer.

TRADING OPPORTUNITIES

Maybe we’ll poke our head above the 50dma tomorrow, or maybe we’ll finally breakdown.  There has been a lot of hope built in to this rally that the Fiscal Cliff will be resolved early.  But this is nothing more than wishful thinking, as anyone who regularly follows national politics will tell you.  These negotiations will get far worse before they get better and the rhetoric will only get louder as both sides try to court public opinion.

This is a good time to lighten up on stocks because not much upside remains without a definitive Fiscal Cliff deal.  At the same time there is plenty of downside risk if talks breakdown.  Friday might be a good day to try out a short because the weekend will give extra time for some politician to stick his foot in his mouth and wreck the fragile hope something constructive will come out of Washington.

INDIVIDUAL STOCKS

AAPL is riding along on the Fiscal Cliff rollercoaster like everything else in the market, albeit with a little more beta.  There is hope AAPL will declare a special dividend because of the impending tax changes, but I wouldn’t hold my breath on that one.

How did I do?

SCORECARD

This segment recaps past blog posts to see how I did.

November 5^th, 2012 “Given the pervasive hope for a Romney win, especially among retail traders bamboozled by the media, creates an opportunity for a trade.  We could easily see a selloff after an Obama reelection if emotional traders dump shares due to an irrational expectation Obama will wreck this country.  That selling will climax quickly and create a great entry point for the trader who understands politics, how the markets work, and supply and demand.  Within a couple of days everyone who wants to pull their money out of equities because of Obama’s win will have done so, meaning all the sellers have sold.  At that point supply dries up and the market rallies.”

Stay safe

AM: Rally extends to the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:55 EST

AM Update

Bears tried again to break this market but this rally is stronger than most expect.  But don’t let this support lull us into complacency.  Each failed breakdown brings us one step closer to the one that sticks.  As an added bonus, at the end of this post I highlighted some of my analysis from a couple weeks ago.

MARKET BEHAVIOR

Markets opened higher and traded up to the 50dma.  Then Boehner held a press conference, spooking the market and it gave back all those gains in a matter of seconds.  But like we’ve seen over the last couple weeks, the market bounced back from the initial knee-jerk reaction.

As seen from recent price action, the market remains emotional and we should anticipate elevated volatility in the coming weeks. But this is a good thing; a perfectly rational market is an efficient market.  It is these emotional swings that present us with the best profit opportunities.  Other people’s pain is our gain.

MARKET SENTIMENT

I hear a lot of traders complain that politicians are driving this market.  But the truth is only supply and demand can move markets.  Politicians are not moving markets, emotional traders hanging on every utterance in DC is what is causing these wild swings. If traders don’t like how the market is behaving, they only have to go as far as the closest mirror to see exactly who is responsible.

A couple of days ago it was Reed’s fault the market sold off.  Today it was Boehner’s.  The truth is it doesn’t matter.  Bears were looking for an excuse to lean into the market, the got it, and they tried their hardest to break this market.  But much to their disappointment, no one else followed their lead and the market bounced back.

But with each failed breakdown, we are that much closer to the one that will really work.  So rather than grow increasingly complacent with each rebound, we need to grow more suspicious.

TRADING OPPORTUNITIES

Lighten up long positions and get ready for the short that is getting closer by the day.

INDIVIDUAL STOCKS

AAPL is holding up nicely along side the broad markets.  The nonstop selloff has been abated, but it needs to rally a few dollars more to retake the widely watched 200dma.  But at this point the ‘death-cross’ is all but inevitable as the 50dma is quickly racing toward the 200dma.  While a lot of people will make not of this, it is a trailing indicator and it is really late to this party.  More than a selling signal, any weakness on the ‘death-cross’ could be a buying opportunity.

How did I do?

SCORECARD

I’ve been sharing a lot of ideas on this blog and I want to start this scorecard feature to highlight my successes and failures.

Nov 15^th 2012  “The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers has already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.”

Stay safe

PM: Tough day for bears

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Bears got taken to the woodshed today were bloodied yet again.  Many of the value investors who were accumulating shares over the last few weeks are comfortable and confident with their positions and their discipline prevented a wider emotional selloff.  The selloff is coming, just not yet.

MARKET BEHAVIOR

It was a big day in the markets with a 25-point swing between the high and low.  In the first hour of trade it looked like the market was breaking down, but the selloff ended just as quick and the subsequent rally continued through the day.  We finished higher by 0.8% and regained the highs of this recent rally.

MARKET SENTIMENT

It was a bad day to be short and this was clearly a bear trap that snared a lot of pessimists.  As I mentioned on Tuesday, this was the wrong time to be short the market.  There is nothing wrong with taking profits here, but it is a little early to be jumping on the short bandwagon.

Volume was just a hair under average and similar to what we saw on Tuesday.  The relatively modest volume showed that while this was a wild ride, not a lot of people were sucked in by the apparent breakdown or subsequent reversal.  This further reinforces the idea that many of the buyers over the last few weeks are confident and prepared to hold through some volatility.  Their willingness to sit tight in the face of selling pressure is what constrained supply and lead to the bounce.

Yesterday I talked about how all the selloffs in the last 5 years were great buying opportunities.  Obviously this isn’t always the case, so how do we tell the difference between a buyable dip and the start of a bear market?  It all comes down to what other traders think.  Right now everyone is obsessed with the Fiscal Cliff and all the other negative headlines out there.  It is this widespread negativity that shows we are still in a bull market.

Compare this to the spring of 2008 after the market already sold off from the 2007 highs.  Even then complacency was the norm as everyone was used to easy money and viewed the market as an attractive buy.  At the time Obama and Hillary were fighting for the Democratic nomination and in the process were trashing Bush and the economy.  Investors took a lot of offense to Hillary and Obama suggesting we were entering a recession.  In fact the candidates were so widely criticized for spooking people that they started referring to it as the “R-word” so everyone would back off.  Obviously Hillary and Obama were simply making political hay and had no idea what was about to unfold, but that obliviousness by everyone is exactly what set the stage for a major selloff.

The question we have to ask in the present day is if traders are complacent and oblivious to the risks in front of us.  Not only are investors in tune with the risks in the world, so is the average Joe.  This doesn’t mean we won’t have volatility and selloffs, but those selloffs are buying opportunities, not a time to head for the hills.  Given how badly the 2008 selloff damaged the average investor’s psyche, I think it will be years before we see widespread complacency lead to a major bear market.

TRADING OPPORTUNITIES

Given the strong reversal today, the 50dma is within easy reach and the bigger question is whether we will break through it or hit our heads.  The market is sensitive to headlines and the building expectations of a Fiscal Cliff resolution are setting the stage for disappointment as negotiations drag on.  While the Fiscal Cliff is not as big of a deal as other crisis in recent memory, it will be enough to spook emotional traders and present an attractive profit opportunity for a savvy trader willing to go against the grain.

In the near-term look for the market to rally a bit more before pulling back.  The selloff will be swift and decisive, but it will find support after breaking the 200dma and 1400.  I’m not a psychic and can’t predict if we’ll make new lows or not.  But if we take our profits early, it really doesn’t matter.  The more important trade will be buying this Fiscal Cliff selloff and getting ready for the inevitable bounce.

INDIVIDUAL STOCKS

AAPL is trading sideways and consolidating recent gains after bouncing off of the $500 level.  What was the must have stock became the must short stock.  It worked if you were daring enough to get in, but this stock is too much of a darling to not bounce hard when the price declines this much.  No matter what the fundamentals show, many traders are infatuated with AAPL and will buy it all the way down.

As for the fundamentals, I have yet to see a young person with an iPhone5.  The Samsung Galaxy SIII is the new cool kid on the block and I’ve seen far more of those than iPhone5s.  No doubt there are a lot of soccer moms who still lust for an iPhone5, but the days of undisputed rule are coming to an end.  AAPL makes a great product, but expect competition to hammer market share and profit margins in coming years.  Of course this is a longer viewed prognosis and in the near-term the emotional volatility surrounding AAPL will make for some great swing trading.

Stay safe

AM: Impressive bounce off the 200dma

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:05 EST

Bulls are eating bear lunch today as the market bounced smartly off of the 200dma on a failed selloff.  The market will selloff, just not yet.

MARKET BEHAVIOR

The markets attempted a selloff in the first hour of trade, but rebounded just as sharply after getting close to the 200dma. The market tried a second selloff during an Obama press conference, but the market bounced back and is now trading in the green.

Clearly there are people trying to takeout this market, but the market is unwilling to go along and bounces back each time.  All is not well with the world, but you have to respect the market’s resilience here.

MARKET SENTIMENT

Little doubt this early selloff seduced many bears into jumping on the short bandwagon, but this quick rebound shows the market is not ready to selloff yet.  The short trade isn’t working because it is failing to trigger wider selling by other holders.  The recent dip to 1350 shook out most of the weak holders and the current crop of owners is more comfortable holding and less likely spooked out of the market.  In addition, these recent shorts are creating the fuel for yet another short-squeeze.  All of this makes for a tough short.

TRADING OPPORTUNITIES

A pullback is in our future, the market just isn’t ready yet and we have to respect this supportive price action.  This is a perfectly acceptable place to take some long profits off the table, but it is still a little too early to short the market as many bears are finding out….yet again.

While I expect we might see more upside here, the risk/reward is not very favorable for owning stocks here.  There is limited upside remaining in this move accompanied by quite a bit of downside exposure.  But this is just for the short-term trader.  Medium- to long-term traders should expect some near-term volatility but will be rewarded for sitting through it.

INDIVIDUAL STOCKS

AAPL is turning into a high-beta proxy for the markets.  It saw the same early selloff but is now at the day’s highs, although not quite in the green.  A little retracement here is a good thing because the recent run was a little aggressive and unsustainable.  Some churn here makes the rebound more likely to stick.

Stay safe

PM: Fear the Cliff?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM UPDATE

MARKET BEHAVIOR

Markets traded lower and finished at the bottom of the day’s range, just a tad under 1400.  Is this the break bears were looking for, or just a bear-trap to snare all the eager top-pickers?

Volume was a tad under average, but picked up significantly from Monday’s sluggish levels.  We are between the 200 and 50dma and a hair under support at 1400, a key level dating back to August.  We still have a way to go before breaking the trend of lower highs, the last high being 1434.

MARKET SENTIMENT

No doubt today’s declining price tempted many chronic bears to re-short the market.  Maybe they will be proven right, or maybe they are early, only time will tell.  Honestly it can go either way here, but usually when all else is equal, you are better off siding with a continuation.

The market was spooked on some commentary out of D.C. about lack of progress and that was enough to send a shutter through the markets.  But any intelligent investor needs to recognize this is boilerplate political negotiation conducted through the media. Expect it, trade it, profit from it.

We are still early in the negotiation process and I expect today’s issues will quickly be ironed out.  It won’t be until closer to the deadline where we will encounter seemingly fatalistic breakdowns that will send the market materially lower.  Heck we might even go over the proverbial Fiscal Cliff when Republicans and Democrats can’t agree on what exactly what revenue increases and cost cutting looks like. But that is just our elected officials playing a high stakes game of chicken.  If you can’t stomach that turmoil, then maybe you need to find another hobby.

TRADING OPPORTUNITIES

Every single catastrophic selloff in the last five years has been a buying opportunity.  The 2008 financial meltdown came and went.  Euro Contagion has blown over a couple of times already.  The Fiscal Cliff Part I came and went.  Even a downgrade of US Debt was a buying opportunity.  And this time will be no different.

Now some people will say buying prior to these events exposed people to a lot of risk and heartache.  But that is buying before the worry sets in.  We are well past complacency and everyone is already fretting over every interview with politicians or central bankers.  Fear complacency not headlines.

Now this is a longer view, in the near term we probably need to whip around a bit before this is done.  And that is a good thing.  It is the other traders who cannot control their emotion that give us the best profit opportunities.  Seeing how we ran up nearly 5% last week, a modest but dramatic pullback is in order.  Maybe it will start tomorrow, or maybe next week.

As for all the ‘tax selling’ going on in the markets anticipating tax hikes next year, all this money coming out of the markets will need to find a home next year.  Selling now is buying later, just another catalyst for a continued rally next year.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL is rising from the grave.  This is obviously a stock that is swinging dramatically from an imbalance in supply and demand.  In September it was over owned around the iPhone5 launch and more recently the huge wave of selling was overdone.  In all reality the big run is probably coming to an end and it is changing from a buy and hold stock to a trading stock.

FB is also showing life after being left for dead with all they shares that were supposedly going to hit the market after the lockup expiring.  Funny how the day that the stock was supposed to crater it went up huge.  Proof again conventional wisdom doesn’t work so well in the markets.

ET CETERA

I’m experimenting with posting twice a day, once during the trading day and another in the evening.  This will let me share ideas midday while there is still time left to make a trade and again in the evening to help digest all the day’s action.

Stay safe

AM: Markets still finding support

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:54 EST

AM UPDATE

MARKET BEHAVIOR

Stocks are churning above 1400 and in the green at midday as traders demonstrate willingness to buy and hold at these levels.  We are finding support as tentative optimism over a Fiscal Cliff compromise persist.

MARKET SENTIMENT

No doubt cynical bears are leaning into the is market again, but the market is holding up for the time being.  Bears putting on new shorts are creating the fuel for what could turn into one more short-squeeze.

It all comes down to how many new buyers can be tempted to wade in above 1400.  We’re working on our 6th close above the 200dma and 3rd close above 1400.  The longer we hold here, the more tempted people will be to buy.  Of course the irony is their confidence is what will ultimately undo this rally.  Once they are done buying, demand will dry up, and we’ll selloff.

There is always news in the world, both good and bad.  Right now the market is gravitating to the good news and ignoring the bad.  It helps that our politicians appreciate the importance of perception and are doing their best to make it look like they are working toward a compromise.  Of course it also helps that we are at the early stages of the negotiations and it is easy to agree in principle   But the devil is in the details and we should expect some major wrenches in the works when the negotiations move into the finer details.  A major snag is what could trigger the next round of selling.

TRADING OPPORTUNITIES

I still think there might be a little more upside left in this move, so wait a little longer before putting on a short position.  But we are getting close to the end of this run and longs should start looking to lighten up.  Of course this is directed toward the swing traders, longer viewed investors can continue holding, just expect some near-term volatility and be prepared for another dip before all of this is resolved.

Stay safe

Buy, sell, or hold?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets finding support after last week’s sharp rally, but how long can this keep up?  Maybe the more important question, is wise to holdout for those last few dollars?

MARKET BEHAVIOR

It was an interesting day in the markets.  Initially the market sold off, but it found support and finished near the day’s high, although still in negative territory.  AAPL made a huge comeback and no doubt contributed to some of the tech market’s strength.

Today’s volume was below average, but not surprising being the first trading day back from the holiday weekend.  Today markets the 5^th consecutive day above the 200dma and it seems the worst fears of careening off the fiscal cliff have dissipated.  Of course this rally creates room for another bout of pessimism to take hold.

MARKET SENTIMENT

It is pretty obvious we’ve come a long way in a short amount of time.  The speed of the bounce has not allowed many people to change sides and we still have a fair number of bears gunning for the markets even if they were chased out in last week’s short squeeze.

Where we head from here largely depends on how other people are positioned.  There are still a lot of bears out there, but many of them were chased out of their shorts last week, meaning they have renewed ammunition to use against the market.  We also had some momentum buyers jump on board the break above the 200dma and 1400 resistance/support.  Momentum buyers are a fickle group and will bail at the first hint of trouble.

Both of these factors point to selling pressure in the near future, but the counter argument is these things often go further and longer than most expect.  Combining those two ideas, we might expect a little more upside before this bounce runs out of steam.

TRADING OPPORTUNITIES

As I shared last week, we are close to the end of this move, but I would like to see one last push higher before rolling over.  I thought we might get that at the open and that would have made for a great exit/short.  But opening lower makes it more likely we might see one last push higher before rolling over.

Of course debating a little higher or simply lower is nothing more than trying to pick a top and gambling at best.  We need to accept that we can never sell the top and it is foolish to try.  Either we intentionally choose to sell early, or the market forces us to sell late.  A case can be made for each, but personally I prefer selling early because it is far less stressful to be in cash.  Holding temps brings out the emotions greed and regret.  When I’m in cash, it keeps my head clear, allowing me to identify and pounce on the next opportunity.  I’ll always miss some upside, but I’m okay with that because it means I will be in a better position for the next move.  The goal isn’t to make all the money, only the easy stuff.  Leave the rest to the gamblers.

More often I find people who think it is better to sell late because the logic is you capture the entire move and leave the door open to an extended run higher.  And don’t get me wrong, I understand the logic behind the idea.  But in reality it works less well in practice because human emotions of greed and regret get in the way when trying to sell something on the way down.  We start obsessing about what we could have sold it at just a couple of days ago.  Then we are tempted to wait for it to come back.  If it comes back, greed kicks in and instead of selling we decide to hold a bit longer.  If it falls again, we convince ourselves this is just a minor dip and it will continue higher if we just wait a little longer.  I know because I’ve been there.

The beauty of selling early is you don’t have any of those doubts.  And the proof is in the pudding. I’ve read countless interviews with successful traders and virtually all of them claim a major key to their success is selling too early.  In fact, I can’t recall a single one that said he prefers to sell on the way down.

Like many aspects of trading, this is an individual decision and you should stick what gives you the most success.

Stay safe

Why you should sell this pop

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Really strong rally on the abbreviated, post-Thanks Giving trading session.  Obviously volume was ridiculously light, but it was real money exchanging hands and low volume profits are just as real as their higher volume counterparts.

MARKET SENTIMENT

I didn’t expect today’s strong rally, but at the same time it didn’t surprise me either.  The press is attributing it to strong Black Friday sales, but that is baloney.  All of the decision makers were out of the office and today’s trade was nothing more than tripping autopilot buy orders.  Most of them were stop-losses from shorts, but there were also some breakout buying as we easily cleared resistance at 1400.  But rather than traders sitting in front to their screens making decisions to buy or sell, last week traders placed tripwires above and below the market as a risk management technique to prevent them from being caught with their pants down while they were on vacation.

The thing we have to be wary of with today’s trade is people are not as committed to these gains because most didn’t actively chose to buy these levels.  Instead it was automated risk management that triggered this pop.  Shorts were protecting against larger losses and longs were buying the breakout so they don’t risk being left behind.

This setup makes for an awfully fragile rally and we covered a ton of ground in five trading sessions.  There is no way the rate of this rally, mostly driven by a short squeezes, can continue.  The point of maximum pain for shorts is where the market will peak and turn lower.  Decisively breaking 1,400 could be that point.  Or we could regain all the post-election selloff and test the 50dma to fully humiliate bears before turning lower.  But either way we are far closer to the end of this thing than the start.

TRADING OPPORTUNITIES

Longs should lighten up after this strong run.  It is possible we’ll see a little follow-on buying when the market opens on Monday, but the smart money is taking profits here, not buying the breakout.  The goal isn’t to top tick the market, but to make the easy money and let someone else shoot themselves in the foot by holding too long.  We’re currently in a swing trader’s market as the pendulum swings back and forth between bears and bulls.  Expect some turbulence in the near-term intended to demoralize both bears and bulls before the market finally reveals its true intentions.

I expect a continuation of the current bull market because there is nothing new and unexpected lying in front of us.  It is the fear of the known, not the unknown, that presents the best profit opportunities for the savvy trader.  Everyone already knows about the Fiscal Cliff, Debt Ceiling, European Debt Crisis, Middle East conflicts, and slowing China.  The fact that everyone is already talking about, even obsessing about these issues means we can safely ignore them.  Their fear is our profit opportunity and it is the crowd’s reluctance to buy that creates the asymmetric trade.

For the time being, lock-in swing trading profits and anticipate for the impending pullback.  But over the medium term, plan for an upside breakout from this consolidation.

Stay safe

Holders are holding

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Markets added a little on this pre-Thanks Giving session.  As expected, volume was far under average.  But seeing the market close above the 200dma is encouraging as it demonstrates holders are not eager to flip their shares.

Friday’s shortened session will have even less trade and most likely make for another boring session.  But after the last couple months, boring is good.  Don’t expect any real buying or selling until next week.  There is always political risk in the Middle East, but outside of that not much should happen until big money managers return to the office.

MARKET SENTIMENT

It is constructive to see people continue holding stocks after the large bounce back to the 200dma.  That means most holders are waiting for higher prices and their continued holding will keep supply tight and support prices at these levels.  This current stability is demonstrating everyone who thought the world was coming to an end already sold and the current crop of holders has a longer-term view.  This shift in ownership is what put a floor under the market.

TRADING OPPORTUNITIES

If there is one thing the market doesn’t do well, it is finding the perfect balance point.  Instead it tends to overshoot on both the high and low side.  We sold off more than we should have and no doubt we’ll also bounce higher than we ought to.  Expect prices to continue higher next week, but don’t get greedy and be prepared to lock in profits because while the news might be random, the market’s reaction to it isn’t.  The market will get a little frothy, we’ll run out of buyers, and the inevitable negative headline out of DC, Europe, or the Middle East will send of lower.  And if we’re being honest here, it isn’t the headline that sends us lower because there are negative headlines every single day.  It is running out of buyers that knock the markets lower.   But people don’t realize this because the financial press gets paid for coming up with reasons and they always find something to blame it on.

After we peak and come back down, we might make a new low, or we might bounce prior to 1350.  But the great thing is it really doesn’t matter to the trader who is in cash and patiently waiting for the next trade.  The market will bounce when it bounces and the opportunistic trader will be there to make money.

The game plan is higher, lower, and then higher again.  Sounds easy enough, but the money is made in the details, in this instance, getting the timing right.  And that is why we watch to see what everyone else is doing so we can put the odds in our favor.

Stay safe

Holding the 200dam

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets traded flat in this low-volume holiday-week session.  Today’s action supported Monday’s rebound and we’ll probably see higher prices before lower prices.

MARKET BEHAVIOR

Stocks traded sideways after Monday’s tremendous rally.  Volume was light during this holiday week, but it is supportive to see the market close above the 200dma for the second consecutive day.  Light volume makes the market susceptible to manipulation, but the cynical bears were unable to dent yesterday’s big move.

MARKET SENTIMENT

Clearly the last 50 S&P points were primarily driven by late shorts rushing for cover.  Most often the obvious trade is the wrong trade and when your neighbor is telling you how he sold all his stocks because the market is going to collapse, you know the market is becoming a safer place.  And that is exactly what happened here.  All the emotional sellers sold, there was no one left to sell, and prices rebounded as soon as supply dried up.

But the thing any bull needs to remember is short-squeezes are not sustainable by themselves.  We need follow on buying from big money managers to continue this rebound.  And chances are they will take a wait-and-see approach, especially through the remainder of this week because most senior traders are out for the holiday.

TRADING OPPORTUNITIES

The markets are especially sensitive to headlines out of D.C.  There is probably more room to the upside and that remains the high-probability trade, but any bad headline could crush the markets.  No doubt our politicians are sensitive to this and are weighing their words carefully.  That doesn’t mean someone won’t make an off-the-cuff comment that spooks the market, but it is more likely our leaders will deliberately measure and parse each word carefully, fully cognizant of what will happen if they don’t.

We very well could retest 1350 in the near future, but we’ll probably push up to 1400 first.  Currently the market is split between passionate bulls and equally passionate bears.  This is a recipe for volatility and we should expect some wild swings as the market oscillates between one extreme and the other.  But this presents a beautiful trading opportunity for anyone willing to buy the dips and sell the rallies.  In this environment take your profits early and often because the market will snap back before you know it.  We’ll probably see several failed breakouts/breakdowns before this finally moves out of this range for good.

The optimist in me continues to believe all the bad news is already priced in and this will resolve to the upside as the world continues to dig itself out of this hole.  Many people want to argue with this view, but their cynicism is what will fuel the rally.  If everyone was excited about the future, then there is nowhere to go but down.

Stay safe

The squeeze is on

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Don’t listen to bears claiming the low volume invalidates today’s move, selling has dried up and bears are powerless right now.

MARKET BEHAVIOR

Volatility cuts both ways as shorts got blown out of the water.  A lot of bears are pointing to the low volume today, but in the markets we win and lose on of price, not volume.  In reality, all the low volume demonstrates is selling dried up like the Sahara Desert and there was nowhere to go but up, and by up I mean shoot up like a rocket.  I’ve been talking about this for a few days, so hopefully it didn’t catch anyone by surprise.

MARKET SENTIMENT

Bears got a little too cocky last week and that lead to their barbecuing today.  Some people think you need to chase off all the bulls before a market can reverse, but that is wrong.  No matter how bad things get, you will always have willing buyers.  If you don’t, the free market lowers prices until willing buyers can’t resist.  This principle is the core of free markets and supply and demand.  The market price is always the balance point between bulls and bears.  If supply or demand skews one way or the other, the market price automatically moves to regain balance between the two sides.

But if we can’t look at numbers of bears versus bulls, what do we use to identify potential reversals?  It’s not numbers that signal tops or bottoms, but the attitude of each side that we are looking for.  Arrogance, cockiness, timidness, and uncertainty are signs of an imminent reversal.  Last week bears were patting themselves on the back for their savviness and insight.  I bet they are not feeling so smart today.

Today’s low volume signals bulls are still timid and bears are rationalizing the bounce trying to play down the significance.  That means there is still fuel in the tank for additional price gains.  It could be tomorrow or a few days from now, but the market is primed to go higher and all it takes is a minor positive news story to make the market jump.

TRADING OPPORTUNITIES

Stating the obvious here, but today was a great day to be long as this was the biggest up-day in almost three months.  And little surprise it came on the heels of a sharp and emotional selloff.  Don’t be afraid of the light volume, that just shows other people are watching this from the sidelines and all those on the outside are potential buyers who will keep pushing this thing higher if they start chasing.

Hopefully everyone took my advice and either avoided shorting this market, or took their shorts off last week.  There is still some upside left in this move, but expect volatility as the market works through this reversal.  This is setting up nicely for swing trading; buy the dips and sell the rallies.  The market needs to trade sideways for a bit and chew up bears and bulls alike before a directional breakout will stick.

Stay safe

Could our politicians actually do the right thing?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Bulls flexed their muscles as Obama and Boehner took the worst off the table.

MARKET BEHAVIOR

Stocks notched a new low in early trade before surging higher following conciliatory commentary between Obama and Boehner.  It made for the highest up-day volume we’ve seen in months.  While we only finished higher by half a percent, the positive reversal was far more impressive when considering the depths we rose from.

One day does not make a trend, but it showed more feistiness out of bulls than we’ve seen in a long time.  That is one of the biggest paradoxes in the markets, the fewer the number, the stronger they are.  Thinning the bull ranks is what finally allowed them to mount a serious counteroffensive.

MARKET SENTIMENT

It felt like a sentiment shift took place as Obama and Boehner appeared to take the worst case off the table.   No doubt there will be hang-ups and elevated tensions over the coming weeks, but it seems both sides are fully committed to brokering a deal in a timely manner.  It won’t be pretty, but it will happen and the forward-looking nature of the market will be looking past the Fiscal Cliff before the end of the month.

Of course this doesn’t mean all is rosy with the world because austerity will undoubtedly be part of the brokered compromise, split between increased tax revenue and spending cuts. But the economy has most likely recovered to the point where it can hold its own without the fiscal and monetary props.

It is entirely possible we’ll see a minor dip in GDP, but addressing the debt and deficit concerns could provide a boost in sentiment and outlook from both investors and business leaders.  We live in a highly leveraged economy and perception about future opportunities is what drives commerce.  Removing uncertainty by putting the deficit on a more sustainable track will no doubt help build confidence, the economy, and ultimately jobs.

TRADING OPPORTUNITIES

Today’s move revealed a side of the market we haven’t seen in a while.  Chances are this is part of the bottoming pattern, especially if politicians continue showing constructive progress toward addressing the Fiscal Cliff.

At this point the spring is wound tight and any positive news could set off a huge short-squeeze.  On the other side, much of the pessimism is already baked into the markets, so it would take a very big piece of bad news to push pessimism even lower.  For these reasons, the asymmetric trade remains owning the market here; it is more profitable to be among the first buying the dip than the last selling the plunge.

Now don’t get me wrong, everything is not right with the world and there will be more volatility before this is done, but for a swing trade the smart money is long this market.  But when the market moves your way, don’t get greedy and lock in those profits before they evaporate in the next pullback.

Stay safe

A willing buyer for every seller

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR

The market traded mostly sideways and found support at 1350 the day after Wednesday’s plunge.  Volume was elevated for such a modest move and a lot of shares exchanged hands with the weak selling to the bold.

MARKET SENTIMENT

The downdraft took a day off as there was a willing buyer for every desperate seller.  The constructive thing is this churn is replacing skittish, short-term holders with more courageous, longer-viewed owners.  All the Johnny-come-latelys who chased this Summer’s rally and were buying above 1400 are fleeing the market in droves.  At a certain point they will all be flushed out and replaced with calm, cool, and collected value investors who smell profits in other people’s panic.  Now this doesn’t mean the panic induced selling is over, but the lower we go, the closer we come to the end of this.

S&P500 daily at end of day

The Fiscal Cliff is all anyone is talking about, but the thing we have to ask ourselves is if the Fiscal Cliff frenzy can get any worse?  Can Obama’s or Boehner’s rhetoric get any worse?  Or are expectations of fiscal calamity already predicting the worst and there is nowhere to go but up from here?

TRADING OPPORTUNITIES

The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers has already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.

The upcoming holiday week could obscure trading as many of the big decision makers are away from their trading desks, but if we look back at last year, the Monday after Thanks Giving was a huge reversal and showed early strength that turned into the best Q1 rally in decades.  I’m not sure if the same thing will happen here, but it is certainly a possibility to consider, especially if we see constructive collaboration on the Fiscal Cliff.

Stay safe

Another leg down

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets added to the decline, clearly undercutting the 200dma and resting just above 1350.  Was this the capitulation point, or just the start of a bigger move lower?

MARKET BEHAVIOR

Big down day in the markets as we continued the Q4 slide on high volume.  The market is now 8% off the September high.  That makes this a material pullback, but still far from a major one at this point.  Remember, most often it is the slow-motion declines that do the most damage because people don’t notice it happening when the moves are not dramatic enough to make headlines.  Plunges like this get everyone’s attention and run their course fairly quickly.

Given the size and severity of the moves the last few weeks, I expect we have a hard bounce in our near future.  Will that be tomorrow?  Or will we have another few dramatic drops before bouncing?  I can’t say because my magic crystal ball isn’t working, but I do know the market doesn’t make huge directional moves without a dramatic reversal thrown in just to keep things from being too easy.

MARKET SENTIMENT

The bigger question is if this coming bounce will be a bottom or just a sucker’s rally before more selling.  That is the harder question to answer.  The market’s psyche is an interesting thing and it sure does its best to try to confuse even the most seasoned of investors.  There is enough uncertainty surrounding the markets that we should expect a return of volatile trade.  We’ve already seen those volatile down days, but also know there will be strong up days as part of this too.  Obviously the market can’t leave bears out of the pain trade for too long before putting the screws to them.

The Fiscal Cliff is the big thing on trader’s minds and the market reacts strongly to any comments out of our national politicians.  Today it happened to be Obama’s first press conference since being reelected.  But the thing to remember is the Fiscal Cliff is a completely artificial and manufactured phenomena that is 100% under the control of just a few men.  They might be playing a high-stakes game of chicken to leverage a stronger negotiating position, but remember this is all just showmanship for the cameras.  These guys will broker a last-minute deal because that is their job and any politician is too spineless to make a real stand and risk committing career suicide.

The thing to keep in mind when the news is hyping up how much damage falling off the Fiscal Cliff will cause our economy, they are quoting a Congressional Budget Office report that assumes we will go the entire year of 2013 without a deal.  I suspect we probably won’t even go a few weeks before a deal is struck, again our politicians don’t have any core values and will cave fairly quickly when the heat is on.  But honestly this is a good thing and part of why this country is so successful.  We need a compromise even if it is last-second and involves lots of posturing for the cameras.. The worst thing for us is ideologues throwing up permanent roadblocks and falling on their swords for their hardcore base.

TRADING OPPORTUNITIES

I didn’t expect today’s selloff and thought we might be firming up a bit.  No doubt expectation of a rebound will prove correct eventually, but in the markets being early is the same thing as being wrong.  This is why it’s good to have a defensive strategy in place.  No one can be right 100% of the time and success in the markets is about managing those losses when you are wrong so you don’t give back all the profits you made on the good trades.

I still expect the market will bounce at some point, but the market is not behaving the way I expect, so it is best to step back and wait for the market to start acting more predictably again.  Maybe that will happen on Tuesday as we bounce back from Wednesday’s selloff.  Or maybe we selloff for a few more days first   Either way the smart move is to wait for the right entry point.

The market could continue selling off here, but there is no way to guess how far and how long that will go, so I’m not going to short the market and will instead wait for the higher probability trade of buying the bounce and riding that for a quick swing trade.

Remember, we never need to be in the markets and the best place to be when the market isn’t behaving as expected is in cash.  There will always be future profit opportunities, but losses are forever.

Stay safe

What is the harder trade?

By Jani Ziedins | Intraday Analysis

Markets were lower, then higher, and finally lower again.  Is that u-turn an ominous sign or simply the indecisiveness of the market trying to fool everyone?  I keep hearing bears talk about the widespread optimism and hope filled market, but I sure can’t find any of those market optimists.  Maybe they are hiding from me.

S&P500 daily at end of day

MARKET BEHAVIOR

The market opened lower on Tuesday, but first couple hours showed a strong rebound rally and no doubt sent some late shorts running for cover.  Unfortunately the market rolled over not long after because additional buyers failed to step in and support those price gains rally.   The market covered a lot of ground, but volume was just average as neither bulls nor bear were driven off in large numbers.

The trend remains lower and Tuesday’s early price action marked a new low for this pullback.  A lot of times these selloffs climax in a ‘V’ bottom, but the longer we trade at this level, the less likely we’ll carve out a ‘V’ bottom.

MARKET SENTIMENT

I keep reading articles and investor opinions that say the market is too optimistic and filled with hope.  But the thing is I can’t find any of those reported articles full of optimists and hope.  Maybe I am looking in the wrong places, but I am finding very little hope and even non-investor types are debating the Fiscal Cliff with everyone they meet.  Heck, today I even read a well-reasoned article on why the Fiscal Cliff, Debt Ceiling, and Europe is going to send us back to the 2009 lows.  The guy was trying to make himself out to be a contrarian, but 10 to 1 the comments to his article were supporting his bearish theme.  It sounded more like an echo-chamber than legitimate contrarian views.

No doubt the bears could be right and we have only seen the tip of the iceberg, but traditionally the markets don’t work that way.  We don’t see 50% declines when the biastras at Starbucks go on about how screwed this country is.  50% declines happen when that biastra is bragging about the dot-com stock he just bought or how many investment houses he owns.  We are miles away from that type of widespread irrational exuberance that leads to bubbles and massive corrections.

As for the notion that our economy is on ‘life-support’, that is what every recovery looks like.  Selloffs are only buying opportunities because the crowd is too shortsighted to see the potential in the future.  Taking the other side is a great way to make money; buy shares cheap when everyone says what a bad idea it is to own stocks and sell them when everyone thinks they are headed to the moon.

TRADING OPPORTUNITIES

The market is still in a down-trend and it is risky to pick a bottom.  As I said yesterday, these levels look interesting and are far safer places to buy in at than at any point in the last several months, but I could easily be a bit early in expecting a rebound.  Maybe the market will bounce decisively this week, or maybe it will selloff a bit more before bouncing.  But either way, this is a horrible place to be short the market.  If we look at the market like a spring, the post-election selloff unwound a lot of the downside potential and there is not a lot left in the downside move.  At the same time the emotion driven selloff has compressed the spring to the upside.  I’m not always right, but I’m okay with that if my mistakes are small and my correct calls are large.

Stay safe

Quiet, but constructive day

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The holiday lead to a tight, low-volume day, but given what happened last week we can count that as a victory.   There is not a lot of hope left in the markets and many of the weak hands have been chased out as we crashed through key technical levels.  The abundance of pessimism is making an optimist out of me.

MARKET BEHAVIOR

The market is finding its footing, at least temporarily.  We closed 1377 on Thursday, 1379 on Friday, and 1380 on Monday.  Monday’s trade fell within a tight range, seven points between the high and low, on exceedingly light volume, no doubt due to Veteran’s Day.  It is encouraging to see we made it through the weekend without compounding last week’s crisis of confidence.

We continue trading under the 200dma.  All the stop-losses set under 1400 and the 200dma have already been triggered and that selling event has come and gone.  From here it is harder to identify an obvious stop-loss underneath the market.  This is good because it is far less likely the market will stumble through another large concentration of stop-loss orders, triggering a new avalanche of selling.

Between all the selling that has already occurred and the lack of a critical technical level underneath us, the bears are going to have to work a lot harder to extend this move lower.

MARKET SENTIMENT

It is challenging to find a positive news story in the financial press.  Fiscal Cliff this, Euro Debt Crisis that…..  The press is even reading body language and facial expressions of our politicians trying to figure out what is going on behind the scenes.  The question for us is how do we trade this?

The first thing to recognize is we don’t trade news.  News is largely random and unpredictable.  In addition, the modern internet era made it next to impossible for the average trader to get ahead of the crowd before headlines become priced in.

But if we can’t trade the news, what do we trade?  We trade other people’s expectations of the news.  This is a small but crucial nuance.  People, not events, create emotion-driven, asymmetrical trades and high-probability profit opportunities.  For example, if everyone fears a Fiscal Cliff, then we assume these traders have already priced it in.  Common sense tells you anyone expecting an imminent market crash would sell ahead of it and quite possibly short the market.  Using that logic, we can infer anyone talking about the perils of the Fiscal Cliff has already reduced their exposure.  Based on the chatter in the press and investor groups, the Fiscal Cliff risk is already largely priced in and much of the selling expecting this event has already occurred.

No doubt we could see more selling if conditions deteriorate, but what happens if the Fiscal Cliff is not as bad as everyone fears?  This is where the asymmetrical trade kicks in.  The market fears the unknown and often prices in a larger risk premium than the event deserves, meaning much of the downside has already been accounted for.  If things did in fact get ugly, there isn’t a lot of downside remaining.  But if on the other side, if things go as expected, the market will rally because the uncertainty, fear, and risk of the worst is removed.  And if things go better than expected, the market will surge ahead.

This is what creates the asymmetrical trade.  The market will selloff more if things go worse than expected.  The market will rally if things go as expected.  And the market will pop if things go better than expected.  In one case the market moves down, in two cases the market goes up. And not only are the discrete outcomes in our favor by a factor of two to one, so are the probabilities and magnitudes of those outcomes.  The expected and most likely resolution will lead to a rally because it removes risk and uncertainty.   Only the low probability, worse than expected, will lead to further price declines.  And even if we do see prices decline, a large portion of the selling has happened ahead of time, meaning there is less downside remaining.

In the markets there are no guarantees, but there are probabilities.

TRADING OPPORTUNITIES

By no means is it completely safe to own stocks down here at 1380, this is the stock market after all, but without a doubt buying stocks today is far safer than it has been at any point over the last four months.  In fact, the riskiest time to own stocks was back in September when we were trading over 1450.  That is the paradox of the markets; it is safest when it feels the most dangerous, and it is most dangerous when it feels the safest.

We will know in a few days if the selloff continues or bounces.  The market has already made two legs down and that is usually enough to refresh a bull market.   If we are moving into a bear market, there are often three legs down, meaning we could see another bout of selling before the market temporarily bounces.

We have a chance for a strong rebound that takes out the shorts, or one more leg lower.  Those are not horrible odds for owning stocks at these levels.  My guess is pessimism has climaxed and we’ll head higher.  As mentioned earlier, news is largely random and without a doubt we could have a headline take our legs out, but if things stay the same or improve modestly we should see the markets bounce back.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

Selloff takes a breather

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The market ends flat, but many traders and pundits expect further weakness, a sign that can be interpreted as much of the selling has already occurred.    We might have lower-lows in our future, but look for a bounce here as late shorts get squeezed out of the market.  Near-term volatility will make this a swing-trader’s market.

MARKET BEHAVIOR

Market finished mostly flat on Friday after some ups and downs, but given the price action of the previous two days, this is a significant victory.   Volume was higher than average, but less than either Wednesday or Thursday.  For the time being, panic driven selling has abated.  This is a good thing because selling can trigger even more selling in a snowball effect.  The pause today gives traders the weekend to regroup and reevaluate their portfolio.  After some time away from the markets, investor’s nerves might calm down and we might see more rational trade next week.

MARKET SENTIMENT

Given the plunge over the last couple days, almost all the weak hands have been shaken out.  But the thing to remember is this pessimism is creating the fuel that will power the next rally.

People who are excited about the market are fully invested and can’t move the market any higher.  A pessimist is out of the market and the only thing he can do is buy stocks and push the market higher.  This is why contrarian investing works.  Optimists are powerless to move a rally higher, only pessimists can do that.  Too much optimism and a rally stalls; too much pessimism and things are primed to take off.  Learn to fear confidence and embrace pessimism.

From where we stand, it is hard to imagine the fear over headlines getting worse.  If you talk to any investor, the only question is whether Obama, the Fiscal Cliff, or Europe will crush the stock market first.  That kind of widespread pessimism, confusion, and fear among retail investors creates golden opportunities.  If these guys want to give away their money, I have no qualms taking it.

TRADING OPPORTUNITIES

The market looks very buyable here.  The panic driven selloff paused and gave investors a chance to regroup.  An avalanche of selling is a dangerous thing to jump in front of, but after the dust settles there are deals to be found.  If the market continues to find support here, look to wade in.  No reason to plunge in all at once.  Buy a little, let that show a profit, and then buy a little more.  If the market rolls over, your portfolio risk is mitigated because you are holding a smaller position. Chalk that loss up as a cost of doing business and look for the next entry point.

If we do rally next week, it will be interesting to see what kind of rally we get.  Often we can see a powerful surge higher as the shorts get blown out of the water.  These pops rarely last long before collapsing, so if we see big gains, get ready to lock in profits and wait to buy the pullback.  If we churn sideways and grind higher slowly, you can continue holding for an extended period of time.

We could see some near-term volatility as the market tries to figure out which way it wants to go and most likely we will be in a buy-the-dip, sell-the-rally mode through the end of the year.  If a savvy investor takes profits early and often over the near-term, it really doesn’t matter if the market heads higher or rolls over, you’ll win either way by trading the swings.  The only advantage individual investors have in this game is our nimbleness; don’t fail to take advantage of it.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

The selloff continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets continued sliding today, but the selling seemed to abate some by looking at the volume.  Buyers are still a little gun-shy and we need their buying to put a bottom in this slide.

MARKET BEHAVIOR

Markets continued the selloff and broke through the 200dma.  Volume was lower than Wednesday, showing the mad rush of selling was slowing, but the decline continued because buyers were unwilling to step in.  As horrible as things appear, we are less than 7% off a 52-week high.  But that is a double-edged sword, while we are still having a great year, that also means there is a lot of air beneath us.

The 200dma often provides support in a bull market and testing that moving average is a healthy part of moving ahead.  The question is if we are leaving the bull market behind and moving into a bear market where the 200dma becomes a ceiling.

MARKET SENTIMENT

The difference between this selloff and other selloffs we saw in 2011 and 2012 is this time sentiment was already fairly low before the selling started.  Optimism is the fuel of selloffs because you need hopeful owners to spook out of the market.  If everyone is already pessimistic, there are no hopeful people left and supply dries up, leading to increasing prices.

2008 was a different animal because while sentiment was already low after a yearlong bear market, traders still failed to understand the true risk of mortgage-backed securities and credit default swaps.  So even though sentiment was already low, it was still far above where it should have been given the dangers the market was exposed to.

But how is that different from now with the European Debt Crisis and the Fiscal Cliff?  The difference is today you can walk into any Starbucks and find a random stranger who knows the ins and outs of these impending crises.  Back in 2008, even smartest people on Wall Street didn’t have a clue what a MBS or CDS were.

In the markets you can ignore what everyone is talking about because it is already priced in.  That is the difference between 2008 and today.  We’ve been talking about European Contagion for almost three years now and I can’t even keep track of how many Fiscal Cliffs there have been.  Financial journalists could recycle articles from two years ago and no one would even notice, that’s how long we’ve been talking about this stuff.

TRADING OPPORTUNITIES

The truth is no one can say for certain if we will bounce off of the 200dma or crash through it.  Trading is a game of probabilities and we have to wait for the high-probability trade.  As I’ve shared earlier, I think the market is setting up for a nice buy, but it is foolish to get in front of this steamroller.  Let the gamblers try to pick the bottom.  There will be plenty of profit left even if you are a little late to the rebound.

Stay safe