PM: S&P500 breaks 1500

By Jani Ziedins | Intraday Analysis

Jan 24
S&P500 daily at end of day

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

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

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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.

Rob Butta January 25, 2013

Would like to know what do youmake of the fact that the analysts’ consensus target price for AAPL is around 600+ ? There is a huge disconnect between the current stock price and its potential target, and it is possible that if a large hedge fund decides to start building a position in AAPL, the trend will reverse and it might be a chasing game on the way up all over again, and status conscious fund managers who feel that they ‘have to own AAPL stock’ will start piling on again. Your thoughts please.

    Jani Ziedins January 25, 2013

    AAPL is way too large for any one fund’s buying to budge the needle, so it will take a coordinated effort by a large group get this thing moving higher again. The other problem is AAPL is the most widely held stock already so there are very few new buyers left. It appears the stock is transitioning from being a stock Growth Funds must to own to more a Value and Dividend play. A lot of what we are seeing here is large funds unwinding their “overweight” AAPL position and becoming either “balanced” or “underweight”. To trigger the kind of buying you mention, most of these funds would need to go back to “overweight” AAPL and that probably won’t happen without a big catalyst. Wednesday’s record earnings and the stock collapsing 10% show most people are not that interested in this stock anymore. Its become a show-me story and they will have to come up with something new. Maybe that is a new product, maybe it is a new international growth strategy, or maybe it is doing something will all that cash. But until then, the stock will probably be stuck in the $400s.

      Rob Butta January 29, 2013

      Many Thanks for your detailed and very informative explanation. I do not own AAPL but I a much interested to understand the dynamics at play here, and reply above was quite an eye opener for me. Thanks again and have a Great Day !

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