PM: What short-squeeze

S&P500 daily at end of day

What happened to today’s short-squeeze.  We closed higher, but it should have been a lot higher.  Did this give us a clue about how this market is positioned and where it is headed?

MARKET BEHAVIOR

Markets closed above the 50dma for the first time in nearly two months.  This would be considered a big win except it came on the heels of a strong employment report that failed to excite traders.  Volume was well below average and it seems many traders have cutout for the rest of the year.  Low volumes can lead to increased volatility as it becomes easier for smaller trades to move the market, so we might expect more unpredictability from the markets in coming weeks.

MARKET SENTIMENT

It was surprising to see the market’s underwhelmed reaction to an unexpectedly good jobs report and drop in unemployment to 7.7%.  The market even traded in the red for part of the day.  It was encouraging to see the market rally into the close and finish near the highs, but it is still curious the market failed to rally strongly on good news given how negative sentiment seems.  In times of extreme pessimism, the markets will vault higher on something as little as less-bad news, yet here we have good news and the market shrugs it off and only squeezes out a 0.3% rally on light volume.

We might infer from the lack of a meaningful short-squeeze the markets are not overly pessimistic.  This is good news for bears and bad news for bulls.  The last few short-squeezes sent bears into hibernation and that lack of shorts in the market is why we didn’t see more upside from today’s news.  The apathetic rally also means there are not a lot of buyers on the bull side left to push us higher either.  Earlier in the week I was reconsidering my thoughts regarding a pullback because of the seemingly widespread negative sentiment, but today’s price action shows bearish positioning is not as prevalent as it sounds.

TRADING OPPORTUNITIES

While we finished the day strong and closed above the 50dma, I’m not sold on this rally just yet.  It still has to prove other buyers are willing to step-in at these levels and we won’t slip back under the 50dma due to lack of follow-on support.  Today’s price action nudged me slightly more negative than I was coming into the day.  I don’t have a lot of conviction in this bearish view, but today’s moves seeded to indicate there is not a lot of upside left the markets right now.  But just to clarify I only expect a brief pullback relating to emotional Fiscal Cliff worries and this will create a buying opportunity once the Fiscal Cliff is in the rear view mirror.

For a near-term trade, look to short the market if we break under the 50dma again and consider buying the market or at least covering shorts if we hang above the 50dma for three days.  Of coures all bets are off if our politicians surprise us all and come up with an agreeable compromise next week.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL continues acting like a drama-queen swinging between bouts of enthusiasm and despair.  Everything was great on Thursday and it was all broken again on Friday.  While it doesn’t feel helpful, this price-action is necessary to cleanse an over-owned stock.  Analysts will point to this or that for why we are selling off, but they are overlooking the simple and more accurate reason of supply and demand.  AAPL was perceived as the safest stock in the world and it was flooded with overly optimistic and slightly naive owners who assumed it was a sure thing.  But once everyone and their grandmother had as many shares as they could fit in their mattress, there was no one left to buy and gravity took over.  Now all these late comers are selling for a loss and gladly selling their stock for a steep discount just so they don’t have to endure any more pain.  But their pain is someone else’s gain.

Stay safe