PM: Negative GDP

By Jani Ziedins | Intraday Analysis

Jan 30
S&P500 daily at end of day

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

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

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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.

Peto1 January 30, 2013

Not sure what you mean when you say that investors are staying away from Amazon but tons of new buyers are pushing the stock up. Isn’t that contradictory? Can you explain what you mean?

    Jani Ziedins January 31, 2013

    Thanks for the question

    Traders holding and sitting out of a stock don’t affect it’s price, only those actually buying and selling do. Most people already love AAPL’s attractive valuation and own it. This means there are very few new buyers remaining no matter how much better the valuation gets. On the other side, there are a lot of people staying away from AMZN because of it’s ridiculously high valuation, but that means there is a large pool of available buyers that can get sucked up in the momentum story, especially shorts forced to cover.

    It is all about the size of the pool of available buyers. AAP’s pool is small because everyone already loves it and owns it, AMZN’s pool is large because it is so distrusted and investors are staying away and shorting it.

    I hope this helps

      Peto1 January 31, 2013

      Okay, I think I understand what you’re saying. But then what would have to happen, with the starting point on both stocks being where they are as you’ve described, for Apple to move up significantly in price and conversely for Amazon to go down?

        Jani Ziedins January 31, 2013

        AMZN need to run out of chasers, namely people shorting the stock. Once everyone has given up saying AMZN is overvalued, it will run out of buyers and nose over. This happened to NFLX. Everyone was screaming overvalued at $100, $150, $200, and $250, but the stock kept creeping higher as shorts were forced to cover at higher and higher prices. Eventually the cynics gave up and people stopped talking about how overvalued it was and that was the peak. Once everyone stops criticizing AMZN for its outrageous valuation is when longs should get out.

        The opposite will happen in AAPL, one everyone has given up all hope on AAPL and is no longer promoting its great valuation, that means most have sold out and supply dries up, sending the stock back up. You saw this in FB, it had to become the most hated stock on Wall Street before it could rebound. I still see headwinds for AAPL because there is still a lot of people who love this stock.

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