Monthly Archives: January 2013

PM: Dip under 1500

By Jani Ziedins | End of Day Analysis

PM Update

The S&P500 is resting after the recent run up and AAPL lost its mojo.

MARKET BEHAVIOR

Stocks closed under 1500 on elevated volume. Today was the third down-day out of the last four as the hangover from the pervious euphoria is catching up with the market.

MARKET SENTIMENT

Everyone knows the market cannot go up forever, so some selling is normal and expected, but what we really want to know is if this is where the market rolls, over or if this is an opportunity to buy the dip.

So far the selling has been contained and not nearly as dramatic as one would expect after the headlines we’ve seen. Unexpected strength is bullish even when accompanied by down-days. This is not to say selling cannot accelerate to the downside, but if the market finds a bottom and support on Friday, that means near-term selling has climaxed and the rally continues. A lot rides on tomorrow and it will give us greater insight into where the market is headed.

TRADING OPPORTUNITIES

Expected Outcome:
Buy the dip if we find support, but if the market continues sliding, let it find a floor first. The uptrend will resume, but we might see better prices first. If the market decisively regains 1500 tomorrow, then it will be a good buy signal, but if weakness continues, look for support at 1490 or 1475.

Alternate Outcome:
The surge of buying might be behind us and the correction has begun. If tops were obvious, we’d all be rich by now, so we just have to trade what the market gives us. The market probably still has more upside, but we are late in the move and smart money is locking in profits and waiting for the next trade. No reason to force a trade either long or short here and the best call could be sitting this one out.

INDIVIDUAL STOCKS

AAPL is stuck under $460 and everyone should give up on the chances for a quick rebound after 6-days at these levels. In fact, we still might see new lows out of this stock as hopeful holders give up on the rebound. The best trade is stepping to the sidelines and waiting for the next tradable opportunity, either higher or lower from here. A break above $465 is buyable and under $450 is shortable, but take profits in these trades early and often because this is now a volatile trading stock and profits will disappear as quickly as you find them.

Stay safe.

AM: Testing support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:22 EST

AM Update

The S&P500 tests support at 1500 and AAPL struggles with resistance at $460.  One is headed higher and the other lower and it is the opposite of what most think.

MARKET BEHAVIOR

The S&P500 dipped under 1500 in early trade following yesterday’s 0.4% decline.

MARKET SENTIMENT

Red days are normal and expected, especially after the long string of up-days we saw over the last few weeks.  The bigger question is if this is the near-term pullback everyone’s been waiting for, or just a modest dip before resuming higher?

TRADING OPPORTUNITIES

Expected Outcome:
Modest dip or pullback to support, either way this will be limited selling and present a buy-the-dip opportunity.  I don’t know if we’ll find support at 1500, 1490, or 1475.  Heck, we could even head all the way back down to 1450 and I wouldn’t be concerned.  Rallies pullback, that’s what they do and there is no reason to over analyze a situation.

For the swing-trader with some profits, we are getting pretty far along and any point over the last few weeks would have been a good time to lock in profits and wait for the next high probability trade.  Swing-trading the indexes with a little bit of leverage to spice things up can be quite profitable.  2x leverage means a 2.5% move in the indexes yields a 5% return.  Do that 12x over the course of a year and it compounds to 80% ROI.  Not bad.  The key is getting those 5% gains, locking them in, and then waiting for the next high-probability trade.  You don’t need big moves to make money in the markets, taking a little here and there add up over the year.

For the longer-term trader, the economy is still looking up in spite of any near-term weakness.  Recoveries take time and the most patient often win in the end.  Just expect some near-term volatility and don’t let it shake your resolve.

Alternate Outcome:
Bear markets start when people least expect them.  This rally is turning 4 in two months and that is pretty old for a bull.  But that is under normal conditions and the 2008 bear market was anything but normal, so we should also expect the subsequent rally to be abnormal too.  The lack of widespread complacency is what keeps me positive on this market.  When looking for a major top, we need to look at a bigger audience to judge complacency.  Too many normal people are still afraid of equities for this to be a major top.  When you need to be worried are when you mother-in-law is giving you hot stock tips and we are a long way from that level.

AAPL daily at 12:23 EST

INDIVIDUAL STOCKS

AAPL was turned back by $460 again and that level is providing a lot of near-term resistance.  Failing to close above $465 this afternoon tells me the chances for a quick recovery are dead.  Further, if the stock cannot break $460, soon, I think lower prices are in store and this would be a good time for people to cut their losses and wait for the breakout above $460 before buying back in.  Everyone bought AAPL for a reason and if that reason is no longer valid, they should get out.

Stay safe

PM: Negative GDP

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Trivial decline in the face of negative GDP, how can that be?  AAPL struggles with $460, while AMZN is near record highs, what gives?

MARKET BEHAVIOR

Stocks started strong, but finished at the day’s lows and just a hair above 1,500.  What began as surprising strength in the face of a negative GDP headline faded into the close.  Volume was above average, but lower than yesterday.  This shows sellers were not rushing for the exits and it was more a lack of buying that let the market drift lower.  The other noteworthy thing is today’s 0.4% loss was the largest decline of the year.

MARKET SENTIMENT

Just a few months ago, a negative GDP would have crashed the market, yet today we set a new intra-day high shortly after the headlines hit the market.  What gives?  Journalists and fundamentalists are coming up with various excuses, but the truth is holders didn’t care about the headline and chose to keep holding, expecting higher prices ahead.  It doesn’t matter if these traders are right or wrong, the fact remains they want to keep holding and they are not going to let some silly headlines flush them out of the market.

We find ourselves in a market with limited supply because no one wants to sell, and not only  that, the steadily rising prices are converting former pessimists into buyers.  The real takeaway from today’s trade is this market is not afraid of headlines.   Risk of unexpected bad news is something traders normally live with, but the market is demonstrating a carefree attitude toward fundamentals and that is giving investors a free pass to be long.  Markets decline for various reasons, but it looks like this one won’t top until we run out of buyers because headlines cannot dent this rally.

TRADING OPPORTUNITIES

Expected Outcome:
While the day finished in the red, the market’s resilience in the face of unexpected negative headlines is quite bullish.  0.4% is trivial if we talking about unexpected negative GDP.  This doesn’t mean the coast is clear and this move is near the end, but it doesn’t look like it is done yet.  Look for a bounce off of 1500 tomorrow to confirm a continuation.

Alternate Outcome:
The end is near and we could be in the early stages of the top.  Failing to hold 1500 would be a change in character and we could see further weakness.  At this time I don’t expect a selloff to be anything more than testing recent support.   Holders have shown a lot of resilience in the face of some highly negative headlines and if they haven’t cracked yet, I don’t expect a modest pullback will send them running for cover.

AAPL daily at end of day

INDIVIDUAL STOCKS

APPL failed to hold $460 for a second day.  I’ll give the stock one more shot to surge higher Thursday, but if we don’t see strong rebound from these oversold conditions, this is going to become AAPL’s new home for a while.

A lot of people are dumbfounded by how AAPL can have record profits and be down by 35% while a company like AMZN misses and is holding near record highs.  It all comes down to supply and demand.  Everyone loves AAPL and anyone who wants some already has as much as they can fit in their portfolio.  AMZN is the scariest stock on the street and investors are afraid to own it.  Contrarian investing works because while AAPL is extremely popular, there is no one left to buy it.  On the other hand investors avoid AMZN, meaning there are tons of new buyers available to keep pushing the price higher.  Supply and demand; understand how it works and the market starts making a lot more sense.

Stay safe

AM: News, what news?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:14 EST

AM Update

Teflon rally shakes off economic contraction.  AAPL struggles with $460 and chances of a quick rebound are fading fast.

MARKET BEHAVIOR

Stocks traded modestly weaker on unexpected news of economic contraction in the 4th quarter, but given the magnitude of the headline, the market’s reaction is surprisingly subdued.

MARKET SENTIMENT

People can trade technicals, fundamentals, or the market.  Technicals say we are overbought.  Fundamentals say we are two-months away from a new recession.  Yet the market could care less and is holding near 5-year highs.  Markets are a collection of traders buying and selling their opinions and expectations.  Fundamentals and technicals are secondary because they only influence trader’s opinions and expectations, they don’t actually move markets.  More importantly, we only care about changing opinions and expectations.

Buying and selling is what makes markets move.  Traders with existing opinions have already placed those trades and are waiting.  It is traders who are changing their minds that provide the buying and selling that moves prices.

Today’s economic contraction report did little to change anyone’s mind, so prices stayed the same.  Bears remained bearish and bulls stayed bullish.  The bad news for bears is that headline was about as spooky as it gets and if any bulls were hanging on by their fingertips, that would have pushed them over the edge.  This proves bulls are confident and holding on for higher prices regardless of what the fundamentals or technicals show.

Journalists will point out the half-full parts of the report to explain this resilience,  but their job is to find reasons to explain the market’s move, or in this case the lack of a move.  The truth is bulls are getting greedy and bears are impotent (already out of the market).  When a headline like this cannot change a bull’s mind, the only one left to change is bears buying into the market and that is why we should expect higher prices over the near-term.

TRADING OPPORTUNITIES

Expected Outcome:
If headlines of economic contraction can’t spook bulls out of their positions, not much else will.  If this market cannot be brought down by negative news, then the only other thing is running out of buyers.  As long as cynics remain, the market will have fuel to continue rallying.  Eventually bears will develop a “if you can’t beat them, join them” attitude and buy this market   Those that jump on the bandwagon sooner will profit more than those that wait until the very end and buy the top.  It is okay to be wrong, it is fatal to stay wrong.  The sooner we recognize and fix our mistakes, the more successful we will be.

Alternate Outcome:
Markets can go down for any number of reasons, but this market is demonstrating an immunity to negative news and that greatly mitigates unexpected downside risks.  This rally will eventually turn over, but only after everyone has jumped on the bandwagon.  With today’s resilience, and if it holds through the close, we should expect the pace of bears turning into bulls to accelerate, but this is the last push toward the end of this rally and those that get in too late will be left holding the bag.

AAPL daily at 1:14 EST

INDIVIDUAL STOCKS

AAPL finally broke above $460 this morning, but is struggling to hold this level midday.  Moving into last week’s gap will be a significant technical milestone.  There are a lot of new buyers and regretful holders at the $460 level, but once we get through their selling pressure, the clear air of the gap will give less resistance up to $490 because there will be fewer people trying to get their money back.  But we have to break above $465 first.

We are in the fifth-day of the post-earnings selloff and the longer we trade at these levels, the less likely a V-bottom becomes.  If we fail to break into the gap this afternoon, chances of a quick rebound are practically nil.  The two remaining options are a grind higher and more selling.  Since so many people are still bullish on AAPL at this valuation, I see a much larger pool of available sellers (current holders) than new buyers.  If someone does not already own APPL at these levels, they probably are not going to buy it no matter how cheap it gets.  That lack of demand from new investors will be a real headwind turning this stock around.

Stay safe

PM: Moving past 1500

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

The S&P500 set another new high and is poised to continue.  AAPL flirted with $460, but was unable to break above.  Another couple of days of sideways trade will make a sharp rebound unlikely.

MARKET BEHAVIOR

The S&P500 set another new high in above average volume.  The more people wait for the pullback, the higher this thing goes.  Every market tops, but they usually go further and longer than most expect and that is clearly the case here.

MARKET SENTIMENT

Virtually everyone holding a diversified basket of stocks is showing a profit with the market at 5-year highs.  When things are going this well, there is very little selling pressure as holders keep holding on for more.  Eventually this ride will come to an end, but we are not there yet.  As long as there are regretful investors watching this market rally without them, there will be fuel to keep pushing us higher.

The market held 1500 for a couple of days and today’s break above 1504 confirmed the continuation.  The breakout was a modest 0.5% and relatively contained.  We need to watch for an unsustainable surge higher, but that will be a move well in excess of 1% and far higher volume than today’s 17% above average.

TRADING OPPORTUNITIES

Expected Outcome:
Yesterday’s dip was all the market needed to refresh itself and while we are getting further and further extended, this market still has legs.  We might only see another 20 or 40 points of upside, so jumping in here is clearly late to the party, but there is enough upside left that shorting this market is not advisable.

Alternate Outcome:
Today’s pop could be the false breakout that dragged in the last of the buyers, but it sure didn’t have a capitulation feel.  As always, the market can get spooked by its own shadow and nose over without warning, but the market is in a rallying mood and ignoring negative headlines.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL rallied modestly on light volume.  It tried to recover $460, but it could not break thought this level.  The encouraging thing for AAPL is the light volume shows sellers are taking a break for the time being.  Maybe hopeful holders are holding a little longer as the expected rebound is about to take place.  V-bottoms happen over a couple of days and if AAPL continues trading sideways at these levels, that greatly diminishes the probability of a sharp rebound.  If AAPL doesn’t trade sharply higher tomorrow, look for either a rounded base or more selling.

Apple released an upgraded iPad without much fanfare.  The one takeaway is they would not have done this if a completely redesigned iPad release was imminent, so one potential catalyst can be eliminated.  The interesting thing about Apple dropping the numbering convention on the iPad means future upgrades will most likely revolve around memory and processor upgrades.  Design-wise it is really hard to do much with a thin, rectangular piece of glass.  The headwind AAPL will continue facing is the existing iPad and iPhone products are so good that few people see the value in upgrading for fairly incremental improvements in newer models.

Stay safe

AM: New highs….again

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EST

AM Update

The S&P500 bounces back after early selling and makes a new high.  AAPL challenges $460, but runs into resistance

MARKET BEHAVIOR

The market had an open invitation to selloff after yesterday’s dip and this morning’s early weakness, but it bounced back and made new highs instead.  This price-action is supportive of 1500 and if we hold through the close, the market is not ready for a pullback.

MARKET SENTIMENT

How far can this thing go?  That is what most traders are asking themselves right now.  They are interested in buying this market because last fall’s worries are ancient history, but they are hesitant to chase a market that ran this far and is poised for a pullback.  They are stuck in this indecision, but each point higher pushes them closer to buying.  The thing about chasing is it is not like a breakout or breakdown where everyone is watching the same levels and a flood of orders his the market at once.  Chasing is a gradual phenomena where traders change their minds over time.  It is this steady stream of new buyers that allows the market to drift higher in spite of all the calls for a pullback.  No doubt this cannot go on forever, but it usually last longer than most people expect and that is exactly what is happening here.

One way these things end is when a larger wave of regret hits traders in unison after the market continues marching higher without them.  Buying picks up and the pace of gains accelerates until most traders can no longer stand sitting out and jump in headfirst, but this surge marks the end of the rally as buying finally exhausts itself.  So far this pause at 1500 shows buying isn’t getting out of hand just yet.

TRADING OPPORTUNITIES

Expected Outcome:
I’ve been wary of a pullback for a few days, but the market’s resilience around 1500 is indicating support, not exhaustion.  No one has a crystal ball and our understanding of the market evolves with each new piece of information.  Barring a weak close today, the market is supported by new buyers and still has more room to run.

My initial hesitation was due to stop-loss and breakout buying that pushed us through 1500.  These buyers have limited resources and their support usually fades within a couple of days.  Since we held these levels for a third day, it shows real support from follow up-buying and this is more than a short-squeeze.

Alternate Outcome:
Markets don’t always exhaust themselves in a single push higher and we could see a rolling top here at 1500.  Watch for a material violation of new support at 1500, but until then stick with the trend.

AAPL daily at 1:23 EST

INDIVIDUAL STOCKS

AAPL rebounded from recent lows and is challenging $460 in late morning trade.  A lot of buy-the-dip traders bought AAPL at $460 after earnings, only to watch it plunge under $440 within 24-hours.  No doubt a lot of these buyers are filled with regret and looking to exit their impulsive AAPL trade at break-even.  We also had people hold AAPL through earnings who failed to sell the initial dip to $460 and they promised themselves they would finally sell if the stock regained $460.  Attitudes like this make technical levels behave like support and resistance.  When regretful owners jump at the chance to sell at $460, that will hinder further advancement.

While $460 will provide some resistance,  the major roadblock up ahead is $500 where a huge swath of regretful investors would love to get their money back.  We will probably bump up against $460 for a couple of days, maybe even turn back from it, but the real level to watch is $500.  Any swing-traders should wait to buy the break above $460 and look to sell around $490.  On the lower side  a break under $450 signals a lack of support and we will see new lows.

Stay safe

PM: Modest decline

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Markets broke the streak of up-days  but that is a good thing.  AAPL bounced today, but is this the real deal?

MARKET BEHAVIOR

The S&P500 dipped less than 0.2% and ended an impressive streak of eight up-days.  While the fractional decline doesn’t constitute material selling, it does break the streak and lets us move past the obsession with counting up-days.  Volume was right around average as holders were not spooked by modest selling and the market closed a hair above 1500.

MARKET SENTIMENT

This was the first time the market didn’t set a new closing high in nearly two-weeks.  Buying took a break simply because there was so much of it since the start of the year.  Trading would be easy if the market went up every single day, but we are not that lucky and actually have to work for our money.  Today was the second close above 1500 and it would be nice to see two more closes at this level to confirm support.  But at the same time, some selling here is normal, expected, and healthy.  I would be more concerned about the sustainability of this rally if we kept heading higher than if we dipped and found support.

Complacency is creeping into the market, but it is just starting and not pervasive yet.  There are still a lot of recent sellers watching this market rally without them and they are tempted to jump on any pullback.  Big money managers under-weight this market are also struggling with the lesser of two evils, getting left behind or buying the top.  But the longer they wait for the pullback, the more uncomfortable they become watching the market head higher without them.  It is easier to justify losses when the entire market dips than explaining why they failed to keep up with a rallying market.

TRADING OPPORTUNITIES

Expected Outcome:
It would be hard to count today as real selling.  The dip was minor and volume was average.  The market can refresh through either selling or sideways trading.  Today’s move was sideways and supportive of 1500, but we need to hold these levels a couple more days before we can stop expecting a pullback.

The market clearly wants to go higher and long-term investors should keep holding, but those out of the market or with shorter timeframes should wait a couple of days for the market to either pullback or build a solid base at 1500.

Alternate Outcome:
A sustainable rally goes two-steps forward, one-step back, but not every rally is sustainable or predictable.  We could continue rallying after today’s modest 0.2% pullback, but just because the market heads higher doesn’t mean we need to be part of it.  If the market doesn’t look sustainable, sit it out.  There are eleven months left in the year and there is no reason to force a trade that is less than ideal.

AAPL daily at end of day

INDIVIDUAL STOCKS

We all know AAPL will bounce, the question is when.  It still sounds like most people are claiming AAPL is oversold and poised for a bounce and no doubt they will be proven right, but we have to ask when and how much before deciding to make this trade.  If a lot of nervous holders are waiting for that bounce, it won’t happen.  If swing-traders are buying the dip, it won’t happen either.  I’m suspicious of all the people who think AAPL is oversold and makes for an easy trade back up to $500.  No doubt it will get there, but it might need to go through $425 first.

People are very emotionally attached to this stock and I understand the reluctance to sell when it could bounce any day now.  Rather that just cut out, set an upside target and downside stop-loss.  Maybe $490 on the upside and $430 on the downside.  Then stick to these levels.

AM: Embrace the pause

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:07 EST

AM Update

The market is trading sideways at 1500 and AAPL’s early rebound is filling owners with new hope.

MARKET BEHAVIOR

The S&P500 dipped under 1500 in early trade, but recovered that psychologically significant level by midday.  A bit of sideways trade is constructive for a continuation.  The market has seen few down-days this year and a little distribution and profit taking should be expected, even welcomed.

MARKET SENTIMENT

The market isn’t worried about much here.  The only negative story making headlines is AAPL’s collapse, but that damage is contained and largely a single stock event.  Complacency is always something to be wary of, but it isn’t enough to bring the market down by itself.  It isn’t complacency that tops out the market, but investors being fully invested when they feel comfortable.  Running out of new buyers is the underlying structural event that causes complacent markets to peak.  So while complacency is creeping in here, many investors who sold toward the end of last year are not fully reinvested yet and it is their buying that is holding up this market.   It takes time for these sideline watchers to be won over and buy back in and we are still in the middle of this process.

TRADING OPPORTUNITIES

Expected Outcome:
The market probably needs a couple down-days as part of the two-steps forward, one-back.  This is the process of moving forward and don’t let modest weakness spook anyone.  For those that are holding, they can keep holding.  For those looking for a place to get in, wait for some weakness, but don’t wait too long because the dip will be shallow and quick.

Alternate Outcome:
A move above 1505 says the market is ready to keep going.  Of course a sharp advance on gigantic volume would likely be capitulation and signal a near-term top, but a more casual move above 1505 is putting the squeeze on shorts and pressuring those watching from the sidelines.  This is a chasing rally and as long as traders are watching from the sidelines there will be fuel to propel this market higher when they start buying back in.  We also need to be wary of a confidence rattling headline, but so far the market is pretty happy with the world and not too worried about last year’s headlines.

AAPL daily at 1:08 EST

INDIVIDUAL STOCKS

AAPL bounced back from early weakness and recovered $450.   We might even see the stock come up even more, but don’t be fooled, this is just a dead cat bounce to squeeze late shorts and keep hopefully owners holding on.  Anyone looking for a V-bottom is going to be disappointed.  Sharp bottoms form in over-sold stocks like we have in AAPL, but they also require an unexpected catalyst that decisively reverses the trend.  With the next earnings report three-months away, it will be a long time before we get another actionable catalyst   Further, at this juncture the market is no longer impressed with earnings out of AAPL and it needs to see something new to bring the stock back to life.  The market has clearly decided AAPL is a mobile phone company with increasing competition from Samsung on the high-end and low cost-rivals on the other end of the scale.  The market already expects strong phone sales, new phone models, and some kind of dividend/buy-back.  None of these events will reinvent the company or stock.  If anyone thinks AAPL will come back just because it is a great company will be waiting a long, long time.

I know many people are reluctant to sell AAPL here, but at least put a plan in place.  Pick levels above and below where you will sell the stock and stick to these.

Stay safe

LA: How far can this go?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Look Ahead

Four-weeks into the year and money managers are already behind the eight-ball.  As for AAPL, there are plenty examples of everyone’s favorite stock losing its mojo and trading sideways for years at a time.  Will this be AAPL’s fate?

MARKET BEHAVIOR

The market has been up every week this year.  Quarters often exhibit a consistent personality and so far this is starting out as a bullish quarter.  This would suggest the rally has legs and any dip should be considered a buying opportunity.

MARKET SENTIMENT

A lot of money managers are already behind their benchmarks and we are just a few weeks into the new year.  Last year was a difficult year for big money and this year is not starting out any easier.  At the end of 2012 many traders were reluctant to buy the Fiscal Cliff drama and chose the more conservative route of sitting it out.  That would have been a smart move if the market imploded, but it didn’t and instead shot up aggressively, leaving many traders behind.

From the first day of the year these under-invested managers were already lagging their benchmarks.  Rather than chase too-far, too-fast, they waited for the inevitable pullback.  But while they’ve been waiting, the market has continued higher, putting on even more pressure.  Things got even worse last week when AAPL imploded, but the indexes held firm.  AAPL is the single largest holding by most money managers and this put them even further behind the indexes.  It is already shaping up to be a cruel, cruel 2013 and the year is only beginning.

Why all this matters is money managers are faced with a major dilemma, keep waiting for the pullback at the risk falling even further behind, or bite the bullet and jump on board the bandwagon.  This is “deja vu all over again” as most money managers were stuck in this same place last January.  As long as traders are waiting for the pullback, it won’t happen and that is why the market continues rallying.  Once these guys reach their breaking point and jump on the bandwagon, the market will run out of new buyers and we nose over.

TRADING OPPORTUNITIES

Expected Outcome:
We have not seen any real selling in 12-trading sessions and the biggest down day of the year is a modest 0.32%.  For those brave enough to buy the Fiscal Cliff paranoia and stick through to0-far, too-fast, it’s been a fantastic start to the year.  While the market cannot go up every day, any weakness should be looked at as a buying opportunity.  I would be reluctant to buy here, but if the market dips for a day or two, that is an invitation to join the rally

Alternate Outcome:
While the trend is clearly higher, we could breakdown at any time if a nasty headline spooks the market or we simply run out of buyers.  Rallies always end, but typically they go further and longer than most expect.  We might see a dip to support this week, but don’t expect the market to breakdown.  Smart money is buying the weakness, not selling it.

AAPL weekly at end of week

INDIVIDUAL STOCKS

There are a lot of people defending the intrinsic value in AAPL and if it was a great buy at $550, then it is a steal at $450.  And while they might be right, the market doesn’t agree and we all know what happens to traders who argue with the market.

There are plenty of examples of iconic businesses with great growth, but their stock price stagnated for a decade.  MSFT is well off it’s all-time highs and has been dead money for over a decade.  Same exact thing from CSCO.  WMT finally regained its 2000 high thirteen-years later.  SBUX peaked in 2006 and didn’t regain that level for five more years.  Even AAPL traded sideways for over a decade after surging 700% between 1985 and 1987.  Without a revolutionary new product, expect AAPL to join the ranks of has-beens, at least in traders’ eyes.

The question any AAPL owner needs to ask is how long are they willing to hold to get their money back. No doubt we could see a bounce back to $500 and that would make for a great short-term swing-trade, but any strength in AAPL should be sold.  MSFT, WMT, CSCO, and SBUX were great companies with strong growth and industry leading profitability,  but that didn’t prevent the stock from stagnating for long stretches.  There is a lot of profit to be made swing-trading AAPL, but buy-and-hold investors are not going to see new highs any time soon.

Stay safe

WR: 4th in a row

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

Another up week as this rally knows no limits, but a strong market didn’t save AAPL traders who are stuck wondering what to do with their losing positions.

MARKET BEHAVIOR

The S&P500 rallied another 1.1% this week, making the 4th consecutive weekly gain and 8 out of the last 10.  Weekly volume was lower than average but only because of the holiday shortened week.  We are 61-points above the 10-week moving average and 102-points above the 40-week moving average.  Outside of a few weeks of weakness in the final weeks of the year, the market has rallied non-stop from November’s 1340 lows.

MARKET SENTIMENT

Following the financial news and trader forums, most of last month’s worries are long forgotten and the market is pretty pleased with the world.  The market often swings between extremes of pessimism and complacency.  Last November and December the world was falling apart and now everything seems fine.  Funny how that works.

The contrarian in me is suspicious of this rally, but the thing to remember is moves in the direction of the go further and longer than anyone expects.  While people have called for a pullback since the huge Fiscal Cliff spike, the market has marched higher instead.  Obviously this cannot continue indefinitely, but when in doubt, stick with the trend.  Eventually this market will run out of new buyers, but it hasn’t happened yet.

TRADING OPPORTUNITIES

Expected Outcome:
The market rallied over 100-points nearly non-stop in less than a month.  While the market goes further and longer than anyone expects, there are times when the odds are in your favor and others when it is best to sit it out.  Right now is time for sitting.

Alternative Outcome:
The market will only pullback when everyone stops calling for a pullback.  Are we there yet?  Obviously not since the market is up eight-days in a row.  The market can go even further if it means humiliating the experts and gurus, but while the market can go higher, that doesn’t make it a good trade.  We are here for the easy, high-probability money and jumping on this rally is late in the game.  While more upside might remain, that doesn’t make it a good trade.

AAPL weekly at end of week

INDIVIDUAL STOCKS

I received a lot of questions from holders of AAPL about sticking with their positions after last week’s plunge. The simple answer is only hold is if your original trading plan calls for holding in situations like this.  If you bought at $550 and acknowledged that the stock could continue falling another 20% before rebounding, continue holding.  But if you bought at $550 and didn’t expect the stock to dip under $500, then clearly your original thesis is invalid and there is no reason to keep holding at $450.

AAPL could bounce at any time, but even if it does, selling is still the right thing to do.  This isn’t about what works this one time, but about how we want to trade over our career.  I have friends who are still holding CSCO they bought at $60 and waiting for it to come back 13-years later. Can anyone actually claim that is the smart trade?  What is the difference holding AAPL at $450?  Personally I don’t care if AAPL comes back or not, when a trade violates my original thesis, I get out.   This is larger than a single trade and is about being a successful trader.  Undisciplined traders might get lucky here and there, but the traders who stick to his plan will succeed over the long haul.

Stay safe

PM: Close above 1500

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The S&P500 continues making new highs, but who is buying and why are they buying?  That is the key to understanding where we go from here.  After some reflection I realized why I blew the AAPL call and hopefully this will keep me from making the same mistake in the future.

MARKET BEHAVIOR

The S&P500 finally closed above 1500 and finished near the day’s high.  Volume was slightly above average as a decent number of traders show a willingness to buy stocks at these levels.  But are they buying stocks here because they think the market is headed higher, or are they buying for other reasons, such as covering an index short as part of unwinding their hedged AAPL position?  Understanding motivation is an important part of figuring out where we are headed.

MARKET SENTIMENT

Stocks are making a strong move after breaking resistance at 1470 and have come 30-points in six-trading days.  The last down-day of any real significance was 13-trading sessions ago when the market dipped a measly 4-points.  To find a more meaningful sell-off you have to go back to the final days of last year during the Fiscal Cliff gridlock.

It is amazing how calming a smooth rally is on the nerves and there is far less fear in the market than the closing weeks of 2012.  But as a contrarian trader, I feel more comfortable when everyone else is nervous.  It is nice to think the market can rally for dozens of days without selling off, but typically the real world isn’t so easy.  There is no reason to expect a major pullback, but some selling would be normal after rallying 100-points in less than a month.

One of the more interesting dynamics at play is the market’s strength in the face of AAPL’s collapse.  I wrote why hedge funds are buying the index as they unwind their AAPL potion in this morning’s blog post.  The concern for traders is this short-covering is not an enduring phenomena and without new buyers expecting higher prices, we risk running into a ceiling real soon.  But that is a good thing, pullbacks are a health and normal part of moving forward.  When we go too-far, too-fast, it doesn’t end well.

TRADING OPPORTUNITIES

Expected Outcome:
There is no reason the market cannot rally 14+ consecutive days without a minor pullback, but the further we go, the more we push our luck.  Knowing how the markets work, it would be foolish to suggest people rush out and buy after so many up-days.  Can we go higher?  Sure.  But is that a high-probability trade?  Of course not.

The bigger challenge is figuring out how far the inevitable down-days will go.  Will it be another 4-point dip before rallying the next day?  Or will we pull back to support at 1470?  We tend to go down faster than we go up, so we could easily retest 1470 over a couple of days next week.  But don’t short the market expecting a lot more selling than that.  Take profits early and often in any counter-trend trade.

Alternate Outcome:
If the expected outcome is a down-day after 13 up-days, then the alternative is another dozen up-days.  That surely would surprise market participants as they watch in awe as the market leaves them behind.  While the contrarian view says we should expect the unexpected, we also need real buying to propel a move like this.  If new buyers develop a fear of heights, the market peak will be a self-fulfilling prophecy.  Can we rally for a month without any real selling?  Sure.  It is likely?  No.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL gave up another $10 as hopeful traders waited in vain for the expected rebound.  But I can’t be too critical, Wednesday afternoon I was an AAPL bull too.  As part of my blown call, I’ve done some reflection on why I got it so wrong.  It turns out I fell for one of the things I often warn other people about and that is thinking the contrarian trade is going against trend.  AAPL’s decline had clearly gotten a little out of hand and that obviously meant traders were overly bearish in the name.  But what I forgot is contrarian is going against the crowd, not the trend.  If I dug a little deeper I would have realized most traders felt there was real value in AAPL and it was only time before the stock bounced back.  The crowd expected a bounce, not a $50 selloff, and that is why we ended up with the plunge lower.

Contrarian trades work because people trade their conviction.  People own what they think will go up and sell what they think will go down.  If everyone expects AAPL to bounce, they already own it in anticipation of the bounce.  But if everyone already owns AAPL, who is left to buy?  That is exactly what happened on Wednesday and Thursday, AAPL put up good numbers, but the stock plunged because everyone who wanted AAPL already owned it and no one was left to buy.

I know better, but that still didn’t keep me from developing a blind spot when I was convinced of the value in AAPL.  The saving grace is I limited my losses by keeping my position size reasonable and cutting my losses quickly.

Stay safe

AM: AAPL keeps sliding

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:12 EST

AM Update

Markets break above 1500 in early trade, will they be able to hold it through the close?  AAPL cannot catch a bid and is under $440.  What will it take to finally get the stock to bounce?

MARKET BEHAVIOR

Stocks opened strong, breaking through the 1500 barrier in early trade, but couldn’t hold those gains and dipped under this key level by mid-morning.  The market found a floor at 1495 and is attempting another assault on 1500.  It will be interesting to see how the market closes and if the pattern of early weakness followed by closing strength is changing.

MARKET SENTIMENT

The S&P500 continues defying weakness in AAPL and broad market investors are unfazed by AAPL’s troubles.  AAPL posted great earnings and is not indicating signs economic weakness; it is simply an isolated story of an over-owned stock.  That is why selling has not spread beyond AAPL.

But how does this unexpected strength affect broad market sentiment?  Some people theorize hedge funds were long AAPL and short the index as a hedge.  They thought AAPL was going to outperform the indexes, but were afraid of economic and political risks taking all stocks, including AAPL down.  In situations like this, they buy AAPL and short the S&P500.  This limits their exposure to the difference between AAPL and the S&P500, allowing them to make money even if AAPL declines, as long as the broad market declines even more.  This is a great way to isolate a single stock’s story from wider economic concerns.

A quick example will better illustrate this concept.  Lets say a major European bank becomes insolvent overnight and requires a high-profile bailout.  All stocks tank on this news, but some more than others.  If AAPL falls 5%, but the S&P500 with its heavy exposure to financials falls 7%, then the hedge fund actually made 2% that day because AAPL outperformed the S&P500.  (-5%) – (-7%) = +2%   This simple idea is the entire reasons hedge funds exist.  They reduce risk by hedging out broad market risk, allowing them to focus exclusively on individual stock stories.  But obviously this only works when they are right about the individual stock story.

Why this matters to the broad market is many of these hedge funds were short the S&P500 as part of their AAPL trade and when they sell out of AAPL, they are also buying back their S&P500 short.  If this really is the case, this is a temporary  lift because short covering is not driven by expectations of higher prices. We need to see other buyers step in to keep this rally going.

TRADING OPPORTUNITIES

Expected Outcome:
The market is taking it’s time at 1500, which is supportive of these levels as long as people are buying for the right reason.  Momentum chasers and short covering represents a small sliver of available money in the market.  While it is large enough to move the markets when they work together, they don’t have staying power to keep prices up by themselves.  This is why we want to see three or four days of support at a level before feeling confident other buyers are also buying these levels.  Today is the second day of trade around 1500 and if we keep this level through Monday and into Tuesday, it proves there is more to this new high than just short covering and we can stay long or add new positions.

Alternate Outcome:
With too many people waiting for the expected pullback, the market continues marching higher, crushing bears and filling traders watching from the sidelines with regret.  These two groups are the ones that keep buying the market and pushing it higher.  With as much selling as we saw between September and November, there are still lost traders holding cash and ready to chase this thing higher.  Breaking through 1505 and closing strong would show this market is still ready to move.

AAPL daily at 1:12 EST

INDIVIDUAL STOCKS

Another bad day for AAPL as it dropped under $440.  If AAPL was a great buy at $550, then it is a screaming deal at $450, but the question any AAPL bull must ask is where are all the buyers?  With continued weakness, new buyers are clearly not interested in this stock at $450 even though a lot of people who swear by the huge intrinsic value.  What this tells us is everyone who believes in AAPL is already fully invested, leaving no one else buy.

I was one of those people until yesterday, but the 10% decline on record earnings invalidated my thesis and in these situations there is nothing left to do but get out and reassess.  AAPL could easily find a floor around $450, but the same thing was said about $550.  The truth is these things go longer and further than anyone expects and clearly that is happening here.

There are two groups of traders watching this stock.  One is value investors attracted to the low P/E and dividend.  The other are holders desperate for a rebound.  The question becomes who will move first.  Value investors, especially those that resisted the temptation to buy AAPL at $500 are an obviously a patient bunch and waiting to see how low this will go.  On the other side are the hopeful owners insisting there is real value in AAPL and it is only a matter of time before it recovers.  At this point it seems far more likely the hopeful crowd will be demoralized by the steady march lower and eventually sell when they just can’t take it anymore.  Once everyone completely hates the stock, it will finally find a bottom and start rallying.  Both FB and NFLX had to go through this cleanse of maximum pessimism before they bottomed.  We should expect the same from AAPL, meaning we need to get rid of all these hopeful owners before this stock can bounce back, and that means lower prices in the near-term.  Apple Inc is a great company, but it will take time for the AAPL stock to work through its supply and demand imbalance.

The best way to trade situations like this is to sell and reassess with a clear head.  If you still believe in the story, buy back in when the price action supports your thesis.  No one is right about every trade and we all lose money, the difference is successful traders admit defeat and move on.

Stay safe

PM: S&P500 breaks 1500

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

The S&P500 market another new high, but it wasn’t able to hold those gains into the close.  Is this the start of a pullback to support or just another bear-trap?  AAPL was pummeled and never caught a bid, finishing at the day’s lows.  What does that mean for the near-term trade?

MARKET BEHAVIOR

The market showed impressive strength in the face of AAPL’s collapse.  The S&P500 broke above the psychologically important 1500 level while AAPL plunged 10%.  In a break from recent character, the market started strong and finished weak, failing to hold 1500.  One day does not make a new trend, but it is noteworthy enough to watch more closely.  Much like the rest of the month, volume was above average and most traders are actively participating in this market.

The last time the market printed 1500 was long before the financial meltdown and this is a significant milestone. It took a few years, but the market is finally getting its mojo back and encroaching on the all-time high, just 75-points away.  All the people who bailed on the market years ago because it was broken can’t be all that happy with their emotion-driven decision to shun equities and stick their money in 1% bonds.

MARKET SENTIMENT

It is noteworthy the market couldn’t hold 1500 and retreated back to the 1490s.  We have seen a lot of buying over the last two-and-a-half months and it would be perfectly reasonable for the market pullback to support before resuming the uptrend.  The market needs periodic rests to maintain quality ownership.  If prices rise too quickly, conservative investors get nervous and sell to emotional momentum traders.  Momentum buyers are notoriously weak-kneed and bail in droves when the trend turns against them.  While volatility is good for swing-traders, it is bad for investor confidence and everyone benefits from a stable market.

TRADING OPPORTUNITIES

Expected Outcome:
The preferred outcome is a modest pullback and consolidation of recent gains.  A nice and steady rally is preferable to a dramatic sawtooth ride for most investors.  Without a near-term pause, I will grow increasingly suspicious of the sustainability of this rally.  The market doesn’t need to pullback, but it should at least digest gains.  We saw nice sideways trade following the Fiscal Cliff  spike and that allowed the market to continue higher.  We need to see something similar to confirm the durability of this rally to 1500 and beyond.

Alternate Outcome:
Seeing the S&P500 bump its head on 1500 might be a tad too obvious because the market hates being predictable and this could be yet another bear trap before surging higher.  The market will pullback at some point, but trends are far more likely to continue than reverse because they continue countless times, yet reverse only once.  While the market can continue higher, it gets harder and harder for the rational trader to keep holding.  It is foolish to holdout for top-dollar and most often it is preferable to get out on the way up.

The market is one big head game and most people do better selling into strength because selling weakness leaves them filled with regret over not selling earlier.  The temptation is to wait for the market to go back up to the previous high, but more often than not the market steps lower, leaving the trader with even more regret at not selling the first dip.  And beyond this, the early seller has a huge psychological edge because he is watching the pullback with cash in hand and hungry to buy.  Compare this to the guy riding the elevator down, nervously trying to decide if he should get off or not.  By the time the market finally chases him out, the early seller is buying back in and ready to ride the trade back up.

I’ve read countless interviews with successful traders and I have yet to find one who claims his key to success is selling on the way down.  Every single one claims they sell too early, many going even further and saying that is the number one key to their success.  Maybe they are on to something.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL’s massive plunge caught a lot of people, including myself, off guard and that is why it happened.  The most noteworthy thing is the stock never caught a bid and finished at the lows of the day.  This is the most owned stock by big money and they failed to prop up their most important investment.  Big money knows the market is a game of perception and often they will defend their positions by buying shares to prevent a major selloff.  I was surprised we didn’t see that with AAPL, especially in after-hours trade when it would have been a lot easier to manipulate the market.  Based on this completely absent defense, it seems everyone already has as much AAPL as they can handle and no one is able or willing to put new money at risk.  That is a scary prospect for the stock.  No matter how solid the fundamentals, if there are no new buyers, the stock will continue languishing.

The problem for people hoping for a rebound is the biggest catalyst came and went and there really isn’t anything over the next few months to trigger a strong move.  The iPhone5S will be met with a yawn.  Management was hostile to questions over their cash hoard, so don’t expect much movement on that anytime soon.  Apple TV is still a R&D project.  And virtually all the other good news concerning global sales is already baked into the stock.  Without a reason new for investors to buy, it seems we are stuck at these levels for a while.  The stock could rally or slide another $20 or $40, but any expectations of recovering $600 in the next few months are a pipe-dream.  Apple Inc remains a great company, but it’s stock is out of favor and everyone who believes in the story already has all the stock they can handle.

Stay safe

AM: Markets surge while AAPL tanks

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:00 EST

AM Update

AAPL tanks and the market breaks 1500, what’s going on here?

MARKET BEHAVIOR

The market ignored all the noise over AAPL’s plunge and broke above 1500 in early trade.  Clearly the AAPL story is a single-stock event and the rest of the market is doing fine without its leadership.

MARKET SENTIMENT

I am surprised at the market’s resilience when the index’s biggest member stumbles in a bad way, but this is just another example of the market doing the least expected thing.  The market clearly wants to go higher and it is winning over reluctant traders with each passing day.  The only question is how many reluctant traders are left to win over before we run out of new buyers?

Today is the first day in a while that started strong and it will be interesting to see what happens in the second half of the day. Often these things go further and longer than most expect and that is clearly the case here.  Earnings have been fairly decent, even AAPL put up good numbers, so it seems the economic recovery is still intact and things are turning out better than feared.

It appears the Debt Ceiling showdown is being postponed and the market has yet to find a new fatalistic obsession.  Right now the only thing bothering traders seems to be too-far, too-fast and that is easily overcome by the market’s continued strength.  The thing we need to keep an eye on is the level of cynicism remaining in the market, if this market wins over too many fans, then we are approaching saturation and will run out of new buyers.

TRADING OPPORTUNITIES

Expected Outcome:
The market clearly wants to go higher and it would be foolish to try to short such a strong market, but that widespread attitude could be the thing that finally lets a short work.  Those that are still in the market can move up their stops and hold for a little longer, but there is nothing wrong with locking-in profits and waiting for the next trade.  The difficult trade is for those on the outside looking in.  It is tough to watch other people make money, but never force a trade just because you feel like you are being left behind.  There will be countless profit opportunities over the next 11-1/2 months.  If you missed this trade, just wait for the next one.

Alternate Outcome:
Last year’s Q1 rally continued for 3-months and we could easily see something similar here, but we need to look at what made last year’s Q1 rally possible.  The summer of 2011 saw a massive selloff between the downgrade of US debt and financial instability in Europe.  The markets sold off nearly 20% in a matter of days followed by moths of volatile sideways trade prior to the record-setting 2012 Q1 rally.  Compare that to this summer’s 8% dip and concern over spending another four years with the same Democrat in the White House.  These are two radically different setups and they will most likely produce different results as well.

The fear of a global depression in 2011 gave traders flashbacks to 2008 and they sold in droves.  It was the pervasive pessimism and huge pool of sellers that provided the fuel for the 2012 Q1 rebound.  We also had a wave of selling last summer, but it was far smaller, meaning the fuel for this Q1 rally is more limited.  No doubt we can keep going higher, but it needs to be part of a sustainable grind higher, not a race to 1600 that will inevitably run out of gas and come back down.

AAPL daily at 1:00 EST

INDIVIDUAL STOCKS

What can we say about AAPL?  AAPL reported one of the most profitable quarters in the history of the world and investors blasted the stock for being too predictable, stable, and profitable.  The ironic thing is if Cook came out and said we are changing our strategy and sacrificing margins for market-share, the stock would have shot up like a rocket.  For whatever reason, investors are punishing AAPL for its high-dollar, high-margin product lineup and predicting it is the next Blockbuster Video and on the verge of going out of business.  But the truth is smartphones have barely penetrated the global market and there is so much upside that both AAPL and Samsung will hardly be able to keep up with demand.  But everyone assumes because AAPL isn’t selling a $15 smart phone that they are headed out of business.  Someone better tell BMW and Nordstroms that they don’t have a viable business model because they don’t sell scooters or have dollar bins for poor people.

But no matter what, we trade the market and the market doesn’t like AAPL.  What we are watching is the cleansing process; AAPL was the most loved stock on Wall Street and now it has to become the most hated before it can recover.  NFLX and FB went through the same thing and provide a roadmap for AAPL’s eventual recovery.  My mistake was thinking sentiment had bottomed, but where I went wrong was not recognizing that a stock as loved as AAPL was needs to become even more hated than what is normally required to bottom.  This plunge to $450 certainly goes a long way to achieving that goal.  It might not be the final bottom, but we are getting close.

Hopefully most people closed out their trades and are not willing to ride this thing down.  While Apple Inc. might be a great company, we trade the stock and stubbornness should never let us go down with the ship.  The greatest advantage individual investors have is our nimbleness.  We can get in and out of positions in seconds and if we don’t take advantage of this, we give up the only edge we have on large institutions.  I’m not promoting overtrading, just saying that we don’t have to go down with the ship.  Sell out of AAPL here, clear your head, look for the right entry and jump back on board when the time is right.  There is no reason any of us should ride AAPL from $700 to $450.  That is the way people go broke.  Take our loss and move on.

Stay safe

PM: AAPL plunges after-hours

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

The S&P50o notched another new high, but the big headline is AAPL’s poor performance in after-hours trade following its earnings release.  The company announced record earnings, but the market was unimpressed and pummeled the stock.  It is okay to be wrong in the markets, but it is fatal to stay wrong.  Anyone caught on the wrong side of this trade needs to follow their trading plan.

MARKET BEHAVIOR

The S&P500 traded fractionally higher, but it was enough to set another new high.  Today’s volume was above average, but the lowest out of the last four days.  Good earnings from blue-chip companies propped up the tech sector, at least during regular hours.  Of course everyone knows what happened after-hours, but we will get to that later.

MARKET SENTIMENT

The market keeps pushing higher, but in a tentative way.   We see early weakness followed by a rebound and modest gains.  1500 is just a few points away and the rally lacks the enthusiasm and conviction to make a strong move higher, but this is not a bad thing.  Caution is a common characteristic of sustainable rallies.  Brashness, overconfidence, and complacency are hallmarks of major tops.  Reluctance to over-commit here means many traders are still holding back and their available reserves are the fuel that can continue pushing this market higher if they are compelled to chase a move higher.

But enough about this stuff, everyone wants to hear about AAPL.  AAPL is the largest member of the S&P500 and NASDAQ indexes.  No doubt today’s after-hours selloff will be felt by the indexes tomorrow and could be a catalyst for a near-term market top.  AAPL closed lower by 10% at the end of after-hours trading and is primarily responsible for a 0.4% drop in SPY and 1.5% in loss in QQQ in after-hours.  AAPL has largely been a single-stock story recently as it traded near 52-week lows while the S&P500 was making 5-year highs, but is this story big enough to shift market sentiment and finally trigger pullback?  It will be interesting to watch.

TRADING OPPORTUNITIES

Expected Outcome:
Tomorrow will be a real test for the market.  If the pattern of strong closes continues, it is showing signs the market wants to keep going higher.  But if the market cannot shake early weakness, look for bears and nervous holders to pile on the selling and push the marked back down to 1470.

INDIVIDUAL STOCKS

Swing and a miss.  Obviously I blew my AAPL call.  Not that it was a bad trade, it just didn’t work out and that is all that matters.  AAPL had one of the most profitable quarters in the history of the word, yet the stock was pummeled 10% after-hours.  We don’t trade fundamentals, we trade stocks and when the stock goes the wrong way we lose money.  Simple as that.

For those of us in AAPL, we need to figure out how to pick up the pieces.  It is perfectly normal, even expected to be wrong in the markets, but what is fatal is staying wrong.  Successful traders take their lumps and move on and that is what we need to do here.

In Wednesday morning’s post I wrote about position size.  Using a 3% risk target and the option market’s expected move of 7%, I came up with a maximum position size of $43k for a $100k account.  Lets see how this trade did if the after-hours selloff holds into Thursday.

At the height of selling, AAPL was down 11% from Wednesday’s close, so lets use that number.  An 11% loss was larger than the option market’s prediction of 7% and 11% of $43k is a $4,730 loss, or a 4.73% hit to the $100k model portfolio.  While an ugly number, it certainly is not a catastrophic loss and easily lets the trader live to fight another day.  The original 3% loss limit was conservative to begin with because as we just saw, sometimes things can get carried away.

But from a risk management perspective, a 5% loss is not that big of a deal.  We took a calculated risk and sometimes these things don’t work out.  But this isn’t just rationalization, a 5% loss is very manageable if we don’t let it grow.  It takes 14-consecutive 5% losses to lose 50% of a portfolio’s value.  (it is not 10 because the losses get smaller as the portfolio shrinks)  But f we let this loss get away from us, it only takes six 10% losses to wipe out half of a portfolio.  This is why cutting losses early is such an important part of success in the markets.

If any of you are in AAPL, don’t feel bad, it was a calculate risk and it didn’t work out.  These things happen and if you are having a difficult time with this, trading might not be the right thing for you.  But no matter what, we need to figure out how to move on.  After-hours trading sessions are notoriously illiquid and the price action we saw this evening might not represent what happens tomorrow.  The after-hours crowd most likely got the direction right so don’t expect AAPL to rally tomorrow, but the size of the loss can be distorted by the thin trade.

Obviously the market will open weak, but where it goes from there is key.  No doubt many traders saw the horrible headlines screaming 10% loss in AAPL and the market will open with a wave of sell orders.  But where the market goes from there will set the tone for the rest fo the day.  One strategy for trading gap downs is to let the market stabilize in the first five-minutes of trade.  If supply dries up after the initial wave of selling, prices can actually rebound through the day.  Take the low of the first five-minutes of trade and use that as your stop-loss.  Continue holding as long as the market stays above this level and if you are lucky you will recover a decent chunk of the early selloff.  But if the market starts selling and breaks the stop-loss, get out!  The first loss is often the best loss.  Take your 5% loss and move on to the next trade.

Tomorrow’s AM post will get more into how to trade AAPL going forward.

Stay safe

AM: Markets flat and AAPL up ahead of earnings

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:20 EST

AM Update

The S&P500 is flat and digesting recent gains.  We will watch this afternoon’s trade to see if the patter of late strength continues.  AAPL is trading higher ahead of earnings, but no matter how confident you are, always mange the risk in any given trade so you will always live to fight another day.

MARKET BEHAVIOR

Stocks are flat this morning as we digest recent gains and a pause here is healthy and supportive of current levels.  We will watch through the close to see if the trend of strong finishes continues.  We are close to 1500 and often the market is drawn to levels everyone is watching.

MARKET SENTIMENT

Tech stocks are doing well after strong earnings from bellwethers like GOOG and IBM, but the eight-hundred pound gorilla is AAPL reporting after the close.  With most of the macro-economic worries falling off the front page, earnings are getting more visibility than they have seen in a long time, but is this enough to keep the rally going?

The market is within 10-points of  1500, a major psychological milestone.  While round numbers are secondary for direct supply and demand, breaking through and holding 1500 will be a psychological boost for the market and help get sideline-watchers back in the market.  But more importantly, will these be the last buyers before demand dries up, or will this finally break the dam and flood the market with new buyers?

The dynamic between bears and bulls seems fairly balanced.  Bears are still bringing up old headlines and too-far, too-fast, but bulls are emboldened by the recent gains and everyone loves being on the winning side.  When everything is equal, you have to side with the trend, but just realize every day brings us closer to the inevitable pullback.

The expected pullback is nothing more than that, a pullback.   Retesting support will provide a reality check for the market and keep the rally fresh and sustainable.  People who claim a massive selloff is ahead are not paying attention and too hung up on dire headlines that the market already digested and discounted.  The market can crash at any time, but it won’t be because of the things everyone is already talking about.

TRADING OPPORTUNITIES

Expected Outcome:
We will most likely run into resistance at 1500, but how we trade after that will determine the market’s next move.  If the market peaks and reverses from 1500, then expect a retest of recent support.  1470 was a significant resistance level could provide support for a pullback.   We could also see sideways trade at 1500, which is supportive of a continuation.  If the market surges through 1500, that is the harder trade.  It might not be a sustainable, but often these things go further and longer than anyone expects and it is hard to watch the market race ahead without us.

Alternate Outcome:
Most people are talking about too-far, too-fast and expecting a pullback, including myself, but that alone is reason enough to wonder if we might not pullback at all.  This is what we saw in Q1 of last year and this year’s Q1 could be the sequel.  This is the reason I will watch the market for supportive price action that shows this rally has legs.  I don’t want to force a trade here because we are vulnerable to a pullback, but risk is a part of trading and I will keep waiting for the right entry point.   The best way to describe my attitude to the market is short-term cautious, long-term bullish so I need to keep looking for a place to get back in the indexes.

AAPL daily at 1:20 EST

INDIVIDUAL STOCKS

AAPL is modestly higher just hours from earnings.  The options market is still predicting a 7% move.  To calculate this, add together the at-the-money weekly call and put, approximately $17.50 each, then divide by the stock price.  ($17.50 + $17.50) / $510 = 6.9%.  For those that are familiar with sports betting, this market equivalent of the over/under.

Remember we want to limit our risk in any one trade to 3% of our account value.  3% is not a stop-loss or position size, but the size of loss we are willing to take on an individual trade relative to our account size.  If you have a $100k account size, you don’t want to lose more than $3k on any individual trade.  If 7% is the expected loss, 7% * investment = $3k.  Using a little algebra we come up with $3k/7% = $43k initial investment to achieve a 3% risk profile for an AAPL trade.

This isn’t to say 7% is the most you can lose on AAPL if earnings are downright horrible, but it is a reasonable approximation.  And more often than not, the actual result will fall within the predicted 7% range because of the concept of limited gain, unlimited risk associated with selling options.  This means the options market tends to error on the high-side when coming up with their over/under to account for this unlimited risk of an outlier event.

Stay safe

PM: Eying 1500

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Stocks are within striking distance of 1500, but the bigger question is what it will do once we get there.   Wednesday after the close is when we finally figure out what is going on with AAPL and if recent selling is justified.

MARKET BEHAVIOR

Stocks had a good day as the S&P500 notched another new high in higher than average volume.  The market is in clean air, meaning virtually everyone who owns stocks is making money and we no longer have overhead resistance from the “just let me get out at break-even” crowd.  It certainly looks like the market is attracted to 1500 and while not of technical significance, no doubt the nice round number will have a psychological impact on traders.  We are still a ways from 1576, the all-time high, but that could be in play if this rally continues over the next few weeks.

MARKET SENTIMENT

The market is riding an elevator higher after breaking resistance at 1473.   Will we bust on through 1500, or hit our head?  The interesting thing from a sentiment analysis is many traders have a nuanced view of the market here; many think it will head higher in the short-term, but a pullback is just around the corner.  This complicates things because it is vastly easier to contrarian trade when people have a single view of the market.

The challenge with this split view figuring out how people are positioned.  Are they riding the market higher and plan on selling at the top?  Or are they just sitting on their hands, waiting for the expected pullback?  When people have a single view of the make it is pretty obvious if they are long or short the market depending of if they think the market is going up or down.

With the market at 1492, 1500 is just a stone throw away and I expect we will challenge that level soon, maybe even tomorrow.  The question is if we should buy this level, take profits, or go short.  It would be crazy to buy this level after such a strong run, but it might be just crazy enough to work if too many people are waiting for the pullback.  But we could also hit our head if too many traders are getting greedy and dreaming of 1525 or even 1575.

TRADING OPPORTUNITIES

Expected Outcome:
Everyone knows a pullback is coming, the question is when.  Do we selloff tomorrow, or rally until summer?  Then there is the size of the pullback; are we headed to 1470 or 1350?  All good questions that every trader must come to terms with before trading this market.

Long-term traders can just sit through all this noise because they know over time they will come out ahead.  The downside is they could trade sideways for months or even years before their investment thesis works out.  Short-term traders can avoid those sideways trades, but timing becomes everything.

Nothing has chanted materially for the long-term trader and they should keep doing what is working.  As I’ve shared elsewhere in this blog, I believe we are in a secular bull and a person that holds a diversified portfolio over the next decade and be handsomely rewarded for their patience and discipline   (some might argue most of those gains are simply inflation catching up with us, but I’ll save that discussion for another time)

Over the near-term, it would be difficult to recommend buying this market here.   Further, I subscribe to the line of thought that if you wouldn’t buy something today, then you probably shouldn’t own it here either.  Trades often view purchase price and profits as two different things.  One is sacred while the other can be thrown around with reckless abandon because it is someone else’s money.   No, that is your money, you earned it by putting capital at risk, don’t be reckless and let is slip away just because it is profit.  The only reason we are in the market is to make profits, so don’t be so flippant with them.

If now is not a good time to buy and a decent time to take profits, what about shorting the market?  The trend is still higher and shorting is a counter-trend trade.  It is hard enough to make money trading with the trend, so only the most bold should even consider going against the trend.  If you can’t help it and must short, don’t do it here.  Wait for the market to surge higher and short that top.  If we break 1500 tomorrow, that could be an interesting place to consider a short, but you have to recognize a short here is a low-probablity trade and a great way to give away money.  Just ask any of the bears who have shorted since 1350.

Alternative Outcome:
Last year’s first quarter rally didn’t quit until April.  We could see something similar if traders keep waiting for the pullback that never comes and are eventually  forced to chase.  Quarters often develop a personality and this could be a chasing quarter just like Q1 last year.  Many traders took tax gains into the end of the year and companies paid special large dividends.  This pile of cash needs to be put to work and buying equities is a great place to do this.  It also looks like the Debt Ceiling debate is getting kicked down the road, so we might see clear sailing for a while.  But sustainable rallies have a moderate pace with two-steps forward, one-step back.  When we see the step-back, we can jump in when the market finds support and is ready to resume the uptrend.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL had another yo-yo day.  It opened higher, sold off midday and rallied into the close.  The stock is mostly biding time until earnings after Wednesday’s close.  The stock isn’t making a strong move either way as both bears and bulls seem content with the stock where it is.  We are at the lower end of the range, meaning bears’ opinions are more represented in the current price.

As I said above, the indexes are harder to read because of the more nuanced view traders are taking toward the market, but in AAPL things are very black and white.  Either people think AAPL is a steal here, or they think it is grossly overvalued.  This makes reading sentiment a lot easier.  The question any AAPL trader needs to answer is if they think the wheels are coming off, or if all this doom and gloom is overblown?  I’m not a long-term AAPL bull and am more impressed with what MSFT is coming up with, but this is a multi-year story and in the near-term there is still a lot of upside for AAPL, especially when the name is as punished as it has been.  But this is just one person’s opinion.

There are no guarantees in the market and it can always make fools of us no matter how sound our research and analysis.  Always practice prudent risk management and have a plan for what you will do if a stock goes up, down, or sideways so you don’t have to think about it when emotions are running high in the moment.  If AAPL traders higher, hold for additional gains.  If it gaps lower at the open, wait a few minutes to see if value investors step in and support the name.  If the stock trades flat, get out of the name and look for something more interesting since an uninspired AAPL is a stock that is probably headed lower over the near-term.

Stay safe

AM: Market up, AAPL down

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:36 EST

AM Update

Stocks are trading modestly higher after early weakness, but AAPL isn’t finding the love as it dips under $500 ahead of tomorrow’s earnings.

MARKET BEHAVIOR

Stocks traded modestly lower at the open, but in typical fashion found a floor mid-morning and bounced back near break-even. How much longer can this pattern of early weakness followed by afternoon strength last?  The more obvious something becomes, the closer it is to changing and this pattern is getting fairly obvious.  One of these days a lot of traders are going to buy the mid-morning dip and be dumbfounded when the market continues lower instead of bouncing like it is supposed to.

If we hold 1480 into the close, this will be the 3rd day in a row we closed above this level and if we can hold above this level by Thursday’s close, the market is showing support and will more likely continue higher before pulling back.

MARKET SENTIMENT

We are stuck in a place where is it no longer valid to make a blanket statement claiming the market is overly bullish or bearish.  To figure out what is going on we need to split the market into segments based on timeframe.  This is often the case when the market is on the verge of counter-trend trade.  I have no idea when the market will pullback, but pullbacks are fundamental to the markets so we know one is coming.  Maybe it will come this week or maybe it will be like last year were we went three-months without a meaningful pullback.  We don’t make money calling for a pullback, we make money getting the timing of that pullback right and that is the hard part.

Near-term sentiment is becoming fairly optimistic as headlines are taking more of a positive tone and pessimists are keeping most of that negative attitude to themselves.  But the other side of this argument is the market saw a massive level of selling in the October and November correction and those buyers are on the sidelines wondering if they need to chase this market or risk being left behind.

TRADING OPPORTUNITIES

Expected Outcome:
The market is pausing above 1480 and if we can hold these gains into Thursday’s trade that is supportive of a continuation.  But if we see weakness develop over the next couple days due to AAPL or Debt Ceiling developments, look for a modest dip back down to 1470, 1460, or 1450, all levels of technical significance as recent support or resistance.

Alternate Outcome:
The market can continue marching higher without pausing because of all the recent sellers sitting on the sidelines   Moves in the direction of the market often go longer and further than most expect and there is no reason we can’t keep going higher here.  How a person trades this is all about risk management.  We’re in this game to make money and to make money we need to lock in profits at some point.  Some people like to let those profits ride and others have smaller goals and prefer to turnover their portfolio with smaller gains.  I’m straddling the fence in this regard.  I have a large portfolio of buy-and-hold investments and that lets me be far more active with my personal trading account.  But this is what works for me, what works for you could look a lot different.

AAPL daily at 12:37 EST

INDIVIDUAL STOCKS

AAPL dipped under $500 this morning as the stock was hit by more selling ahead of tomorrow’s earnings.  Is this just nervous traders getting cold feet and bailing ahead of this event?  Or are some people trading on inside information and getting ahead of the rest of us?  Only one way to find out and that is to see what AAPL says tomorrow.

Recent weakness accounted for much of the negative supply chain rumors out there and even if they prove out accurate, the stock shouldn’t see too much selling because those sellers already sold before earnings.  This creates a potential sell-the-rumor, buy-the-news following earnings.

Stay safe

LA: A big week

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

This will be a key week for the markets.  We have AAPL’s earnings and the House vote on extending the debt ceiling three months.  We also want to watch how the market responds technically to the new breakouts and if we can hold the recent gains.

MARKET BEHAVIOR

As everyone knows, the markets made new 5-year highs and continues the trend of higher-highs and higher-lows over virtually every timeframe from daily charts all the way to monthlies   In fact, we are not that far from making all-time highs in the S&P500 and digging our way out of the decade-long slump of the 2000s.  The best time to buy-and-hold is when everyone says buy-and-hold is dead.

MARKET SENTIMENT

The big events coming up on Wednesday are AAPL’s earnings and the House’s vote to extend the debt limit three months.  Normally a single stock isn’t worth discussing when talking about the broad market, but AAPL is no ordinary stock since it represents almost 5% of the S&P500’s weighting.  A 10% move in AAPL could move the market 0.5% and that is before considering sympathy moves in related stocks.

How is the market lined up for these events?  It seems like many investors stopped paying attention to the Debt Ceiling after the Fiscal Cliff compromise.  Maybe that is because when our politicians reached a Fiscal Cliff deal, traders assumed they will do the same on the Debt Ceiling and it isn’t worth worrying about.  Or maybe the market has such a short attention-span that it can’t focus on something that is still weeks away.  Maybe fatigue set in and pessimists got so throughly thumped by the Fiscal Cliff rally that they just gave up.  But no matter the reasoning, given the recent market’s strength, it seems selling due to Debt Ceiling worries is very limited.  Without much pessimism to act as fuel, a Debt Ceiling deal will generate a modest pop at best.  In fact, if more people bought the expected Debt Ceiling deal, we risk seeing a sell-the-news event when buyers fail to show up after the announcement.

AAPL is a different deal.  The stock is trading at the lower end of the recent range and the latest headlines suggest a 50% reductions in iPhone5 production.  The technical and fundamental story seem broken and that chased a lot of investors out of the stock.  But all the selling into earnings creates an asymmetrical trade if most of the pessimistic selling happened ahead of time.  Bears could very well be right about AAPL, but if the recent selling already accounted for most of this negative view, that leaves little downside for when the bad news finally come out.  But what happens if the news is better than expected?  The stock pops dramatically as bears get chased out in a short-squeeze.

It will be interesting to see how much influence AAPL’s earnings have on the broad market.  Lately the stock has become disconnected from the market and  the market could have a good day even if the market plunges, or vice versa.

Outside of these two events, the market has priced in a fair amount of optimism and is less concerned over issues that plagued the market through the last year such as Euro Contagion, Obamacare, Obama’s reelection, Fiscal Cliff, raising taxes, and now the debt ceiling.  But I have little doubt the market’s next fatalistic obsession is just around the corner.

TRADING OPPORTUNITIES

Expected Outcome:
One of the more fascinating aspects of the market is you can find traders with completely different opinions on the market and they can both be right (or wrong) at the same exact time.  A bear could be shorting the market and bull buying the market, and they can both make money.  The bear could expect a pull back to support over the next couple weeks while the bull is expecting it to rally over the next three months.  Two completely different views on the market and they can both make money if they time their sales right.

And here I find myself with a split personality.  I’m bullish over the longer term, but am cautious over the short-term.      And to clarify, cautious doesn’t mean bearish, just expecting the market to retrench a little before heading higher.  Maybe that happens this week, but even if it doesn’t, we’ve come a long way and it is always smart to take worthwhile profits to keep greed at bay.

Alternate Outcome:
If too many people are taking profits here, that could keep the rally moving higher.  If the premature profit takers end up buying back in, their demand pushes prices even higher.  It will be an interesting week.  If the market pulls back modestly and quickly finds support, it could be buyable.  Same goes for a pullback to 1450, or even 1400.  The one thing I would be reluctant to do is chase a surging market higher.

AAPL weekly at end of week

INDIVIDUAL STOCKS

I’ve already discussed the AAPL trade above, but I’ll just mention the risks associated with holding through earnings.  Even if the odds were an obscene 80/20 in a person’s favor, that still means one time out of five he will get it wrong.  And the same can happen here, no matter how great the setup is, some trades just go bad no matter how sound the analysis and that is why we practice responsible risk management.  The options market is predicting a 7% move, so if a person wanted to limit their risk to just 3% of their portfolio, don’t hold any more than 50% of your account in AAPL.

Stay safe

WR: New 5-year highs

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review

Stocks set new 5-year highs, but how much longer can this rally keep it up?  How are you going to trade AAPL’s earnings next week?  Are there other ways trade this than just buying ahead of the announcement?

MARKET BEHAVIOR

The S&P500 broke out to 5-year highs this week and printed levels we haven’t seen since 2007.  Volume for the week was average as most traders returned from the holiday break.

The market is 65-points above the 10-week moving average and 90-points above the 40-week moving average.  (similar, but slightly different from the 50dma and 200dma)  While it is not unusual to trade this high above these moving averages, it makes it less likely we will go significantly higher before the MA’s have time to catch up.  There are two ways the market closes the gap, one is dipping back to the moving averages, the other is trading sideways and letting them catch up.  The 10-week moving average is turning up quickly and the 40-week is edging higher as well so we might have to wait too long before resuming the uptrend.

MARKET SENTIMENT

What a difference a week makes.  Last week’s negative headlines disappeared and all of a sudden the world is a much better place.  This is a bit of an exaggeration, but the market’s attention has moved away from pessimistic worries and is focusing on upbeat data that justify the recent strength.  This is the typical tail wagging the dog that goes on in the financial press.  Journalists look to see what the market is doing and then dig to find plausible reasons to explain the move.  If the market goes up, they report positive developments.  If the market heads lower, they highlight the negative.  I don’t blame them for this, they are journalism majors and just doing their job, but as traders we have to see through the noise and figure out what is really driving the market.

We came from an extreme oversold condition following the election and no matter what the news was (impending Fiscal Cliff showdown), we were bound to rally because after all the sellers sold, supply dried up and there was nowhere to go but up.  And here we are, 140 points higher and no one can claim the market is still oversold.

So where do we go from here?  The economy is slowly improving, recent earnings have been decent, and politicians are making progress on the Debt Ceiling, but that is what we already know and how traders justified buying this rally.  To get the market heading even higher we need even more.  Either we get better than expected fundamental data or we need these fence-sitters to jump in and start buying.  Without these catalysts, the market will probably trade sideways and let the moving averages catch up.  And this is not a bad outcome either.

TRADING OPPORTUNITIES

Expected Outcome:
Sentiment has improved dramatically in recent weeks and the market isn’t paying nearly as much attention to negative headlines.  The Debt Ceiling is a page three-story as the teflon rally breeds complacency.  I have little doubt the market can keep heading higher next week as we find new shorts to squeeze, but I’m not in the business of picking tops.  I want to make worthwhile a profit and then move on to the next trade.

To clarify, this position is only intended for the more active traders who try to time the market’s regular fluctuations.  Longer viewed holders should keep holding, but expect some near term volatility before the market continues rallying.  While many of you hold for longer periods of time, understanding what the market is doing in the near-term helps manage the anxiety when the market goes through a normal and healthy dip.

Alternate Outcome:
The market can continue climbing from here.  The distance above moving averages is still not at extreme levels and we have room to go.  There are shorts still hanging on and pessimists to be converted.  This could give us one more push higher, but what’s another 20-points gain on a 140-point rally?  If a trader got in early enough, it isn’t worth risking existing profits for a few more dollars.

And don’t get me wrong, I’m not predicting a crash or a sizable pullback, just step back after two big steps forward.  I swing-trade the market and try to take advantage of these smaller market moves.  Depending on market action, next week I could jump back in if I like what I see, but this is my trading strategy and time horizon.  You need to follow what you are most comfortable with.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had an exciting week as the stock broke recent support at $500 and plunged to $484 before finding support.  Most of the selling was from a high concentration of automatic stop-losses placed under the widely followed $500 level.  But as soon as these autopilot orders were triggered, the market found a bottom because most of the holders who bought during recent weakness are willing to hold through some volatility.  They are value investors taking a longer view on the stock and were not going to let a $15 dip change their entire investment thesis.

AAPL’s earnings are coming up next week and will mark a significant turning point for the stock.  Bears have leaned into the stock recently and the burden of proof falls on them.  The stock sold off in anticipation of slowing growth and shrinking margins and that has been the lead weight dragging the stock down.  If it turns out the concerns were overblown, expect this weight to be cut free and the stock to pop higher.  But there are no guarantees in the market, especially when dealing with such a polarizing stock.  The safer play would be to trade the stock after earnings.  If earnings are bad, the stock will be oversold before value investors step in and prop it up.  If it beats, the stock will surge higher over coming days and weeks.  In either case, the stock would be buyable after earnings and you avoid the risk of holding through earnings.  The one circumstance I would not buy after earnings is if the stock traded flat.  Without an oversold dip to buy or a strong rally to jump on, I’d stay out and look for something better to trade.

Stay safe