Two percent gap-up at the open as we averted the Fiscal Cliff. Huge short-squeeze as the last bears were sent for cover. We easily eclipsed December’s high and continue putting in higher-highs and higher-lows. It goes without saying this is a bad time to be a bear as we covered 60-points in two-days and 120 in two-months. Regardless of headlines, the trend is higher.
Lets celebrate our politicians saving us from the very disaster they created! Cynicism aside, the market is popping on avoiding some arbitrary and artificially created event. If we didn’t have a “Fiscal Cliff” to be saved from and instead politicians sprang a surprise tax-hike and spending cuts on the markets, they would have tanked big-time. This shows the news doesn’t matter as the exact same change spun two different ways creates dramatically different results. Successful traders don’t trade the news, but the people’s reaction to the news. This isn’t a game of fundamentals or technicals, but human psychology.
In two-days the bipolar market rallied 60 points from certain Fiscal Cliff apocalypse to unbridled euphoria. But as we’ve seen, extremes in sentiment rarely last. By the time the Fiscal Cliff confetti hits the ground, the market will already be fearing something new. Right now the new rallying cry of the pessimists is the Debt Ceiling. And to be honest, default is a far bigger deal than some politically conceived Fiscal Cliff. But expect the halo and fuzzy feeling from the Fiscal Cliff compromise to continue for a bit as the market expect this collaboration in Washington to continue. Only after we see a return to stubbornness and partisanship will it start weighing on equity prices.
A lot of the rally was driven by short-covering and we should expect the pace to slow, even pullback, as the market forgets about the Fiscal Cliff and focuses on what comes next. The recently passed bill did not address the Debt Ceiling and we should expect this to weigh on investor’s minds in coming days and weeks.
This morning’s short-squeeze is a good time for swing-traders to lock-in profits. We might see some additional short-squeezing over the next day or two, but it is a fools folly to hold out for top dollar. For others looking at new buys, it is a little late in the game to chase the rally and we could see some selling of the news in coming days. For longer-term traders, I remain bullish but expect some near-term volatility, wait for those dips to initiate new positions.
It is possible stocks will continue racing higher in a repeat of 2012’s record-setting first-quarter rally, but if this is the case, there will be plenty of time to jump back on the bandwagon since market rallies take time.
AAPL opened at $555 this morning, up 10% from its recent lows. People are jumping all over each other to buy a stock that just a couple of days ago was left for dead. Swing-traders should look to lock-in profits as the stock could run into overhead resistance at the 50dmda. Wait for the inevitable dip to buy back in. For longer-term investors, hopefully you bought earlier and have a nice profit cushion to ride out near-term volatility. If you missed the rally, try to resist the temptation to chase and wait to buy near-term weakness. And hopefully any shorts learned their lesson about being greedy and holding too long or chasing the obvious short too late in the game.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.