Markets surged past resistance at 1420 and are now in line with pre-election resistance near 1430. All of the Obama reelection selloff has been recovered and the market continues flaunting strength in the face of pervasive negativity.
It is a bad time to be short the market and bears are feeling more pain today as the market refuses to acknowledge their view of the world. But as we know, markets operate on supply and demand, not fundamentals. Fundamentals and sentiment can influence supply and demand, but price is exclusively driven by supply and demand and all other factors are secondary.
Because the pessimism is fairly widespread, that view is already priced in. People trade their views and if everyone is telling you how bad the world is, then they have already traded those opinions. After they sell, these people are simply cheerleaders since they can no longer dump more supply on the market. But here is the interesting thing, while the current bears are unable to further pressure prices, they can boost prices if they start buying back into the market. And that is the heart of contrarian trading. The crowd cannot push the market any further in their direction, but they can move markets if they change their mind and push the prices the other way And this rally is doing just that.
Don’t expect the market to go straight up and their will be some turbulence, but we should hold above the 1420 going forward. If there is material a violation of 1420 that likely means the rally is fizzling. But a test of 1420 and modest penetration will just be part of digesting these new gains. Today’s pop is largely driven by shorts getting blow out of the water and their frenzied buying will climax soon and we should expect a little retrenchment.
Stocks rallied on encouraging words out of Washington on progress toward averting the Fiscal Cliff. Maybe they will actually get something done before the deadline, but you have to wonder if this is a buy-the-rumor, sell-the-news setup forming. But either way I expect this rally will continue into next year as the economy continues growing slowly and headline events turn out better than trader’s worst fears.
AAPL popped along with the broad market today. It is getting late in the game for AAPL to announce a special dividend, so anyone hoping for that should adjust their expectations accordingly. Today AAPL’s price-action is mirroring that of the indexes. That is progress as the stock is weaning the emotion out of its trade. Emotion is not an on-off switch, so we can expect more wild swings, but this is part of getting back to more normal trade.
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.