WR: 4th in a row

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