PM: Beware of volume

By Jani Ziedins | Intraday Analysis

Dec 18

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks closed at the highs of the day and are within 2% of a 52-week high.  We easily cleared former resistance/support between 1430 and 1440 and closed just a hair under 1450.  Volume was the highest we’ve seen since the bounce off of 1400, which signaled the end of that a two-day slide.  The high volume signals a large wave of capitulation by bears and a frenzy of chasing by late bulls.  Looking back over the last few months, volume of the levels we saw today often signaled a change in direction/sentiment for the market.  Something to take note of.

MARKET SENTIMENT

Today’s high volume offers plenty of reason to give pause and assess the situation.  Is this the point where too many people bought into this rally?  Have all the bears been chased out of the market?  Have all the fence-sitters jumped in?  Is this setting up to fall due to a dearth of new buyers?  News doesn’t really matter if everyone is fully invested and no one has money left for buying.

The other day I cautioned about selling something just because it went higher, but this time is feeling different.  As I already mentioned there was huge volume today.  We cleared major resistance and triggered all that automatic buying from bears covering their shorts and fence-sitters afraid of being left behind.  Everyone on TV is talking about 52-week highs and all-time highs after that.  We’re not seeing cautious optimism out of bulls, but beat their chest and shout at the top of their lungs arrogance.  And bears are cowering with their tail between their legs, not telling everyone the market is about to collapse.  Further, it seems by listening to people the Fiscal Cliff deal is all but signed at this point.  What a dramatic change in sentiment from just a few days ago.

And so now we are left asking, where will the next incremental buyer come from?  There is a mountain of money in gold and treasuries, but those traders are very slow to warm to equities and that is the story of the next decade, not the next month.  Over shorter periods of time liquidity is more static and on a daily/weekly basis these fund-flows won’t have a huge impact.  Who can buy the market here?  I’m not sure.

TRADING OPPORTUNITIES

Anyone sitting on nice profits should consider trimming back after such a strong run.  The goal isn’t to make all the money, just the easy stuff.  Leave the top-picking to the gamblers.  The market rallied 100 points in the last month and is expecting an imminent Fiscal Cliff deal given the recent strength.   There is no reason the market can’t go higher, but every up-day brings us one day closer to the step-back.  I’m very bullish over the medium-term, but given everything I am seeing, a pullback to the 50dma wouldn’t be unreasonable.

AAPL daily at end of day

There are three ways to participate in the markets, long, short, and out.  Each position has its own risk/reward profile, so what works for one position might not work for another.  In cases like this, selling stock you own to lock in profits is reasonable and responsible move.  If you are out of the market, stay out of the market because chasing this late in a move is never ends well.  If you find yourself in this situation, just wait for the next high-probability opportunity.  And for shorts, don’t jump in front of this rally by trying to pick a top, but watch closely for a chance at some quick short profits once the cracks start showing up.  A lot of people bought the market over the last 100 points and anything but a home run out of the Fiscal Cliff will probably lead to a let down in the market.

INDIVIDUAL STOCKS

AAPL had another good day.  Funny how dangerous it was to buy at $500, but here at $530 everyone is getting excited again.  Anyway expect some chop in the name over the near term, especially if there is weakness in the broad market.  It is still a good buy for the medium-term, but be prepared for some volatility.

Stay safe

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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.

Md December 19, 2012

I would be careful trying to trade from short side; Transports look to be braking out, AAPL may have bottomed, Yen weakness will be a plus for liquidity globally

    Jani Ziedins December 19, 2012

    I agree. Shorting is only for the most experienced and nimble and is usually an exercise in futility when going against the trend, but some people insist so I cover it here. If a person wants to short, wait for the market to break first and only keep the short on for a couple days.

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