AM: Looking for direction

By Jani Ziedins | Intraday Analysis

Nov 30

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

Follow

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.