PM: Markets rally on hints of compromise

By Jani Ziedins | Intraday Analysis

Dec 17

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks bounced off the 50dma and regained all the losses accumulated during Thursday and Friday’s selling.  Volume was just a smidgen higher than average.  We are again at 1430 that has proved to be a difficult level to close above.

MARKET SENTIMENT

Stocks took off on half-full developments out of Washington.  We don’t have a Fiscal Cliff deal yet, but talks between Boehner and Obama seem more productive as each side is showing more willingness to compromise.  Today’s price action was a combination of buy-the-rumor and a massive short-squeeze.  In spite of what everyone thinks, the market wants to go higher and you cannot get in the way of that.

TRADING OPPORTUNITIES

Bears were thwarted again as they got squeezed for the umpteenth time.  I often say the best trade is the hardest trade.  Right now the hardest trade is owning this market because there is just so much negativity out there.  Can anyone point to one genuinely positive financial headline?  Even a lowering of the unemployment rate is overshadowed by a shrinking labor participation rate.  And that is what makes genuine contrarian investing so difficult.  To do it right, you have to go against your instinct.  You buy when your gut is telling you to run and you sell when you are patting yourself on the back for being a market genius.

I always found a great cue for what the market is thinking by looking at what I am feeling.  I’m a relatively normal guy and if I am excited, then other people are probably excited too.  If I am fearful, they are probably fearful too.  When I am greedy and cocky, many other people are feeling the same way.  Further, people want data and charts to look at.  They want moving averages and standard deviations.  They want people to tell them when to trade.  They think you need to take emotion out of investing because that is what everyone tells them.  They tell you to turn off gurus and trade mechanical systems.  But my success comes from embracing emotion, not denying it.  It comes from ignoring the same data everyone else is watching.  I don’t want objective market analysis, I want opinion.  I’m not trading other people’s ideas directly, but I am sampling their opinions to see what everyone else is thinking.  Is everyone else greedy?  Are they scared?  Is everyone talking about the same thing?  Is there diversity of opinion or is group-think consuming the market?  I don’t trade fundamentals and I don’t trade technicals, I trade other traders.

The market continues flexing its muscles and defying all the critics.  The market isn’t rallying because of good news, it is rallying because all the bad news is already baked in and the market ran out of sellers.  The weakness might not be over, but the medium trade is definitely higher and it is foolish to get in the way of this rally.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL rallied off of the $500 level.  Volume was above average, but lower than Friday’s monster selloff.  There was another analyst downgrade this morning, but we already discussed the value of analyst opinions last week.  But even in the face of a second downgrade, the market bounced back.  At this point these events are mostly priced in and a 3rd or 4th analyst downgrade will have diminishing influence on the stock to the point of being non-events.  There is the very real possibility that if the broad market rallies going into next year, today’s price action could be the bottom of AAPL.  If the broad market breaks down, all bets are off, but a strong market will put a floor under AAPL.  Maybe we trade a tad under $500, but this selloff is very close to being done and we are debating 1 or 2% between here and the exact bottom.  If you like the story, buy the stock, if you don’t there are plenty of other things to trade.

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.