PM: Eying 1500

By Jani Ziedins | Intraday Analysis

Jan 22
S&P500 daily at end of day

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

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

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.